|A letter from
President Bill Chace
As I promised in my letter to the faculty and staff on April
1, I am writing to bring to the campus a better understanding
of the endowment, its management, our fund-raising successes,
the nature of the health care environment and a range of other
factors that annually affect our thinking about the Universitys
financial health. My hope is that the budget can thus become
better understood in all its dimensons.
At the outset let me say something about the principles that
guide the Universitys budget-making. Emory is, as all
of us know, a well-endowed institution. Nevertheless, our
resources are not limitless. We cannot take too much from
the present at the expense of the future well-being of the
institution. Among the principles that must be weighed in
balance in considering fiscal matters are two that pull at
each other: first, the legal and moral obligations of the
institution to its current relationships, including obligations
to maintain, as much as possible, current programs; and, second,
the fiduciary responsibility the University has to future
generations. In meeting these sometimes competing obligations,
Emory has been committed also to the principle of balancing
its budget. Not since the 1960s has the University finished
a fiscal year in the red; we do not intend to permit a deficit
Beginning with this issue, Emory Report will publish
a series of three articles that will address many of the questions
raised during the past two months about the Universitys
finances. I hope that this information will make both the
budget process and the need for benefits changes more transparent.
As always, I invite your comments, questions and continuing
President Bill Chace
How is the Universitys
The creation of each years annual budget requires thousands
of person-hours of deliberation and compromise and involves everyone
from departmental business managers and chairs to deans, vice presidents
and the Board of Trustees. The process takes nearly five months,
from October through mid-February. Along the way the provostwho
chairs the Universitys Ways and Means Committeepresents
to the Council of Deans and the Faculty Council the projected revenues
and the expected big-ticket expense items as a heads-up.
The resulting budget, presented to the Board of Trustees in February,
must hold in balance both the very costly wish lists brought to
the table and the more limited, finite resources available.
The creation of every annual budget entails the projection of
budgets for succeeding years as well. No budget is created without
anticipating long-range levels of income and long-term commitments
of funds. Two years ago this long-range anticipation led the Ways
and Means Committee to require departments to project recapturing
3 percent of their budgets for diversion to other purposes than
those for which they were currently being used. As far back as three
years ago, the current squeeze on the budget was anticipated.
Last fall, after receiving budget requests from all the schools
and administrative units, the Ways and Means Committee toted up
the needs for additional funding to meet those requests. It then
measured projected income from all sources (tuition, endowment,
research and gifts), and determined that requests for additional,
new funding exceeded projected new income by $9.4 million. Something
had to give, and the Ways and Means Committee set about to close
that $9.4 million gap.
What priorities shaped
Here are some factors that went into balancing next years
Competitive salaries for the best faculty and staff continue
to rise more rapidly than inflation. In the Educational and
General Budget (the budget for the schools and related services
such as Facilities Management, Campus Life and Institutional Advancement),
salaries and benefits account for more than half of all expenses.
For FY03, Human Resources (HR) recommended a 4 percent salary pool
to keep pace with our competitive goals. The Ways and Means Committee
determined that resources were sufficient for only a 3 percent rise
in the pool for merit salary increases.
We cannot allow such slippage for long without losing a competitive
edge within our various markets for faculty and staff. At the same
time, HR recommended market adjustments for certain positions; Ways
and Means determined that those adjustments would need to be funded
at half the requested level. Altogether, these considerations reduced
requested expenditures by more than $3.5 million.
Insurance costs are growing much faster than revenue
from all sources. For the past decade the University has been
able to keep a lid on insurance premiums by taking advantage of
creative means to structure our costs, and by shopping for competitively
priced insurers. Nevertheless, the cost of property, casualty and
liability insurance has increased more than 50 percent since Sept.
11. Despite taking every measure possible to keep insurance costs
at a minimum, Emorys insurance costs for FY03 will be $1.3
million higher than in the current fiscal year.
A long pattern of inflation in library and information resources
continues. Next years rate of inflation for library materials
is projected to be 9 percent. Just to maintain current levels
of commitment would mean an additional $650,000 in annual expenditures.
Certain essential needs can be delayedbut only
so long. Our libraries are now at critical shortage of shelving
space and need compact shelving. Ways and Means deferred $1.3 million
for the first phase of that project to move the budget closer to
balance. But those shelves will have to be bought eventually.
New regulatory and accrediting standards for medical
centers such as Emorys have raised costs without offering
commensurate means of compensation to the institution. Likewise
federal law, such as the Americans with Disabilities Act, requires
of institutions a financial as well as moral commitment to making
their facilities accessible for everyone. Annually the University
designates more than $125,000 toward chipping away at barriers to
Tuition at Emory, as well as at most research universities,
has been rising at a rate of at least 4 percent annually for more
than two decades, causing serious concern among our trustees as
well as among our students, their families and the American public.
We must do all that we can to keep education affordable, while
also measuring carefully just how far we can push the tuition envelope.
