A Message on the Economy and University Priorities

To: The NYU Community
Fr: John Sexton
Re: A Message on the Economy and University Priorities
Date: January 26, 2009

Dear Fellow Members of the NYU Community:

The impact of the global economic crisis has been widespread, and each institution of higher learning has had to chart its own course in confronting it. I want to describe to you what we are contending with at NYU and how we are responding, as well as point to our continuing commitment to further the upward trajectory of excellence that has marked NYU's history of the last 2 decades.

A dozen or more major universities in recent weeks have sent out letters to their respective communities. It is now almost conventional wisdom that over the next year or two, universities will have to make cuts in staffing, halt faculty searches, and wring as much as possible out of their administrative expenses. NYU will not be immune from these measures and sacrifices; however, it is in a better position than many institutions.

In 2007, well before the contours of the economic crisis became clear, we began an effort to achieve substantial administrative savings and redirect the funds to our academic mission, an effort we called "re-engineering." This effort saved a net of $5 million in 2007, and recurring annual savings of over $25 million in 2008. We have also partnered with the schools during the past two years to create a contingency reserve fund that now totals about $26 million. This separate fund will continue to grow, ultimately reaching 10% of NYU's operating budget and creating a substantial pool of funds to help sustain the University in truly exigent circumstances.

That early initiative has allowed us the ability to move ahead. Unlike many other schools, we have not cancelled faculty searches or capital projects. We intend to continue to move forward, and to do so following the guiding principles of the NYU Framework 2031 (see especially page 14 of the report). Framework 2031, which was completed well before the current economic problems, pointed out that if NYU is to continue its climb to becoming one of the truly great universities of the world, it has to be more disciplined and focused than the wealthier institutions against which it competes for students and faculty. The current crisis has not affected the priorities or strategies as laid out in the Framework. It does, however, mean that we as a university will need to become even more disciplined and focused.

Accordingly, in the next year, working with our schools we hope to expand annual administrative savings by another $10 million — an effort we call "re-engineering II" — bringing the total to some $40 million per year.

Still, these funds neither should be used to meet structural shortfalls, nor — in and of themselves — are they sufficient to meet all of our priorities (which I outline below). A commitment to maintain NYU's remarkable academic momentum comes with costs and will require genuine sacrifice throughout our community. For that reason, we expect to propose a budget for next year in which there are no salary increases (other than for promotions and for those required by contract). I know this will not be greeted with enthusiasm; however, it will allow us to slow the increase in tuition, to expand financial aid, to continue building our academic profile, and to maintain our community whole to the maximum extent possible. Thus, I hope it will be viewed with understanding.

Every budget is a balance of — on the one hand — revenues and resources, and — on the other hand — needs and priorities. Thanks to the measures that were taken before the economic crisis struck, NYU's budget is sound, but we cannot be complacent. The University's planning must take note of significant hazards — easy to identify but difficult to predict — which could cause a deficit to materialize quickly. For that reason, I want to provide you with a brief summary of the economic status of New York University, to describe the priorities that will guide our decisions in the coming months, and to outline the contingency plans we have prepared in case we face a shortfall.

I. OUR REVENUE BASE

Tuition: Far and away our largest source of revenue is tuition; it accounts for some 60 percent of the University's annual revenues. So, the majority of our attention has to be directed towards this part of our budget. Thankfully, NYU's strong academic reputation ensures a deep pool of applicants with exceptional qualifications even in the face of this economic crisis; indeed, we have had a record year, with more than 37,000 applications for freshman admission. However, the economic downturn gives us cause to worry about the increased financial stress being experienced by some NYU families. This may increase the demand for additional financial aid or have an impact upon future enrollment.

Endowment: University endowments have been the subject of much interest in recent months. Our endowment currently stands at a little over $2 billion absorbing a decline in recent months: between June 30 and December 31, our endowment incurred losses of 19.6 percent.

NYU experienced less of a decline than many peer schools, and considerably less than the market as a whole. Also, investment income makes up a much smaller portion of our annual revenues (approximately five percent) than other major private research universities (some of which are as high as 50 or 55 percent); thus, in a downturn, the impact on our budget is less. Nevertheless, there is a different matter that presents a potentially significant problem for NYU: current New York State law prohibits not-for-profit corporations from allocating funds for spending from any individual endowment account whose market value has fallen below its original contribution value. For NYU, in the current market, this prohibition could reduce the permitted spending from our endowment return by tens of millions of dollars compared to previous years; we are working with other not-for-profits to update this law in the current session of the New York State legislature, as other states have done in recent years. Passage, though, is by no means assured.

In addition, part of our endowment (invested in the mid-1990's) is held in a fund run by Ezra Merkin. Merkin invested part of this fund with Bernard Madoff without the prior knowledge of the University. The University has sued Merkin to recover our losses; according to a letter we received from Merkin in December, the loss would be approximately $24 million.

