MIT maintains strong and active oversight of its financial resources from top to bottom. Since the last accreditation, MIT's financial resources have improved significantly, thanks to successful fundraising and endowment performance and strategic management. A financial framework was created to strengthen financial-planning capabilities and to focus the use of these resources through an integrated prioritization of initiatives. Financial resource-development and allocation efforts preceded the dramatic downturns in the financial markets in late 2008 and 2009, cushioning the shock that MIT faced and positioning us to adapt to a period of economic uncertainty and reduced resources in a thoughtful and strategic way.
The MIT Corporation holds a public trust to assure that the Institute's financial resources are preserved for future generations as well as for current purposes. The Executive Committee of the Corporation serves as the Finance Committee. In 2006, MIT restructured the responsibilities of the executive vice president (EVP) to include the responsibilities of chief financial officer, and the EVP's title was changed to executive vice president and treasurer. Previously, the treasurer's duties were included in the role of the chief investment officer, who is now designated as president of Massachusetts Institute of Technology Investment Management Company. The EVP and treasurer is the officer of the Corporation responsible for stewardship of the Corporation's financial resources. The EVP and treasurer serves as an ex officio member of the Executive Committee and reports on the financial condition of the Institute to the full Corporation at its annual meeting, or more often if requested by the Executive Committee or if deemed appropriate.
In July 2007, financial planning, analysis, reporting, and operations were consolidated under the vice president for finance. This provided an integrated and expanded financial leadership role to support the EVP and treasurer and to serve the Institute's academic and research leadership.
In 2004, the Executive Committee authorized the formation of the MIT Investment Management Company (MITIMCo), which is devoted solely to managing the Institute's investment activities. The Executive Committee appoints the members of the Investment Management Company board, which meets four times a year to review investment policy and results. The president of MITIMCo reports to both the president of MIT and to the Investment Management Company board. The chairman of the Investment Management Company board is an ex officio member of the Executive Committee, and the EVP and treasurer is an ex officio member of the Investment Management Company Board. The Executive Committee approves the annual allocation from the endowment to the operating budget.
The EVP and treasurer is responsible for financial-strategy development, operations and capital-budget planning, debt issuance, and the integrity of financial reporting. Resource allocations are decided within the context of the financial framework, which was the result of a multiyear collaboration with the provost. As the chief budget officer and chief academic officer of the Institute, the provost is responsible for MIT's budget and planning, as well as for academic programs and activities. The Office of the Vice President for Finance supports the provost in his role of chief budget officer. Competing funding priorities include faculty, student, and research initiatives, as well as strategic buildings, capital renewal, and infrastructure. The annual operating budget, including $572 million at Lincoln Laboratory, is $2.4 billion in fiscal year 2009. The budget process is explained in Chapter 2, "Planning and Evaluation."
The provost is responsible for leading the educational and research programs at MIT, with the advice of the president and in concert with the chancellor and the academic deans. (As Chapter 2 explains, the annual budget allocations are based on school and Institute priorities and available resources.) The EVP and treasurer ensures that the Institute's financial, capital, and operational resources are optimally deployed in a manner that supports the Institute's academic mission of education and research.
The Building Committee, chaired by the EVP and treasurer and including the chairman of the Corporation, the president, the provost, the chancellor, and other senior officers including the dean of architecture, reviews proposals for major capital projects before submitting final recommendations to the Executive Committee for approval. The Building Committee also monitors the progress of construction activities.
During the academic year, the Executive Committee meets monthly to focus on the policy and administrative issues facing the Institute. It considers the Institute's strategic direction as well as the management and enhancement of financial and human resources. Comprehensive financial briefing materials are distributed to members. The Executive Committee approves the financial plan and annual operating budget, capital projects, and debt levels, as well as tuition rates and student financial aid policies.
The Institute has made significant investments to ensure that strong financial and control systems are in place, and it employs a committed and experienced team of financial and accounting professionals. A central finance team establishes accounting and control policies and procedures, which are largely executed in the departments, laboratories, and centers.
