'93 Deficit Totals $10 MillionBy Jeremy Hylton
Editor in Chief
The Institute recorded a deficit of $10.1 million for fiscal year 1993, according to a report released recently by James J. Culliton, vice president for financial operations.
In May, Culliton had projected an $8.5 million shortfall, but changes in government reimbursement for indirect research costs, an increasingly needy undergraduate population, and a drop in gifts to the Institute caused the increase in the deficit.
The original budget deficit predicted in May 1992 was only $3.3 million.
Currently, Culliton predicts deficits of $13.6 million for the current fiscal year, $11.8 million for fiscal year 1995, and $9.0 million for 1996.
Despite the continuing deficit problems, Culliton emphasized that MIT is still a financially strong institution. "We don't need draconian measures, but we really need to think very thoroughly and carefully about all the ways we can decrease costs and increase income" and maintain the Institute's leading position in education and research, he said.
"It is difficult to meet all objectives of reasonable growth in tuition and self-help levels, competitive salaries for faculty and staff, and need-blind admissions," Culliton wrote in his annual financial report.
Money from endowment used
The actual gap between revenues and expenses for fiscal year 1993 was $15.4 million on $1.1 billion in revenues. To cover the operating gap, $5.3 million of unrestricted gifts, grants, and bequests to MIT were used instead of being placed in the endowment.
The official budget deficit is the difference between expenses and revenues, less the amount of unrestricted gifts not placed in the endowment.
Another $3.1 million of money from the endowment was applied to the deficit, and the remaining $7 million came from a series of funds, earned income on reserves, and decapitalization of the research reserve, according to Culliton. It was the first time since 1982 that money from the endowment was used to cover operating expenses.
Continuing reliance on the endowment to cover expenses has serious long-term effects for the Institute, Culliton said. "Whatever sits in the endowment collects interest. If you spend the principal, it's not sitting there collecting interest," he said.
In fiscal year 1992, the operating gap was $13.1 million and $6.8 million of unrestricted gifts were used to reduce the deficit to $6.2 million.
The deficit threatened to much higher this year, but academic programs saved a total of $3.3 million.
"That happened and [this extra money] was more than we budgeted for," Culliton said. "This year and the last few years it has been very helpful."
Decline in indirect cost recovery
The increase in the deficit from earlier predictions was caused by three major expenses: a drop in the amount of unrestricted gifts, an increase in the amount of financial aid given to students, and decline in indirect research cost recovery rates.
The third area, indirect research costs, was the largest contributor to the deficit. The government reduced the reimbursement rate for libraries, student services, medical services, and related facilities at a cost of $2.7 million to MIT.
Indirect research costs include library and similar services, administrative costs, and costs to support facilities that are not directly related to a particular research project. These costs are billed as a percentage -- 58 percent for 1993 -- of direct research costs.
A further $1.7 million loss in indirect cost recovery was caused by a slowdown in the growth of sponsored research. Because the amount of research was less than expected, less of the support costs could be paid for by it.
"If your volume does not grow as fast as you projected, less of that indirect cost can be converted through research. The money has to be paid someway," Culliton explained.
Culliton expects that indirect cost recovery will be a problem in the future. The political climate and increased government scrutiny of research universities have forced significant changes in MIT cost recovery policy, Culliton wrote in the financial report.
"Many of the practices and agreements entered into jointly between MIT and the government are now being changed, under the government's objective to establish greater consistency and uniformity across the entire university spectrum, with resultant loss in recovery from sponsored agreements at major research universities like MIT," Culliton wrote.
Financial aid increased
MIT spent a total of $19.5 million of unrestricted funds to provide financial aid, a 13.2 percent increase from last year, Culliton said. Most of the money, $16 million, was spent to meet the gap between undergraduate need and available scholarships.
"In the last couple of years we've had some significant increases because of the economy. Whether we're going to see an abatement in that [because an improvement in the economy] we don't know," Culliton said.
Culliton also said that the end of the Overlap Group, which reviewed financial aid levels for students admitted to more than one school in a group that include MIT and the Ivy League, had no affect on aid costs.
The money used to supplement outside scholarships and fellowships reached 20 percent of tuition revenue this year and is projected for 21 percent of tuition in 1994.
In 1985 a task force on undergraduate financial aid recommended that self-help levels increase at a rate two to three percent above tuition increases. The task force also recommended that if the unrestricted funds used for aid reached more than 15 percent of tuition income, it should be a sign of caution and the financial aid policy should be reviewed.
The total amount of gifts to MIT declined to $89.2 million this year, from $89.9 million last year. Another $7.6 million was received through the Industrial Liaison Program, down $0.1 million from last year.
The total revenue from unrestricted gifts was $3.8 million less than expected -- a total of $14.2 million.
The Institute's policy on large bequests actually limited the amount of unrestricted funds available this year. William A. Coolidge gave $8.4 million to MIT in his will. All this money was placed in the endowment even though it was designated unrestricted funds so that the Institute can specifically recognize the donor and can maintain budget discipline.
Placing the bequest in the endowment maintains budget stability. If the Institute relied on large windfalls in some years, it would skew operating budgets, Culliton explained.
Budget review underway
Last spring, President Charles M. Vest organized four committees to develop recommendations for increasing revenues and decreasing costs. The committees examined revenue enhancement, academic activities, administrative functions, and support services.
The committees submitted reports to Vest, and Provost Mark S. Wrighton and Senior Vice President William R. Dickson '56 are developing final plans to be reviewed by the Executive Committee of the Corporation, Culliton said.
There are certain areas where MIT continues to face financial risks independent of belt-tightening efforts, Culliton explained. "These exposure, or risk, items relate to tuition and salary increase tradeoffs, levels and use of investment and gift income, changes in research revenues and recoveries, and the manner of funding of necessary capital costs," Culliton wrote in the financial report.
He also noted that, "despite efforts to control costs, there are both unexpected and necessary Institute-related events that add to the imbalance in the operating budget. Recent examples include: legal fees, less than full indirect cost recovery, and undergraduate financial aid."