Rice Feels the Pinch of Nation’s Economic Situation

Rice University is better positioned than most universities but not immune to the nation’s economic troubles.

President Malcolm Gillis has notified vice presidents, deans, and the director of athletics that next year’s budget will involve reductions in spending and provide fewer dollars for salary increases than in recent years.

More than three years of the toughest stock markets since the 1930s have taken their toll on university endowments nationwide, and budget cuts have become the rule rather than the exception.

An article in the January 24 issue of the Chronicle of Higher Education reported on “the vast majority of colleges and universities” that have seen their endowment returns lose up to 19.8 percent.

“As endowments continue to shrink, balancing budgets has become more challenging, a plight exacerbated by shrinking financial support from governments, foundations, corporations, and individuals,” the article said, noting that many universities are cutting budgets and looking to reduce their workforces.

Starting with a hiring freeze last November, Rice took early action to avoid layoffs; however, the university cannot avoid tighter budgets because the Rice endowment—between budgeted expenditures and investment losses of about 10 percent—dropped in value from $3.37 billion in June 2000 to about $2.75 billion in December 2002.

Rice depends more on its endowment than most universities—a boon in good economic times but not in bad. While most of Rice’s peers use their endowment to provide less than a quarter of operating budget revenues, Rice’s endowment supports 73 percent of the core general budget, with net tuition (tuition income minus financial aid), annual gifts, and indirect cost recovery on research grants providing the rest. Even when research grants and auxiliaries (such as housing and dining) are added, the endowment provides more than 45 percent of the consolidated budget.

To avoid sharp ups and downs in the endowment payout—and thus the university budget—the board of trustees employs a moving three-year average of the endowment’s value to adjust the annual distribution from the endowment.

Although the endowment’s value has dropped, funds budgeted from it actually will increase next year to an all-time high, but the increase will be smaller than usual. For fiscal year 2004, funds budgeted from the endowment will increase 4.25 percent, compared to 5.25 percent in this fiscal year. Barring a fast and strong recovery of the economy, budget planners expect the increase to be even lower in 2005. In fact, because the markets have been declining for so long, it will be some time before the three-year moving average begins to increase.

At the same time, Rice faces higher expenses due to uncontrollable external factors, such as double-digit increases in insurance and rising utility costs. The projected increase in these areas—$3.1 million—equals about 80 percent of the new revenue from the unrestricted portion of the endowment.

Thus, in budget guidelines sent to deans, vice presidents, and the director of athletics, the university has asked them to prepare for only very limited funding for salary adjustments. Vice presidents and the director of athletics were asked to accommodate modest budget cuts. In addition to controlling expenditures, the university will look for ways to enhance revenues.

“In common with universities around the country, we confront significant economic challenge,” said Rice provost Eugene Levy. “It is not the first time this has happened, and it will not be the last. Rice is a strong, resilient university. Our goal now is exactly the same as our goal during financially more expansive times: to excel by applying what resources we have to the best possible effect, by being creative and focused in continuing to build the strongest possible university, and by ensuring that everything we do is framed within a sharp strategic vision that best serves our students and faculty, our employees, and our mandate. Our economic challenge is a national one, affecting every university as well as cities, states, and corporations. We will deal with it. I have every confidence in our continued success.”