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April 22, 2002

Keeping Emory ascendant

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 University’s 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 University’s 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 now.

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 University’s 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 conversation.

President Bill Chace

How is the University’s budget created?
The creation of each year’s 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 provost—who chairs the University’s Ways and Means Committee—presents 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 budget 2002–03?
Here are some factors that went into balancing next year’s budget:

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, Emory’s 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 year’s 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 delayed—but 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 Emory’s 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 accessibility.

• 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 in staffing.

• 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. It’s a helpful device, in its limited way. But it doesn’t begin to suggest the complexity of a university’s 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 clinic’s 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 Emory’s faculty gets, the prouder we can be at working at Emory—and 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 University’s 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 mission.

Administrative units, by contrast—those such as Campus Life, Institutional Advancement, the offices in the Administration Building, Facilities Management and Human Resources—lose 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 Library.

• $655,000 to replace overburdened storm sewerage on Clifton Road.

• $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 Campus.

Couldn’t the University save money by turning out lights not in use and planting fewer flowers?
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 run—not to mention more environmentally friendly—than the division’s 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 Emory’s membership in the Atlanta Regional Consortium for Higher Education (ARCHE) is participation in the consortium’s cooperative purchasing program. In the last fiscal year, Emory’s 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 flowers—about $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 Emory’s grounds department in FMD is understaffed by about 12–15 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 University’s 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 year—under the current benefits plan—would require a payment of $6.5 million in light of rising costs. Not paying into the VEBA trust would negatively affect the University’s 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 Healthcare’s 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 technology—devices like stints and implants, and expensive diagnostic procedures like CAT scans and MRI—has 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.

Won’t 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 Emory’s 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 issue—the 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 Hospitals—like payments to other hospitals around the country—have 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 up costs.

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 Emory’s 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 percentile—again, 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 research universities.

Keeping this edge is not easy. In the local market, for instance, Emory’s 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, Emory’s hospitals of course had to follow suit—raising the hospitals’ costs by $6 million a year.

In the competition for the best faculty in the world, Emory constantly monitors salaries of faculty at peer universities. We are doing well (see 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 Emory’s 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.



In the last six years, Emory has strengthened faculty salaries across the full range of the Arts and Sciences. The three charts above compare the third-quartile salaries for three groups of faculty members at Emory to third-quartile salaries for the same groups at peer universities, including Brown, Columbia, Dartmouth, Duke, Northwestern, Princeton, Washington (St. Louis) and Yale. In a group of 100, the third-quartile salary would be 75th from the bottom. We use the third-quartile salary rather than the mean, because we seek the best talent for Emory. In each comparison, Emory's percent increase leads the group. The third-quartile salary for the cohort of assistant professors at Emory surpassed those at peer institutions in both absolute number ($54,000) and percentage increase since 1997-98.


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