The Systems Applications and Products (SAP) general ledger system enables accurate and timely accounting for the Institute, including over 3,000 endowment funds. A standard quarterly Generally Accepted Accounting Principles (GAAP) reporting format was created and adopted for quarterly budget and financial reports, as well as for the GAAP exhibits since FY 2003. Using SAP and GAAP gives us an earlier and deeper understanding of the Institute's financial position and unit results, a more standardized closing process, and an alignment of financial information for senior management, the Audit Committee, and the Executive Committee. The SAP payroll system was brought online in 2006.
The Budget and Finance Steering Group (BFSG) conducts regular and systematic reviews of financial and budget results before distributing them to the Executive and Audit Committees. This group also facilitates communication and collaboration on cross-functional financial issues. BFSG members include the leaders of key finance and budget functions. The BFSG is cochaired quarterly by the EVP and treasurer and the provost, and during off-quarter months by the vice president for finance.
Internal auditing is an integral part of MIT's control structure, both on campus and at Lincoln Laboratory. Auditing provides reasonable assurance to management and the Corporation that Institute policies are being adhered to as intended, that adequate internal controls are being maintained, and that assets are properly safeguarded. The internal audit program includes the review of control activities executed within the departments, labs, and centers. Potential audit areas are identified via management and risk assessment. The MIT Audit Division is responsive to requests for targeted services, including investigations into potential frauds or misappropriations.
PricewaterhouseCoopers (PwC) audits the Institute's financial statements. The Institute has received unqualified, or "clean," opinions from PwC on all of the annual financial statements it has issued since the last accreditation report. The Office of Naval Research is the recognized federal audit agency for MIT. To meet federal requirements under Circular A-133 for an annual audit of federally funded research awards, MIT employs a coordinated audit approach that combines work performed by PwC, an internal auditor, and the Defense Contract Audit Agency.
The Audit Committee of the Corporation meets three times each year. It reports annually to the full Corporation after the audit of MIT's financial statements.
The Office of the Vice President of Finance (VPF) encompasses, among other units, the Office of Budget, Finance, and Treasury; the Controller and Accounting Services ; and Sourcing, which includes Procurement, Travel, and HR/Payroll. The VPF website provides policies and procedures, forms, resources, and reports to users. In addition, VPF actively engages with the departments, labs, and centers to streamline processes, improve the quality of data available to the Institute, promote compliance with Institute policies and procedures, and support the DLCs' use of the Institute's financial systems to better manage their financial resources. As part of these efforts, a number of training programs are offered regularly, including sessions on the Institute's financial architecture and its financial systems and processes. About every six weeks, training is offered to new and existing DLC staff on key financial processes. These include procurement, accounts payable, travel, cost transfers, use of the Institute procurement credit card, and "Financial Review and Control"—the Institute process for verifying that financial transactions have been posted completely, accurately, and in compliance with sponsor rules.
A recent addition to the training programs for DLCs is the Specialized Training for Administrators of Research "STAR WEB" program, a Web-based self-study program coordinated by the Office of Sponsored Programs. This program focuses on federal regulations and Institute processes for research administration. Since it became available in 2007, more than 600 users have completed the program modules relevant to their responsibilities.
VPF also supports the provost and other senior management with fact-based analysis, assists in decision-making processes, and models the drivers of the Institute's financial position.
At MIT, the missions of education and research are connected and complementary. Approximately two-thirds of the Institute's 1,000 or so faculty members hold appointments in the School of Science or the School of Engineering. The vast majority of MIT undergraduates—87 percent—specialize in these fields as well. MIT provides these students with lab- and mentor-based education . From the start of their college careers, many MIT students engage in hands-on research, side by side with faculty. This is an inherently expensive process. For example, a lab staffed by expert technicians and equipped with a high-throughput screening device for genomic research indisputably costs more than a lecture hall or seminar classroom.
From 1999 to 2008, operating expenses increased $1 billion, or 77 percent. Operating costs have been rising at a significantly higher rate than the consumer price index because of the rapidly escalating cost of advanced science and engineering department facilities. As with other universities, a very high percentage of MIT's operating costs are fixed costs for education and research. Without great care, such fixed costs cannot be cut significantly without damaging the Institute's ability to perform breakthrough research and provide hands-on, lab-based, apprenticeship-style education.