Many necessary positions requested by support units were
not funded for next year. On the other hand, growth in faculty,
student body and capital plant all require some commensurate growth
As a result of containing costs, it was possible to meet
all requests for increases in scholarship funding at Oxford College
and the schools of theology, law, public health and business, while
meeting most of the requests for the graduate school and Emory College.
How do the pieces
of the budget fit together?
One customary and simple way of showing the budget of a research
university is the pie
chart. Its a helpful device, in its limited
way. But it doesnt begin to suggest the complexity of a universitys
finances. The budget
pie chart cannot show or explain the complex and
vital connections among the pieces of the pie.
To take but one example: the Emory Healthcare operations of $1
billion include the costs of operating The Emory Clinic, Crawford
Long, Emory Hospital and Wesley Woods. Yet that enterprise is tied
inextricably to the academic enterprise of the University, represented
by the smaller Educational and General Budget. The clinics
doctors serve on the faculty of the School of Medicine; many of
the hospitals nurses take courses in the Nell Hodgson Woodruff
School of Nursing on the courtesy scholarship; income from the hospitals
supports academic programs in the medical school and capital purchases
in the Woodruff Health Sciences Center.
Or take another example. The rate each Emory student or employee
pays for a parking permit has some connection to the growth in research
at the University. How so? Well, for each additional faculty member,
there also is a need for more teaching and research space, and those
new spaces mean the construction of new laboratories and classroom
buildings, each one of which requires, by DeKalb County zoning ordinances,
a certain number of parking spaces. These must be built in decks,
whose cost is amortized by the fees for our parking permits. Hence,
the better Emorys faculty gets, the prouder we can be at working
at Emoryand the more our parking rates go up. Excellence costs.
Why not allow departments
to carry over unspent money to the following budget year?
This is, in fact, the Universitys policy for the schools.
Those schools that do not spend all of their budgets in one fiscal
year retain those unspent funds as a surplus that accumulates for
their discretionary spending. Schools have used their surpluses
to renovate classrooms for high-tech teaching, fund start-up laboratory
equipment for new faculty members in the sciences, enhance scholarship
lines, and meet other needs that go to the heart of their academic
Administrative units, by contrastthose such as Campus Life,
Institutional Advancement, the offices in the Administration Building,
Facilities Management and Human Resourceslose their unspent
funds, which go into the general University fund. This fund is used
to meet pressing needs for which there would not otherwise be funding.
Following are examples of how this fund has been used:
$1 million to repair the 30-year-old exterior of the Woodruff
$655,000 to replace overburdened storm sewerage on Clifton
$375,000 for staff and space to assist in the recently concluded
and successful audit of the University by the Internal Revenue Service.
$131,000 to support the regular, 10-year reaccreditation
of the University by the Southern Association of Colleges and Schools.
$269,000 for minor repairs and renovations (lest we find
ourselves a decade hence with much more costly deferred maintenance).
$375,000 for asbestos abatement in renovated space in the
Dental School Building.
$875,000 for renovation and operation of the Briarcliff
University save money by turning out lights not in use and planting
The administration, of course, looks for every possible means to
reduce costs. For more than a decade, the University has purchased
natural gas in a way that has saved hundreds of thousands of dollars
in utilities costs. New alternative-fuel vehicles in Facilities
Management are more cost-effective to runnot to mention more
environmentally friendlythan the divisions old gasoline-fueled
fleet. More efficient lighting fixtures and HVAC systems save thousands
of dollars annually over the systems they replaced.
One of the benefits of Emorys membership in the Atlanta Regional
Consortium for Higher Education (ARCHE) is participation in the
consortiums cooperative purchasing program. In the last fiscal
year, Emorys savings in purchases, through the economies
of the cooperative purchasing program, totaled more than $788,000.
About those flowers: One of the things that makes Emory a pleasant
place to work is that it is a pleasant place. Aesthetics aside,
however, the University spends about the same amount annually to
remove dead trees as it does to plant flowersabout $55,000
from the Educational and General Budget. FMD devotes more labor
to picking up litter than to planting flowers. And Emory finds itself
in a neighborhood and a city where the standards of landscaping
for businesses, as well as residences, are very high.
Nevertheless, we manage to keep the campus lovely with great efficiency.
National standards for universities suggest that Emorys grounds
department in FMD is understaffed by about 1215 percent for
the level of work it does so extraordinarily well.
Why did the University
focus on fringe benefits to cut budget costs?
The focus on fringe benefits this year arose in part because health
care benefits are among the fastest-growing expenses while being
the least under the Universitys control. As a result of unforeseeably
skyrocketing health care costs, the fringe benefits pool this year
has a $3 million deficit. Additionally, the University is required
to maintain on its balance sheet the projected costs it would pay
for retirees medical benefits during the life expectancy of
those retirees. These costs are paid into a Voluntary Employees
Benefits Association (VEBA) trust fund, which next yearunder
the current benefits planwould require a payment of $6.5 million
in light of rising costs. Not paying into the VEBA trust would negatively
affect the Universitys balance sheet.
