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President Details Northwestern's Financial Condition

The Northwestern University Board of Trustees recently approved the financial plan recommended by the University administration.

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February 25, 2009
Dear Members of the Northwestern Community:

The Northwestern University Board of Trustees recently approved the financial plan recommended by the University administration for the remainder of this year and next fiscal year, which starts September 1. Like all institutions, Northwestern faces significant financial challenges as a result of the worldwide recession now under way. I am pleased to report, however, that as a result of the University's historically prudent fiscal management, we enter this period in a relatively strong financial position. I also believe that the financial plan that has been developed will enable Northwestern to not just survive, but to thrive, despite these challenging conditions.

There will, however, be a need for sacrifices. Operating expenses across the University must be reduced in the coming year in order to provide needed funds for faculty and staff salaries and increases in financial aid for students. All requests for incremental resources including proposals for additional faculty and staff positions are being scrutinized carefully and few of those requests will be approved. But in the coming year we plan to increase financial aid significantly while holding our tuition increase to the lowest percentage in more than 40 years, provide modest, selective raises for faculty and staff, maintain our top-level credit rating, and, most important, continue to do the extraordinary teaching and research that have long been the hallmarks of Northwestern.

Specifically, for the remainder of this year and for 2009-10, we plan to do the following:

• Increase undergraduate tuition, room and board by 3.6 percent for 2009-10 while increasing the amount of scholarship funds by 10 percent to $86 million. At a time when many Northwestern families are facing their own economic pressures, we will keep our tuition increase to the smallest percentage in more than 40 years while increasing financial aid funds significantly. We also will maintain our longstanding commitments to need-blind admissions and meeting the full financial need of our undergraduate students.

• Require all academic and administrative areas of the University to reduce their operating expenses (other than salaries) by 3 percent in the coming year. These areas normally receive a 2 percent increase annually, so the reduction will essentially mean a 5 percent cut in operating expenses for next year.

• Limit salary increases. The funds available for salary increases in the coming year will be less than previous years, but there will be modest, selective salary increases.

• Review rigorously all requests for incremental resources, such as plans for new faculty and staff positions, with a goal of adding to the budget as little as possible and only in those areas deemed critical to the University. I want to emphasize that we are not planning any University-wide personnel reductions; however, personnel reductions may be necessary in some areas, such as those supported by external funds that may no longer be available.

• Reduce our capital expenditures, including delaying several large construction projects totaling about $90 million.

• Limit the amount of funds we draw from the endowment. Each year, we have a guideline established by the Board of Trustees to provide a payout from the endowment to be used to help support the University's general operations. Given the high investment returns of the past several years, the guidelines would have allowed the University (with approval of the Board of Trustees) to increase the endowment payout by 9 percent. However, because of the recent dramatic decrease in the value of the endowment, we are not increasing the amount that will be drawn from the endowment next year. That means we will face a tighter budget in the short term, but this will help preserve our endowment principal for the long term.

These steps, along with other budget management initiatives, are necessary because Northwestern, like all institutions, is affected by the recession now under way. Our endowment, which reached a high point of $7.4 billion in April 2008, now stands at approximately $5.6 billion, a 24 percent decline. There are no signs of a quick recovery; indeed, it is likely that our endowment will decline even more.

For the long-term health of the institution it's best to build an endowment to support recurring costs, so we continue to seek gifts that help endow scholarships, professorships and other important activities. Currently, however, we're somewhat fortunate because our endowment contributes less to our overall operating budget than is the case for some of our peers. At Northwestern, only about 18 percent of our operating budget is funded by endowment earnings. By contrast, some peer universities rely on their endowments for upwards of 50 percent of their budgets. Relying less on the endowment and more on other revenue sources, particularly tuition, has been a disadvantage to us when endowments were earning high rates of return. But at a time when endowments are plunging in value and earnings dropping precipitously, the fact that we're less dependent on the endowment for funding day-to-day operating expenses has actually made things more manageable.

Nevertheless, Northwestern, like many other institutions, has had to work hard to maintain sufficient operating cash. We have been able to do so through careful management of our resources and borrowing at favorable rates (the key rating agencies, Moody's, Standard & Poor's and Fitch, confirmed their Aaa ratings on a recent University bond offering). We have also secured additional lines of credit as a backstop in case these financial pressures continue.

Alumni, parents and friends continue to provide philanthropic support to the University, although we do not expect our fundraising efforts to result in the level of success we've experienced in recent years. Philanthropy is declining across the country; at Northwestern it has declined slightly in the first half of our fiscal year. Our hope is that our supporters will continue to make the University a priority during this period.

Applications for admission are up in almost all undergraduate, graduate and professional schools - but that isn't likely to translate into additional tuition revenue. We simply do not have the capacity in most of our programs to add students, nor do we want to do so, as it would change the nature of a Northwestern education. In addition, we expect that both the number of students needing financial aid, and the amount of assistance they will require are likely to increase. That's why we're planning the 10 percent increase in our undergraduate financial aid budget next year, along with increases in aid for other programs. The increase in applications means that we are attracting some of the best students in the country, thereby demonstrating that, even in difficult economic times, the value of a Northwestern degree remains high.

The major economic upheaval that we're now experiencing understandably creates feelings of uneasiness. We cannot control the economic forces that are now sweeping the world. But we can consider thoughtfully the potential impacts of those forces and plan appropriately. I assure you that we're doing just that. In its 158-year history, Northwestern University has weathered some very difficult economic times, from the lean years following its founding to the dot-com bust and aftermath of 9/11 earlier this decade. Through all of those times, the University has remained a citadel of teaching, research and scholarship. With prudent financial management and your assistance, I am confident that Northwestern will continue to be a leader in the academic community and a financially secure institution.

Thank you.

Henry S. Bienen
President