For more than four decades, MIT has proudly practiced "need-blind" admissions, meaning that the Institute admits all undergraduates based on their academic merit alone, without considering their ability to pay. As discussed in Chapter 6, the Institute does not award academic, athletic, or any other form of merit scholarships. All student aid is need-based and meets the full demonstrated needs of students. The Institute has been able to support increases in financial aid that exceed tuition growth. This enables MIT to continue its commitment to ensuring access for qualified students regardless of their family resources. Roughly 13 percent of the endowment's value consists of endowed funds that donors restricted for undergraduate financial aid; this is the second-largest category after professorships. Over the last 10 years, these funds provided an average of 71 percent of MIT's undergraduate financial-aid expenditures.
MIT has seen significant increases in its overall financial resources since its last accreditation, due to growth in the investment markets and extensive fundraising campaigns. MIT's fiscal year is July 1 through June 30. Total net assets were $12.8 billion at year-end 2008 (the latest date for which audited numbers are currently available). The market value of the endowment was $10.1 billion as of June 30, 2008, up $5.3 billion—or 135 percent—since June 30, 1999. These increases have supported an expansive capital investment program that added about 2 million GSF to the campus and renovated over 1 million GSF over the past decade. The Institute is currently completing about $800 million of campus development and renewal and renovation projects (see Chapter 8 for more details). These resources also enabled the deployment of new software and networking enhancements Institute-wide to support MIT's mission and activities.
Gifts and support from investments have become an increasingly large part of overall revenues, increasing from 18.3 percent in FY 1999, to 23.4 percent in FY 2008. Tuition, net of financial aid, was 14.0 percent of overall revenues in FY 1999, compared with 9.5 percent in FY 2008.
For FY 2008, direct costs covered by research grants represented $1,039 million of the Institute's $2.4 billion consolidated revenues of which $448 million is campus research revenue. Indirect cost recovery on grants was $206 million. Direct and Indirect research revenues accounted for 57.0 percent of overall revenues in FY 1999 and 51.5 percent in FY 2008.
As of June 30, 2008, MIT had the sixth-largest university endowment in the nation, reaching a total of $10.1 billion. The purpose of endowment is to provide a level of revenue stability for current and future generations of MIT faculty, staff, and students. For the past 10 years, MIT's endowment has returned, on average, 13.2 percent per year. In February 2008, the Executive Committee approved a new endowment payout rule. The new methodology was designed to provide a more sustainable pattern of support. In FY 2009, budgeted support from investments, including endowment, increased 34 percent, to $600 million.
However, MIT is not immune from the effects of the current economic downturn. We estimate that between June 30 and December 31, 2008, the market value of our endowment declined by about 25 percent, or $2.5 billion. In these challenging times, MITIMCo's success in managing the stability and growth of the endowment will be crucial to the future of the Institute.
The philanthropic generosity of individuals, corporations, and foundations has been a key element in MIT's rise to world leadership in education and research. Between 1998 and 2005, the Institute successfully raised $2.05 billion in the Campaign for MIT, exceeding both its original $1.5 billion target and its revised $2 billion target. Nearly 68,000 donors, including more than 50 percent of the alumni/ae community, participated. This was not only the largest capital campaign in MIT history, but also one of the largest in the history of higher education. It represented a stunning increase from the previous fundraising effort, the Campaign for the Future from 1987 to 1992, which raised $700 million.
MIT's donor base has become similar to that of its Ivy League peers. In the Campaign for MIT, the Institute achieved a record 66 percent of funds from individual donors. In previous campaigns, from 1987 to 1992 and from 1975 to 1980, only 42 percent and 37 percent, respectively, of contributions came from individuals.
Record levels of new gifts and pledges were achieved in fiscal years 2006 through 2008. New gifts and pledges in FY 2008 totaled $436 million, 27 percent more than in the previous year, which in turn was 25 percent higher than the year before. Fundraising accounts for 35 percent of funding sources for major new building projects, up from less than 20 percent in 2000. Although cash receipts have remained steady in the wake of the world's economic crisis, like many peer institutions we have witnessed a decline in new gifts and pledges.
In 2008, the Campaign for Students was launched with a goal of raising $500 million over five years for scholarships, fellowships, programmatic and capital investment in student life, and various faculty initiatives. As of June 30, 2009, approximately $350 million had been raised.
In 2008 the Office of Resource Development and the MIT Alumni Association were relocated from seven different buildings on campus to a newly renovated building at the western end of campus. Co-location of the two organizations has provided many more opportunities to collaborate and work together for the benefit of MIT, its alumni, donors, and students.
