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Institute must cut expenses sharply in face of expanding deficit

Column by Mark Kantrowitz

The MIT Commission on Industrial Productivity culminated two years of study recently by calling for widespread changes in the way American companies operate. The commission based its report on detailed examinations of a number of key industries, but, ironically, it missed one of the largest sectors of the US economy: education.

In addition to being an educational institution, MIT is also a business, and as such it will be facing a critical shortage of money in the next decade.

"What!" you exclaim, "with a $1 billion endowment and a soon to be completed capital campaign, MIT needs yet more funds?"

Strange as it may seem, unless MIT's management takes steps now to control spending and enhance revenues, the deficit between expenses and revenues will increase exponentially over the next 10 years.

The following chart shows MIT's total operating expenses, research revenue, tuition revenue, and the deficit between operating expenses and research revenue over the past 40 years. Over the next 5-10 years, however, the research revenue curve will flatten out, showing little or no increase in revenues because of decreased government research spending. If MIT's management does nothing to curb increasing costs, the deficit will increase to $120 million per year by the year 2000. Of course, MIT could "always" meet costs by raising tuition to $28,000 per year.

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Traditionally, MIT has always had two competing goals: increasing faculty and staff salaries vs. keeping tuition from rising too fast. Since the federal government allows MIT to count only 20 percent of salary costs as overhead on research grants, 80 percent of salary costs comes from tuition revenue and endowment income. In fact, 75 percent of the annual tuition increase can be attributed to increases in salaries.

So if MIT wants to maintain both competitive salaries and a diverse student body, it will have to cut expenses -- dramatically and immediately.

Band-Aid measures can help only for so long. For example, by buying houses for each of the three sororities, MIT could house 200 additional students in the Institute housing system without needing additional facilities. This represents an increase in net income of about $3 million, enough to close the current deficit gap.

But unless MIT makes real changes in the way it budgets and spends money, a $3 million increase will last only one year. The MIT accounting system lacks any notion of fiscal controls. MIT offices and departments receive money for their budgeted expenses as a lump sum, which they may then spend any way they please. A common trick, for example, is to keep a secretarial or administrative position unfilled, and to spend the money budgeted for salaries on other items. Since MIT doesn't have any mechanism for reconciling budgeted expenses against actual spending, spending can grow without bounds.

As such, MIT budgets are meaningless, and have no predictive value. Financial officers for departments have no need to be conscious of spending, because MIT is a cash cow. If you ever need anything from your department, ask for it in June. MIT's fiscal year runs from July 1 through June 30, and non-fund accounts are zeroed at the end of June. Departments with money left over go into a spending frenzy during June.

Coming out of a 40-year period of fantastic growth, MIT is also quite decentralized. By consolidating duplicated facilities, MIT can realize considerable savings. For example, there are more than two dozen offices at MIT whose sole purpose is to produce publications. As a result, MIT has no uniform publication style, and offices which deal with the publications, such as the MIT Libraries, have to collect them from 24 separate locations. If MIT were to create a centralized publications office, staffed with the best people, and provided with state-of-the-art facilities, not only would publication quality improve, MIT would save at least $500,000 a year in salaries and benefits. Similar savings can be realized in each of MIT's administrative systems.

One would think that MIT, a world leader in technology and management, would have the best administrative systems to boot. But as any MIT student who has had to deal with various MIT administrative offices has realized, this just isn't so. Why? Because MIT has a rule preventing MIT faculty from consulting for MIT, even for free. Obviously this rule is needed to prevent a conflict of interest, yet it also prevents MIT from benefiting from some of the most capable advisors.

In conclusion, if MIT were to take a look at its operations from the point of view of a major business -- after all, MIT earns close to a billion dollars a year -- many of its financial problems could be quickly identified and solved. For this reason, I hope that MIT's next president is someone from outside MIT, who has had extensive experience managing large corporations.


Mark Kantrowitz, a contributing editor of The Tech, is graduating with an SB in Mathematics and an SB in Linguistics and Philosophy.