In pleasant surprise, university ends financial year with $46 million surplus

Stanford Report, Dec. 17, 2003

In pleasant surprise, university ends financial year with $46 million surplus
Provost: Investments paid off and donors gave generously, but 'I don’t feel we’re completely out of the woods'

When the university's financial forecast looked gloomy, officials urged faculty and staff not to panic. Now that the picture is brighter, officials caution that fiscal prudence is still the order of the day.

The university's year-end financial results, which were reported to the Board of Trustees earlier this month, show an operating surplus of $46 million for the fiscal year that ended Aug. 31, 2003 (FY03), compared to a $17 million deficit in the previous fiscal year (FY02).

The operating surplus is a result of better-than-expected investment market performance in the last half of the fiscal year, successful fundraising efforts, increased research activity and belt tightening.

"I'm delighted by these results and especially thankful for our employees' diligent efforts to contain costs," said Provost John Etchemendy. "At the same time, I don't feel we're completely out of the woods and we need to continue our responsible approach to using resources with the utmost care."

Stanford Hospital & Clinics (SHC) reported an excess of revenues over expenditures of $36 million, and Lucile Packard Children's Hospital (LPCH) reported an operating surplus of $60 million. Stanford's consolidated net assets increased $1.2 billion to end the year at $12.2 billion.

After experiencing a deficit in FY02, FY03 was expected to be another difficult year, prompting the provost to implement a staff hiring freeze and operating budget reductions. These efforts proved effective in moderating expense growth, even though total salaries and benefits still increased by 10 percent over FY02. (A salary freeze was implemented effective September 1, 2003, but had no impact on FY03 results.)

"The principal reason for this surplus was that the financial markets turned around and that produced results that were not anticipated," said Tim Warner, the vice provost for budget and auxiliaries management. "The returns through Aug. 31 were about 11 percent higher [than expected] and a large fraction of that return came in the last quarter."

In addition to favorable investment market performance, generous support from the university's donors contributed to last year's good fortune. The Office of Development reported gifts totaling $486 million, making it the second best fundraising year in the university's history.

Still, Etchemendy warns, there are many reasons to be cautious. For instance, two thirds of the university's FY03 surplus represents restricted funds. Moreover, a "smoothing formula" designed to mitigate volatile market fluctuations limits the amount of funds that can be used each year from the endowment. Each year the payout - a percentage of the value from the endowment investments -- is figured into the university's budget. Because the percentage is determined by the smoothing formula, which averages multiple years' endowment values, the payout does not change radically from year to year, even if the investment market does.

Etchemendy said he was pleased that the university's endowment had risen considerably from the previous year - to $8.6 billion - but noted that it still falls short of the level it had achieved three years ago.

In addition, some costs continue to rise. The cost of employee and retiree health care increased 16 percent last year, while student financial aid went up 9 percent. Moreover, during the economic downturn, more students have needed financial support.

Randy Livingston, vice president for business affairs and chief financial officer, warned that despite the improvement in operating results in FY03, the university will face many of the same financial challenges in FY04 and subsequent years. Among those challenges are continued increases in health care costs for employees and retirees, continued high demand for financial aid, an anticipated flattening of federal research funding, highly volatile financial markets and costs associated with the opening of new facilities, Livingston said.

Warner added that the healthier economy made him feel more optimistic about the current year and for the planning process for the 2005 fiscal year.

"The good news in all this is that it helps in terms of looking ahead to fiscal year '05. We're also monitoring the situation in fiscal year '04. Based on the returns from the end of the year, it's probably looking a bit better."