As earlier chapters make clear, MIT has historically viewed teaching and research as inseparable parts of its academic mission. Research accounts for over half of MIT's operating budget. Research revenues totaled $1.2 billion during FY 2008, with Lincoln Laboratory accounting for about half of that sum. Total research volume includes all costs billed to research grants and contracts, both direct and indirect.
As described in Chapter 2, the Institute is highly focused on interdisciplinary research. The vice president for research (VPR) has overall responsibility for research administration and policy at the Institute. He or she oversees more than a dozen interdisciplinary labs and centers, including the MIT Lincoln Laboratory, the Plasma Science and Fusion Center, the Research Lab of Electronics, the Singapore-MIT Alliance for Research and Technology, the Francis Bitter Magnet Laboratory, Haystack Observatory, and the Division of Health Science and Technology. The VPR is responsible for research compliance and integrity and plays a central role in research relationships with the federal government, industry, foundations, and international sponsors. The VPR chairs the Research Council and the Committee on Intellectual Property.
The total population of graduate students and postdocs is highly correlated to the level of funding for campus research, as Chapter 4 notes. The sources of research funding are diversified and generally strong, showing a compound annual growth rate of 6.1 percent from 1999 to 2008. The U.S. government provided 75 percent of campus research funding in FY 2008. 38 The largest sources of government funding were Health and Human Services (35 percent—roughly double what it was 10 years ago), the Department of Defense (14 percent), the Department of Energy (10 percent), and the National Science Foundation (10 percent). Although federal sources continue to dominate research funding, private funding from industrial sources, foundations, and other nonprofit organizations has grown, accounting for 20 percent of MIT's research funding in FY 2008. We expect that this trend will continue. For example, the MIT Energy Initiative has attracted over $200 million from 32 industrial or public (nonfederal) sponsors.
New research models are emerging, and the research landscape is increasingly global. This is discussed more completely in Chapter 2, in the section on "Global Engagement." One example of an international research collaboration is the Singapore-MIT Alliance for Research and Technology (SMART) Center, a major research enterprise in Singapore established by MIT and the National Research Foundation of Singapore. The Smart Center began operating in FY 2008. It brings MIT faculty, researchers, and graduate students together with academic and industry researchers from across Asia to collaborate in exciting new areas of science and technology. Another successful research collaboration is the Broad Institute, formed in 2004 by MIT and Harvard, and affiliated with the 17 Harvard-affiliated teaching hospitals as a joint effort to conduct biomedical research. Broad became a separate, but affiliated entity as of July 1, 2009.
As of June 30, 2009, the Institute had $1.7 billion of outstanding debt. The Institute is one of only a small number of private research universities whose bonds are rated AAA.
MIT gained more financial flexibility in fiscal year 2008 through a collaborative effort involving departments, labs, centers, and the Office of the Provost. Where permitted and appropriate, DLCs substituted increased restricted endowment distribution for general Institute budget (GIB) funds. Known as "rebalancing," this effort provided a larger-than-normal increase in the endowment distribution rate, in exchange for a generally equivalent reduction in general budget allocations. This effort also created a solid platform for the future, demonstrated by the fact that 92 percent (or $70.7 million) of departmental funds were successfully exchanged for GIB allocations.
Financial flexibility was further enhanced by incorporating an approach that puts a premium on future flexibility. A closer and more strategic look at the role of debt and liability management in the overall financial picture of the Institute resulted in the introduction of a capital-structure framework in May 2008. This new financial framework was designed to optimize the use of financial leverage and also balance operational risk, maintain the highest credit rating, and minimize the long-term average cost of capital.
As part of the financial framework, a base-case financial plan was developed to guide the FY 2009 and future budgets. This base case includes a balanced budget, $23 million for future financial flexibility, and a 1 percent general operating contingency reserve, or $12 million. It also includes funding for specific initiatives approved by the provost—such as faculty salary adjustments and mortgages, enhancements to undergraduate financial aid, and an increase in the tuition subsidy for research assistants—as well as additional funding to increase staffing in resource development and alumni/ae relations.
