Published by the Students of Johns Hopkins since 1896
August 12, 2020

How the University will immediately cut expenditures

By JAKE LEFKOVITZ | April 25, 2020

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COURTESY OF MARVIS GUTIERREZ.

The University has committed itself to “a series of broad-based and decisive austerity measures” in response to newly-projected large budgetary shortfalls in both the present fiscal year (FY) as well as FY21. University President Ronald J. Daniels announced these measures in an email to the Hopkins community on Tuesday night. 

The University’s prior budgetary projections had put Hopkins on track to achieve a $72 million budgetary surplus by the close of FY20. Before any attempts at mitigation are considered, Hopkins is now projected to stand at a nearly $100 million deficit, according to the Financial Implications and Planning (FIP) report. For FY21, the projection before any mitigation was considered was similarly revised from an $80 million surplus to a $375 million deficit. 

According to University of California, Santa Barbara Professor of Economics Dick Startz, these projected deficits are serious, especially in light of the University’s total budget.

“You don’t have to have revenue and expenditures match each other exactly. But you can’t get too far off either because the bank account will run dry,” Startz said in an interview with The News-Letter. “[Universities] can’t borrow money and pay it back with taxes later on [like governments can].” 

Daniels announced immediate austerity measures as the first of three phases to mitigate the financial effects of the coronavirus (COVID-19) pandemic. The University will limit expenditures in the upcoming academic year by: suspending its contributions to most faculty and staff retirement plans; severely restricting all faculty and staff hiring; and instituting a freeze on base salary increases for faculty and staff. 

These specific measures are expected to save the University $160 million in FY21. This roughly corresponds to the $150 million loss that the University is projected to take from decreased tuition and student-related revenue in FY21. 

Daniels said that over the past month, he consulted with representatives from the Faculty Budget Advisory Committee. Professor Kevin Hemker, a member of the committee’s rapid response team, explained in an interview with The News-Letter why the University chose to suspend its matching contributions to faculty and staff retirement plans. 

“The options included a reduction in salaries, or layoffs or worse. But we realized we could achieve some of this by cutting back retirement,“ Hemker said. “It’s not an immediate impact on peoples’ spending potentials. So we can still leave money out there, and so the City of Baltimore isn’t impacted by a huge financial burden... But we also wanted to do something that was fair to faculty members and that was spread across the University.” 

The report also detailed the need for new expenditures. Between rebating the balance of undergraduate students’ housing and dining charges for the spring semester and declining to collect the anticipated regular student service charges, the University incurred another $12 million in losses. 

The University also remitted another $5 million to students in the form of direct emergency grants, the continuance of student employees’ wages and the waiving of the summer work requirement of financial aid packages. 

According to Vice President for Communications Andrew Green, $112,000 of the $5 million remitted to students took the form of direct emergency grants to students. In an email to The News-Letter, he detailed that these grants were made to help students move out, travel home and be able to participate in online instruction. Most of the balance of the $5 million, he added, is attributable to suspension of the summer work requirement. 

Under Section 18004(a)(1) of the CARES Act, the federal Department of Education has already allocated $6 million in federal relief funding. Hopkins will only be receiving those funds if it commits to using at least half of the funds to make emergency grants to students. 

Green said in an email to The News-Letter that the University has not yet decided whether or not to accept these funds. Recently, several other large private universities have announced that they will not be accepting CARES Act funds. 

The University will also establish two Workforce Relief Funds to make grants to eligible Hopkins employees and contract workers, respectively. The FIP report states that the terms of eligibility for grants under these funds will be controlled by the CARES Act and that University Human Resources will shortly be promulgating guidelines on how employees and contract workers will access the fund. 

Hemker stressed that, in his conversations with fellow faculty, he observed a strong interest in making sure that all the members of the Hopkins community were treated fairly. He felt that University administrators he was in contact with shared this interest. 

“The faculty I have heard have said, ‘We want to make sure that this is equitable.’ It’s not like, ‘We’re the elite and we need to be protected.’ It’s very much, ‘No, let’s protect all the employees as much as we can, and let’s protect the students as much as we can,’” he said. “They really wanted to make sure that everybody was taken care of to the extent possible.”

Other expenditure cuts that Daniels announced include the suspension of 78 University capital projects collectively valued at $29 million, salary reductions for most University officers and the future furloughing and laying-off of some University employees. Twelve hundred University employees have not had work since the University began shutting down on-campus life. The FIP report does not give any specific figures for what the expected savings may be from these actions.