Among the more knotty puzzles confronting the University in recent
years has been the growing pressure on Emory Healthcare. As the
lone academic health center in the metropolitan Atlanta market,
Emory Health-care competes at a significant disadvantage with other
local health care systems. The average cost of benefits to Emory
Healthcares competitors is roughly three-fourths the cost
for Emory Healthcare. Because of its greater cost for benefits,
Emory Healthcare has a much slimmer margin for operating in the
black than do its competitors.
Likewise, the University itself is squeezed by the increasing cost
of benefits. Emory employees are sophisticated users of medical
care. We seek treatment when we need it; we make our annual visits
to our doctors for regular physicals; we make use of mental health
plans; and we order lots of prescription drugs. The cost of prescription
drugs is projected to double between 1999 and 2004.
Additionally, the use of new technologydevices like stints
and implants, and expensive diagnostic procedures like CAT scans
and MRIhas pushed the cost of health care up at the rate of
15 percent annually.
Emory shares in the cost for all of this treatment, absorbing more
of the costs than it passes along to the users. Because of these
increases in health care costs, the fringe benefits pool deficit
would continue to grow
at a compounded rate unless we reined it in.
Wont all of
this budget squeezing be unnecessary once the recession ends?
The constraints we face in building an annual budget are only partly
a function of the national recession. It remains difficult to predict
how long the economy will take to get up to full speed, and it is
impossible to say whether it will ever regain the bullishness of
the last decade.
But the market itself is not really the issue. Yes, positive growth
in the market will mean positive growth in Emorys endowment
and, in return, more income. But income from the endowment accounts
for only 20 percent of the Educational and General Budget. And the
investment market does not control those elements of our budget
most at issuethe dramatic rise in health care costs in the
past two years and the projection of continuing double-digit increases
in those costs.
Why should we trust
those projections about health care costs?
First, because the economies brought about by the austerities of
HMOs have already squeezed most of the savings possible out of the
system. And the payments from insurance companies and from Medicare
to The Emory Clinic and Emory Hospitalslike payments to other
hospitals around the countryhave declined steadily for more
than a decade.
Second, the increasing reliance on prescription drugs and biotechnological
devices shows no sign of slowing down. Americans have access to
an unprecedented array of choices for care, and they see no reason
not to take advantage of those choices.
And, third, because our aging population will rely more and more
on precisely those expensive drugs and devices that are driving
Although Emory, as a self-insured employer, was able to stop increases
in health care costs for a few years after the creation of EmoryCare
and EmoryChoice, the past two years have seen a return of double-digit
increases in the costs of Emorys health care. Some of those
costs have been passed on through increased premiums and deductibles;
but the University pays a greater percentage of those increases
than it has asked employees to pay.
Why not raise salaries
at a lower rate?
For more than a decade, the University has sought to strengthen
its competitiveness in the market for faculty and staff. Our goal
has been to maintain staff salaries at the average for comparable
positions in the markets where we compete for staff. For faculty
members our goal has been to maintain salaries at the 75th percentileagain,
roughly speaking, trying to assure that our faculty members are
earning 50 percent more than the national average for comparable
positions, and roughly the 50th percentile in the first tier of
Keeping this edge is not easy. In the local market, for instance,
Emorys hospitals compete with systems whose fringe benefits
rates average 6 percentage points lower. When a competitor hospital
in December increased pay for nurses by a dollar an hour to improve
its recruitment of nurses, Emorys hospitals of course had
to follow suitraising the hospitals costs by $6 million
In the competition for the best faculty in the world, Emory constantly
monitors salaries of faculty at peer universities. We are doing
graphs below). But other universities are constantly
striving to offer more attractive compensation for those same faculty
members. We cannot afford to let our faculty and staff salaries
slip in this competitive environment, because it would be very difficult,
if not impossible, to regain that lost ground.
How much will the
University save by implementing the new benefits plan?
The current rate being charged for fringe benefits is 26.5 percent.
That means that for every $100 designated from, say, a department
toward salaries, an additional $26.50 is charged to the department
for fringe benefits. That percentage has been creeping up for two
years after leveling for eight years. Every percentage point represents
approximately $2 million of the Educational and General Budget that
could have been spent on raises, scholarships, new faculty or staff
positions, library materials, maintenance and so on.
Because the cost of health care for employees and retirees covered
under Emorys medical plans outstripped projections, the fringe
benefits pool for the University is projected to have a deficit
of $6 million by the end of this fiscal year if no changes are made.
If we did nothing to reduce fringe benefits costs, that number would
grow larger next year. At some point, of course, the University
will have to fund that deficit.
We project that the University, apart from the hospitals, will
save $9.5 million next year alone, thanks to the benefits plan approved
by the trustees. The plan proposed in January would have saved $12.5
million. By the sixth year, annual savings will have grown to $15.4
million ($17.5 million in the original plan). Between now and the
end of the sixth year, the new benefits plan is expected conservatively
to save the University some $60$70 million.