The financial framework is designed to be transparent, with support for operations growing in line with inflation. Key risks to the base case include endowment returns, economic conditions, inflation, competition, and changes in the Institute's ability to recover the indirect costs of research from federal sponsors. Sensitivities are modeled from the base case to measure the impact of these key risks.
Recent performance of the endowment has led to substantial analysis and planning for operating with reduced endowment support as explained in the section on Projections below and in Chapter 2, "Planning and Evaluation."
The global economic contraction in 2008–09 likely will compromise all the Institute's major revenue streams: endowment, tuition, gifts, and research. Market declines have affected even the most diversified portfolios, including MIT's investments, which will reduce endowment funds available to support the Institute's operations. As already mentioned, MIT estimates that the endowment declined in value by approximately 25 percent from June 30 to December 31, 2008. Currently, only research revenues are growing. The Institute is planning for a protracted period of financial constraint, while at the same time preparing for a future in which the economy may improve or worsen.
Taking these factors into account—the likelihood of revenue reductions coupled with uncertainty about the future—MIT anticipates the need to decrease spending by about 10–15 percent over the next two to three years. Achieving a base budget reduction of this magnitude requires a careful multiyear implementation plan, beginning with a number of practical short-term actions. Together, all departments across the Institute are designing new operating strategies that draw on more limited financial resources without sacrificing MIT's values or compromising its mission of world-changing education, research, and service.
The financial flexibility that was built into the 2009 operating budget allowed the Institute to take a measured approach to the radically altered economic climate. MIT was not forced into making immediate midcourse operating-budget adjustments in FY 2009. This allowed time for departments to carefully review their resources and plan accordingly for FY 2010 and beyond.
MIT's organizational structure encourages collaborative and strategic thinking about financial needs and resources. To support the completion of three major construction projects, the Institute secured $275 million of financing in December 2008, a month before Moody's issued a negative outlook on the U.S. higher-education sector. Renovation plans for an undergraduate dorm were scaled back to a level that was supported solely by donor funding and that focused on core infrastructure needs.
The EVP and treasurer and the president of MITIMCo provided leadership and focus to enhance liquidity management through the careful analysis and forecasting of cash flows, an area of critical importance following the economic shocks in 2008. After doing extensive financial modeling, MIT decided that it needed to reduce the $1 billion general Institute budget by $150 million (15 percent) within two or three years. The provost, the EVP and treasurer, and the vice president for finance concluded that for the short term, the FY 2010 budget would be reduced by $50 million across all units, and decisions would be made locally as to which line items would be reduced. This budget includes modest merit pool increases and a flat endowment payout with FY 2009. Recognizing that downsizing everything equally would not be in the Institute's best interests, MIT asked academic units, in aggregate, to reduce their base budgets by 3 percent, while asking administrative units, in aggregate, to reduce by 7 percent. Thanks to extraordinary work in every MIT unit, a 5 percent budget reduction has been achieved for FY 2010, which began July 1, 2009. For additional details, see the Fiscal 2010 Budget Book in the accreditation team room.
Longer-term budget reductions require a more strategic and thoughtful approach. To achieve an additional $50–$100 million budget reduction for FY 2011 and beyond, an Institute-wide Planning Task Force (described in Chapter 2) was launched in February 2009. A preliminary report, found in Appendix 6, was released to the community in August 2009 as our accreditation self-study neared completion. An fall 2009 deadline for the Task Force's final report was set to coincide with the beginning of the FY 2011 budget-planning process. We expect a subset of the working groups will meet periodically beyond October 2009 to review the implementation status of approved recommendations and to provide feedback to senior leadership. MIT is confident that this approach will generate the best ideas to help the Institute adapt to reduced financial resources while preserving and improving its core activities.
At least two changes that have budgetary implications are already clear. First, as noted earlier, the Broad Institute became a separate organization effective July 1, 2009. As a result, MIT's operating costs and revenues will both decrease: direct research costs will drop $104.8 million—the amount MIT budgeted for the Broad Institute in FY 2009—and the general budget facilities and administration revenue will decrease $49.8 million.
Second, the American Recovery and Reinvestment Act of 2009 calls for the federal government to invest approximately $22 billion in extramural research between now and September 2010 for the purpose of stimulating the American economy through job creation and retention. MIT is taking part in this expanded research program.
38 Please see Brown Book Schedule III – Expenditures by Sponsor, in the accreditation team room.