Duke amid the downturn

Doug Breeden sits in his office on a warm April day inside the Fuqua School of Business.

It's a new office, with plush leather seating and cherry-wood paneling. The dean of the business school's office overlooks a new student plaza and Carolina pine trees behind the school. The office has not only the standard waiting room, but also a bathroom complete with shower.

Three years ago, when plans for Breeden's office were first being drawn, Duke University was flush with its own success. Its investment company was reeling in an unbelievably strong, perhaps lucky, 59 percent return on the endowment. President Nan Keohane was announcing that the Campaign for Duke's goal would be raised from $1.5 billion to $2 billion, while trustees and administrators whispered it could go even higher, possibly to $2.5 billion. Marquee gift after marquee gift flooded the University's headlines--$25 million from the Fitzpatrick family for photonics, $35 million from Edmund Pratt to rename the engineering school, $35 million from the Gates Foundation to fund the new sciences building and $25 million from the Bass family for endowed professorships. The Duke University Health System, having acquired what seemed like every health care facility between the Triangle and the Virginia state border, was still in a mode of growth. Additionally, strategic plans called for doubling faculty in the Fuqua School of Business and the Pratt School of Engineering and constructing a slew of new buildings from Research Drive to East Campus.

Three years ago, Duke was riding the crest of a peacetime expansion--the stock market was booming, the Dow at 11,000 and the NASDAQ at 5,000, unemployment was at 4 percent and the federal government was looking at record surpluses instead of record deficits. And the political chattering class was more worried about impeachment and presidential indiscretions than a war with Iraq in a post-Sept. 11, American-led crusade against terrorism abroad mixed with rising unemployment and economic doldrums at home.

Welcome to the '00s, a decade that promises to be a stark alternative to the "merrily-we-roll-along" '90s. And despite the academy's aloof role in society, not even the ivory tower can evade the laws of economic gravity.

"It's not an overstatement to say that we are directly affected by the world economy," Breeden says.

Such a sentiment is felt nowhere on campus more strongly than in Breeden's office, where a tension pervades the mood, disturbing the general confidence of one of Duke's most aggressive, bustling schools. Riding its steady ascent into the top rankings, Fuqua has built up its faculty from 69 to 87 in the past five years and plans to enlarge it closer to 100 by next year. The school has just added a sixth section to its base daytime MBA program--the standard business school program--in response to its rapidly expanding infrastructure of space and faculty. Fuqua's corporate spin-off, Duke Corporate Education--launched in 2000 to raise Duke's image and the business school's coffers by providing custom-tuned educational consulting to the world's top businesses--is actually growing in a climate where most similar corporate education ventures are withering.

"It's very up and down, though," Breeden warns, noting that for every firm that decides the time is appropriate to invest, another firm hesitates to seal a deal with Duke CE because of the second Gulf War and the slow, unstable economy.

Breeden's top worry these days might be the Global Executive MBA program--an elite program in which businesses send top executives to seminars across the globe, supplemented by some of the most advanced Internet-based "distance learning" tools. But the shaky economy has left the program's applications dwindling. Breeden intimates that some had worried about the addition of an extra 65 daytime MBA students when he first announced the increase, but those same people are now wiping their brows with the knowledge that their extra tuition will keep the school financially set despite less revenues being generated by the more exotic programs.

Meanwhile, Breeden is working on the details of a new partnership with Seoul National University. Notwithstanding the challenges of working out the logistics of a partnership half a world away, Breeden is worried less about Korean patterns of business than he is about how the nuclear tension in North Korea and the growing concern that a new, virulent disease in parts of Asia may be disrupting an economy that was on the verge of rebounding after the currency crises of the late 1990s.

All things considered, Breeden, who took office in August 2001, is not exactly worried about his school. It's growing by almost every measure, but there's a sense that lurking just beyond the horizon is a zone no one wants to explore, a realm where the national economic downturn might actually have a real impact on the school.

Call it a recession, call it a double-dip recession, call it a downturn, but regardless of its name, it is enveloping the nation for a third year with no sharp reversal in sight, and the University has started to feel the effects permeate its walls. However, as administrators look warily to the future of the nation--and the University's economic health--they note that Duke has not been affected as acutely as smaller schools and public, state-funded schools. And the recession's consequences have surprisingly provided some silver linings for the University.

Michael Mandl, vice president for financial services, is to the University's dollars and cents what Keohane is to its fundraising stockpile or Coach Mike Krzyzewski is to its basketball program--a veritable czar. He says that on a scale of one to 10, Duke has only sustained about a "three or four" in terms of damage from the recession.

Like Breeden and many other top officials, Mandl's not sweating how the University has handled the first two years of economic funk, but worries more about how long the University can go without making major financial changes.