Fundraising: In August 2008, NYU successfully finished the largest completed fundraising campaign in the history of higher education at that time (over $3 billion). Even in the best of times, fundraising this year would be down from last year's record totals; the nation's financial crisis means we will experience an even steeper decline. Still, our donors to the campaign continue to honor pledges; the University has raised over $100 million since August 31; and Annual Fund donations are holding steady (both in dollars and in the number of donors). That said, we cannot expect fundraising to be as robust as in recent years.

Because of these risks to our revenue, I want to outline for you the University's priorities — which will guide the choices we make — and the contingency planning steps we are undertaking in the event of a shortfall.

II. OUR PRIORITIES

Sustaining Our Academic Momentum: It can be argued that no university has advanced its academic standing and the quality of student life as dramatically and successfully as NYU has in the recent past; however, NYU's improvements are an unfinished work.

In the service of both goals, we intend to continue to pursue our plans to hire faculty across all schools; and we will continue the Partners Initiative, which is expanding our Arts and Science faculty. Likewise, we will press forward with capital projects for academic programs and other important capital needs, as well as our long range space planning process. For example: even as we complete construction on a new genomics research facility, we know that we need to make additional capital investments in science at NYU. Similarly, as a university well known for our excellence throughout the arts, we must invest in facilities needed in that area. And we must continue to support the infrastructure in areas such as information technology.

Maintaining the Quality of the Student Body: Roughly nine students apply for each spot in our freshman class. We currently turn away hundreds of students who are clearly qualified for admission and who would love to be at NYU. We are thus in the enviable position of not having to choose between financial stability and student quality. On the other hand, we have entered a new and quickly changing admissions environment. A number of the changes are the direct result of the economic crisis (availability of loans, for example), but others are trends, national and international, that have been in the making for some years. At the national level, there is increasing skepticism about the role played by SAT scores in admissions, and there is a growing population of outstanding students who begin their studies at one institution and then transfer to another institution; at the international level, more and more undergraduate students are crossing national boundaries to pursue their degree. Thus, as we develop initiatives in the coming years to continue NYU's trajectory of improving student quality, simultaneously we must address the changing environment of undergraduate admissions.

Slower Tuition Growth, More Financial Aid: NYU is dependent on tuition revenue. Yet in this economic climate — when many are losing their jobs or seeing significant income reductions — one of our priorities must be holding down tuition growth to try to ease the burden on students and families. For that reason, in the budget we formulate for next year, we hope to hold the tuition increase for 2009-10 to the lowest in recent years.

Beyond that, we need to be able to target help for those who have the greatest need. Accordingly, the percentage increase in our undergraduate financial aid budget this past year was more than double the rate of tuition increase, and we hope to follow the same formula in the year to come.

Preserving Our Community to the Greatest Extent Practicable: Every day administrators and staff make enormous contributions to the greatness of this university; they serve with distinction and dedication, and their efforts are usually unheralded. Their willingness to take on additional work and to imagine new ways of delivering services has permitted us to achieve the $30 million in administrative savings to date. While, given the possible depth of our nation's economic crisis and our commitment to continue the advance of the University, we cannot guarantee that no cuts in staff will be necessary, but we will work hard to minimize them, and will endeavor to achieve much of our additional savings through normal attrition.

III. CONTINGENCY PLANNING FOR CHALLENGES BEYOND WHAT WE SEE

The above summarizes the situation we see today, but if the last six months has taught us anything, it is to expect the unexpected. Were we to experience significant additional shocks we do not now foresee, we would have to chart a different, even more difficult course. Accordingly, our Executive Vice President, Michael Alfano, has asked our administrative units to develop contingency models for cuts of two, four, six, eight, and 10 percent on top of the cuts already taken for the administrative savings efforts described above. Similarly, our Provost, David McLaughlin, has asked the schools and academic units to develop contingency models to cover revenue losses of four, eight, and 12 percent.

Our contingency plans would first make use of the annual administrative savings we expect to achieve through "re-engineering II." But should we have to go beyond those savings and enact further contingency plan proposals, there will be considerably more pain: we would likely be compelled to make major staff and service reductions. In those circumstances, we will continue to be guided by the same basic priorities I have outlined — aiding our students and protecting our academic enterprise, while being as sensitive as possible to the needs of those who work here.

IV. CONCLUSION

We cannot know for certain what the coming years will bring in the economy or for our University. I know that uncertainty is a challenge; it is a kind of vacuum, and vacuums of this sort tend to be filled by anxiety. However, I can assure you that the Provost, the deans, the administrative leaders, and I will use every tool at our disposal to sustain our academic momentum and protect our academic mission; and we will do all that is possible to aid our students and their families, to preserve our sense of community and our collective morale, and maintain our robust academic momentum as outlined in our Framework 2031 document.

Sincerely,

John Sexton