The FIP report also details specific expected sources of revenue loss to the University. The largest of these is physician clinical revenue from Hopkins Hospital. The newly revised budgetary projections expect the University to suffer a $200 million loss in such revenue in FY21 before mitigation action are considered. 

The next largest categories are: tuition and student-related revenue, at a $150 million projected loss in FY21; unrestricted contributions and gifts, at a $60 million projected loss in FY21; and cost recovery for sponsored research, at a $30 million projected loss in FY21.

Startz explained that this reliance on revenue from Hopkins Hospital sets the University’s financial position apart from that of some other large private universities. It also, he said, raises questions about burden-sharing between the University and the Hospital.

“A very big piece of this, almost half, is bailing out the Hospital. Hopkins has a world-renowned hospital. But one could ask, ‘Should the more traditionally academic side be bailing out the hospital or not?’“ he said. “It’s not that hospitals necessarily make money or lose money. It’s just that... so much money goes through them.”

But according to Hemker, the relationship between the University and the Hospital needs to be understood in terms larger than the strictly financial.

“We are one university. Much like how with a family, you don’t cut off one sibling to save the others. I suspect there will be some shared misery here or some shared fiscal responsibility,“ he said. “I do not feel, as a faculty member, that we’re going to be disproportionately or unfairly taxed to support the medical school.”

Another area in which Hopkins may be more unique, according to Startz, is its vulnerability to changes in the enrollment of students seeking master’s degrees, particularly international ones. 

Per the FIP report, the University does anticipate that the matriculation of international students for the upcoming academic year may be significantly disrupted by COVID-19-related disruptions to U.S. visa processing.

“Master’s students who are there for professional programs... are often paying a high level of tuition. And they’re often one- or two-year programs. So you could certainly understand them saying, ‘I’m going to put this off for a year,’“ Startz said. “Hopkins gives lots of tuition breaks [for domestic undergraduate students]. So if the people who particularly can’t show up are those who don’t get the tuition breaks, that’s another hit.” 

Finally, Hopkins may be atypical in how it structures budgetary responsibility throughout its divisions and departments. 

Hemker emphasized that this actually serves the University well during crises like the ongoing pandemic.

“Hopkins was founded on the idea that... budget decisions are better made when they’re closer to where the action is,“ he said. “So the deans at Hopkins act more like CEOs. They have to have budgets that they balance every year and really have the freedom to invest in strategic planning in the way that they want. That’s been good for Hopkins for a long time. And I think that will pay off for us now.” 

The function of this first phase of expenditure cuts, Daniels argued, is to stem the immediate growth of the University’s budgetary deficits. 

He wrote that these austerity measures, by allowing the University to maintain more balance between its revenues and its expenditures even as revenues are projected to drop, will grant the University more time in which to deliberate and plan for additional future budgetary rebalancing.

“The key will be to focus on the identification of our most compelling priorities and then pursue them faithfully“ Daniels wrote. “To the extent that resource re-allocation decisions are required, we are expecting academic leaders to ensure meaningful opportunities for deliberative debate and discussion. We emphasize, however, that these discussions cannot be open-ended, and must not result in lowest-common denominator strategies that risk drift from excellence and can result in widespread demoralization.”

What this means, Hemker explained, is having to think very strategically about where to invest the University’s resources when the time comes to begin rebuilding. 

“Now more than ever, we’re going to keep investing, but we’re going to have to be strategic about it. You don’t want to take away the lab of a world-class researcher such that they go somewhere else and lose them,“ he said. “That being said, you don’t just only give money to the world-class researchers... There’s going to have to be some strategic decisions about where to invest, how to build back up and then how to go forward.”

Startz agreed that immediate expenditure cutbacks were necessary. He also argued that Hopkins still has the financial room to spread some of the immediate cutbacks out over longer periods of time.

“For example, they’re cutting back on contributions to retirement funds. Not an unreasonable thing to do. But they could include a promise that they’re going to make up the money a year or two from now and spread things out,“ he said. 

Still, he praised Hopkins’ overall response.

“Whenever there’s a financial crisis, there are two risks which it does not appear to me that Hopkins is falling into. One risk is that administrators use it as an opportunity to do all sorts of things that they felt like doing that they couldn’t get away with in normal times,“ he said. “The second risk is to just take the easy way out and say, ‘Let’s cut everything across the board,’ instead of being able to make the much harder political decision of saying, ‘This thing is really important, and this thing we like a lot, but is not as important.’” 

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