At the end of February, Stanford University Provost John Etchemendy announced to the school that all staff and faculty wages would be frozen for the 2003-04 academic year to address the university's shortfall.

More than one senior Duke official has admitted to taking a Pyrrhic delight in the fact that some of the nation's wealthiest universities--such as Stanford, with its $7.6 billion endowment, compared to Duke's own $2.7 billion endowment--have had a harder time responding to the economic downturn because more of their operating budgets come from endowment funds than from other sources of revenue.

"Somewhat ironically... given that we have a smaller endowment, we are less directly affected by the downturn than some of our peers that have a huge proportion of their resources every year coming from endowment income," Keohane said. "It's great [for them] in the fat years, but it means we're somewhat cushioned in the lean years."

Despite the jostling among top schools, their pain pales in comparison to the bleeding cuts that less prestigious schools and particularly public universities are sustaining in the current slow economic climate. The University of North Carolina at Chapel Hill has had to lay off professors and slash programs at the merciless pen of the state Legislature, itself confronting the pressures of the worst economic crisis in the state since the Great Depression.

The University's response, however, has been surprisingly painless. There have been no mass layoffs in any department, no salary wage freezes and no major changes to its funding priorities--at least not yet.

But earlier this spring, administrators reduced the payout rate cap for the endowment. The Duke University Management Company shocked even itself with a 58.8 percent return three years ago, only to see slight losses around 4 percent in the subsequent two years. While the University capped endowment spending at that time at 10 percent a year, it has now reduced that to just 3 percent, in anticipation of losses again this year.

Executive Vice President Tallman Trask says he is busy cutting costs out of Duke's administrative structure by keeping budgets virtually flat for those departments, such as computing, human resources and facilities.

Trask and Provost Peter Lange collaborated this spring to evaluate how the strategic investment plan is faring. At a Board of Trustees presentation in February, these administrators noted that the plan had been written with some flexibility in mind, given the stratospheric economy three years ago. Trask says the plan remains basically intact, but trustees and administrators alike remain cautious about the future, lest projects that have been slightly postponed find themselves in graver jeopardy.

The capital campaign is also chugging along at a surprisingly healthy rate--in early April it stood at $2.05 billion with more than eight months to go. Robert Shepard, vice president for University development, and the heir apparent to John Piva, the retiring senior vice president for alumni affairs and development, says the campaign has not been harshly influenced by the economy--gifts continue to pour in. He says more donors, however, now have to limit their giving by offering a few million dollars fewer than they might have previously, or providing a contribution in a different format. This tendency may explain why the University has seen fewer double-digit million-dollar gifts this year.

Financial aid requests have also skyrocketed, exacerbating the Arts and Sciences deficit, a shortfall that has less to do with the economy and more to do with increasing demands, continual pressures on research funds and a budget that still has to catch up with a decade of growth. While William Chafe, dean of the faculty of Arts and Sciences, says many factors likely contribute to the jump in need-based aid, the economy is undoubtedly one of them, as parents find their bank accounts assaulted not only by rising unemployment but by shrinking stock market returns as well.

Federal spending on research also looks like it may be in trouble. As Washington faces record deficits in anticipation of a front-loaded tax cut, a costly military adventure in Iraq and possible continued domestic economic woes, the National Institutes of Health's spending on research and development for next year appears to be flat-lined. This frugality goes for much of the rest of the federal programs, from financial aid to other research-based agencies. The one exception may be the National Science Foundation, which is working to increase its funding levels by 50 percent and this year hopes to raise its support by 15 percent. Consequently, researchers at the top of their fields, like those at Duke, will still be able to fund their research, but it may become more difficult and grant awards may have to be stretched further.

All of these factors do not amount to that much in the big picture. Certainly, the University is struggling in some areas, but Duke is still growing--the mantra, as Mandl says, is "We're doing as well as anybody."

Mandl and others even note there have been some positive consequences of the recession.

"Generally it's the case that expenditures for construction contracts and work like that tends to be better in this environment because people are wanting work, and so there's some lower pricing on the capital construction costs," he says. Trask also notes that it simply costs less to borrow money.

For instance, the Center for Interdisciplinary Engineering, Medicine and Applied Sciences is ahead of schedule and below budget, savings that are cushioning the strategic plan's financing.

In the meantime, administrators continue to cross their fingers, wishing for the best. With the future of the economy as uncertain as ever, officials are gambling on the hope that the University has enough structural flexibility in place to weather the remaining economic gloom.

"The short answer is that the impact is going to be felt more as a sort of continued, restrained recession," Mandl says. "It hasn't been as severe as maybe some other places and it's more a matter of whether it turns around in the next couple of years."


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