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MIT will cut general spending by five percent in the fiscal year beginning next July, and by 10–15 percent within the next three years, the president and provost said in a letter to the MIT community yesterday. The announcement mirrors announcements by elite universities similarly affected by the global financial crisis.

The policy amounts to a $50 million reduction from $1 billion general funds budget in the current fiscal year. The policy will not affect budget items whose funds come from external sources like rent, outside research sponsorships, or the Student Life Fee.

An outright hiring freeze is not planned, but hiring will slow.

“We will retain our commitment to need-blind admission and need-based undergraduate financial aid,” President Susan J. Hockfield and Provost L. Rafael Reif wrote.

W1 still in limbo

MIT decided in October not to sign contracts committing to renovate W1, which was to open as an undergraduate dormitory by 2010. The Institute will still reconsider signing a contract next year. The decision would have eventually committed MIT to $90 million in bond-financed debt, and postponing it was “a very prudent thing to do,” said Kirk D. Kolenbrander, vice president for institute affairs and secretary of the MIT Corporation.

“We know the W1 decision was not costless,” said Steven R. Lerman ’72, Dean for Graduate Education, referring to the undergraduates in the Phoenix Group, which was established to found the community and organization of W1. Current sophomores in the class of 2011 who would have occupied the dormitory when it was originally scheduled to open in fall 2010 may not have that opportunity. If the project were delayed an additional year, current freshmen might spend their undergraduate career living in the new Ashdown House, NW35.

Projects already contracted and underway at the Sloan School, the Media Lab, Vassar Street, and the Koch Institute for Integrative Cancer Research will continue.

Entirely new building projects are unlikely to appear soon. The proposed Music and Theater Arts Teaching Laboratory, under planning for nearly a decade and tentatively sited at the parking lot at Albany St. and Massachusetts Ave., has now fallen victim to two recessions and will remain a parking lot.

Follow the money

MIT does not know exactly how much money it will lose. The Institute puts a dollar value on the endowment once a year, on June 30, when MIT’s fiscal year ends, Kolenbrander said. Illiquid parts of the endowment, like private equities and real estate, represent an “unknowable quantity,” he said. But MIT knows the numbers will not be good. Peer universities reported that their endowments had dropped anywhere from 6–30 percent by the end of October.

Cuts are not currently planned for this fiscal year’s $2.3 billion budget. Of that budget, about half will be targeted for cuts next year.

Of the total budget, $1.2 billion represents “sponsored research,” income outside MIT’s control, Lerman said. Most sponsored research comes from the federal government so this spending might vastly increase if an economic stimulus package is passed, or it might sharply decrease if the next Congress cuts government spending.

Student life is a budget item and will go down 5 percent like everything else, Lerman said. But the part that comes from the Student Life Fee will stay the same and will increase periodically as the fee is increased. Among the recipients of Student Life Fee funds: the Student Activities Office, the Graduate Students Office, and the Department of Athletics, Physical Education, and Recreation. The Undergraduate Association and Graduate Student Council funding boards are unlikely to be affected.

The Energy Initiative is safe, Lerman said. Most of its funding is external and is not affected by these cuts.

A relatively small amount of the total budget falls in an “enterprise” category, containing services like housing that have their own income streams; dormitory rent pays for house maintenance budgets. Those budgets will not be cut.

The first cut is the deepest

The rest of MIT’s budget, “general institute funds” of about $1 billion, will be cut by 5 percent, about $50 million for FY10.

“Fifty million dollars is a serious amount of money by any measure,” said Kolenbrander. Administrators and department heads will be required next year to submit a budgets showing a 5 percent decrease in general spending.

If groups do manage to under-spend their budgets this fiscal year, they can “carry forward” any savings, offsetting the harm of the required 5 percent budget cut. Academic groups are used to “carrying forward” money from the prior year’s budget, but it is a new concept to many administrative groups, whose budgets are generally reset each year.

There “will not be a hiring freeze,” Lerman said — MIT will still hire qualified candidates. But standards may rise, with managers using what Kolenbrander called “careful scrutiny.”

MIT will also “look hard at events like the community picnic,” Kolenbrander said.

Events will be “a little more modest,” Lerman said. “We’re not cancelling Christmas” this year but his office will hold a less elaborate party. “It’s inappropriate to be lavish” in a recession, he said.

Wages won’t go down, Kolenbrander said. But he did not rule out the possibility of salary freezes or changes to employee benefits. “Few things are off the table,” he said.

MIT’s announcement mirrors others’

In confronting the messy budget implications of the looming recession, MIT is not alone.

Dartmouth College reported first quarter endowment losses of $220 million, about 6 percent of its value. The college’s president planned to freeze external hiring of staff, cut discretionary spending by 5 percent this year, and reduce its budget by 10 percent within two years. “We expect that there will be fewer staff employees at Dartmouth in the coming years,” President James Wright said in a letter to the community on Thursday, Nov. 13.

In a letter to Harvard University, its president, Drew Gilpin Faust, cited financial research agency Moody’s projection that college endowments would decrease in value by 30 percent over the next year. “Our principal sources of revenue are all likely to be affected by these new economic forces,” Faust wrote. “While we can hope that markets will improve, we need to be prepared to absorb unprecedented endowment losses and plan for a period of greater financial constraint.”

Faust promised to maintain Harvard’s financial aid program: “Families with incomes below $60,000 will pay nothing to send a child to Harvard College, and families with incomes up to $180,000 and typical assets can expect to pay no more than approximately 10 percent of income.”

Anthony Marx, president of Amherst College, told the school in late October that its endowment had lost a quarter of its value since June 30. He promised to continue need-blind admissions both for domestic and international applications and to continue its policies of funding every student’s demonstrated need.

And, like MIT, “though we are not considering a hiring freeze, [Amherst] College will review with greater stringency all requests for replacement or additional positions,” Marx said.

Stanford University will cut its $800 million general funds budget by 5 percent in the next fiscal year, Provost John Etchemendy wrote in the Oct. 29 Stanford Report. Stanford will cut its budget by about the same amount next year, he wrote.

‘Don’t panic’

The present economic situation is “unprecedented, at least in my time,” said Lerman. “People who have never been through” a deep recession may have to adjust to lifestyle changes, he said.

What about the job market? Lerman emphasized the “need for a vibrant Career Fair” even as a recession looms. “MIT graduates are still highly sought after,” he said.

There will be a “tendency for people to read this and panic,” Lerman said. “That’s exactly the wrong reaction.” MIT “is a place that knows how to adapt.”