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University erases deficit, endowment sees growth

The University’s 2010-2011 financial statements show significant endowment growth and the elimination of the budget deficit Duke faced during the financial crisis.

The University’s endowment grew 24.5 percent to $5.7 billion during the fiscal year, which ended June 30. The gains exceeded returns of a number of other top universities including Harvard University, Massachusetts Institute of Technology and Yale University, which reported increases of 21.4, 17.9 and 21.9 percent, respectively. The returns bring Duke closer to the $6.1 billion mark reported in 2008 before the financial downturn led to significant losses.

The University’s other main financial achievement of the year was closing the gap between its revenues and expenditures, Vice President for Finance Tim Walsh said. The administration’s effort to cut $100 million in costs is now largely complete. The Duke Administrative Reform Team, which originally aimed to eliminate the deficit in three years, has shifted its focus from actively cutting costs to monitoring the University’s expenditures, he added. The elimination of the $100 million deficit, combined with significant one-time events resulting in revenue, allowed Duke to bring in $53.8 million more than it spent last year.

“Those are the best operating results we’ve had since 2006, which really reflects the successful rebalancing of our operating budget since the financial downturn,” Walsh said. “It has been a three-year process of correcting the budget, and it’s essentially done.”

Endowment returns contribute a significant part of the revenues required for the University’s annual budget. Each year, Duke spends 5.5 percent of the average value of its endowment from the three previous calendar years, a rate that is set by the Board of Trustees.

A balanced budget

Duke’s surplus of $53.8 million can in part be attributed to a major, one-time financial event.

In January, the School of Medicine monetized the patent for a drug developed at Duke called Myozyme, a treatment for a disorder called Pompe disease, which causes muscle damage. The income of $90 million brought the University’s sources of “other income” to $192 million—an 86 percent increase from the previous year, according to the University’s financial statements. Other income, which accounts for 8 percent of Duke’s $2.3 billion budget, consists of revenue not accounted for by net tuition and fees, government and private grants and contracts, philanthropic contributions, investment returns and auxiliary enterprises.

“That [one-time event] obviously skews your results, but we have one-time events happen all the time, they are just different year to year,” Walsh said.

Walsh said although the $100 million deficit has essentially been eliminated, officials must remain vigilant about costs moving forward.

The main financial concern for Duke now is the possibility of cuts to federal research funding, especially from the National Institutes of Health, Walsh said. The NIH accounted for the vast majority of the $613 million in government grants and contracts that the University received this fiscal year. If congressional budget decisions result in a cut to funding, Duke will lose support for research but retain some of the costs associated with conducting that research. A tenured professor whose work has traditionally been funded by the federal government, for example, will be paid by Duke whether or not that federal support continues.

Michael Schoenfeld, vice president for public relations and government affairs, said this is a concern for all universities with a large research presence. Schoenfeld said Duke is lobbying alongside other major research universities in Washington, D.C. The federal government has challenging decisions to make, so it is difficult to predict how much funding the University will receive in the years to come.

“Whether or not the federal government has a budget even and is able to stay open sadly and unfortunately appears to be a day-to-day exercise these days,” Schoenfeld said. “So trying to make long-term predictions about what the federal budget may look like a year, two, three or five from now is basically looking into a crystal ball, and not a very clear one at that.”

Gains indicative of broader trends

Duke’s returns reflected the global economic conditions of the fiscal year, said Connel Fullenkamp, director of undergraduate studies and professor of the practice of economics, who currently writes a biweekly column for The Chronicle. The Federal Reserve’s quantitative easing policy ultimately resulted in the rise of stock and commodity prices worldwide, two categories of financial assets that performed particularly well for the University.

The current state of the endowment remains unclear, however, because the financial markets have experienced significant turmoil since June 30.

Walsh said “close to flat” is a fair way to characterize the endowment’s growth since the end of Duke’s reporting period. Given the long-term nature of the University’s investments, Duke does not have a precise figure for the current value of the endowment.

After a year of high growth for the endowment, the year ahead may prove more challenging.

“A recession looks more likely since the U.S. recovery has sputtered, due to the end of stimulus and the lack of resolution to the housing market problems,” Fullenkamp wrote in an email Thursday. “Also, the European crisis has dragged down demand there and also hurt the U.S. economy since this slows down the world economy and reduces demand for U.S. goods and services abroad.”


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