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From The Faculty Chair

What to do During the Seven Years of Plenty

Steven R. Lerman

By any financial measure, last fiscal year was a very good one for MIT. The Report of the Treasurer for Fiscal Year 2000 documents that our "total net assets" rose by over $2,700 million, a whopping 49.6% increase. This figure reflects both depreciation of our facilities and the value of new facilities, the net of which is fairly minor. This truly extraordinary change arose primarily from incredible investment gains in the MIT endowment ($2,478 million) and a record level of gifts from the Campaign. Put another way, the yield on our endowment last year was 57.7%, one of the highest of all universities and colleges in the nation. This tremendous gain in the financial base of the Institute is a result of the acumen of MIT's key financial decision-makers, particularly Alan Bufferd, the Corporation Investment Committee, and our outside advisors. We all owe them our thanks.

These enormous gains in MIT's financial position naturally lead to questions about what we, as an institution, should do with them. In some odd way, a large increase in financial opportunities presents as many issues for the leadership to grapple with as a decrease might. The big difference, of course, is that the problems posed by a large increase in available funds are a lot more fun to deal with. Before we go on a major collective spending spree, however, we need to put this extraordinary year into a larger context.

First, we need to acknowledge that the successes of last year are not going to be repeated soon; indeed, they may never be repeated. We benefited from a sustained bull market and fantastic performance in the portion of MIT's endowment invested in venture capital funds. Anyone who has watched the markets recently is aware that some of the stocks rising most rapidly in the late part of the 1990s are those that are declining rapidly now. The near-term, future returns on endowment are very uncertain, and there may be more bad news than good news in the next year or two. This isn't a very good time for a round of what Alan Greenspan called "irrational exuberance."

Second, we need to continue to think long term rather than short term. Endowment yields will go up and down, but averaged over the long term it is reasonable to assume that the future will be much like the past. This means endowment returns in the 9% to 10% range. President Vest has worked with the Corporation Executive Committee over the past two years to develop a financial plan that relies on reasonable long-term assumptions but provides somewhat greater financial flexibility to the Institute in the next 10 years. In particular, the Corporation's Executive Committee has authorized a higher-than-usual payout of yields from the endowment that will be devoted largely to a set of core needs. The administration has already put in place actions such as the elimination of summer tuition for graduate research assistants not taking courses, a significant number of new presidential graduate fellowships, and a sustained increase in the level of maintenance of the physical facilities. Two of these actions are positive steps that make MIT more competitive in seeking research funds and the best graduate students to work with on that research. The third step reverses the long-term trend of deferred maintenance that has characterized the Institute's budgets over the past 20 years. We have also embarked on the most ambitious construction program since MIT was founded, including the Stata Center complex of buildings, a new undergraduate residence, two new graduate residence facilities, the new sports and fitness center, a second Media Laboratory building, and several additional projects in the works. Once completed, these new facilities will revitalize many parts of the campus in significant and exciting ways.

With all of the above as background, the question remains about our priorities for further investments. The senior administration has been actively seeking the views of the faculty on this question by speaking at various School and Department meetings. President Vest made a presentation at the October meeting of the faculty that was identical in substance to the presentation he gave to the MIT Corporation earlier that month. These discussions will continue to elicit diverse views on what we can and should do over the coming years to make the best use of any increased financial flexibility resulting from the success of the Capital Campaign and the growth of the endowment. The consultative approach being taken by the senior administration should be commended by all of us. It is important that we, as faculty, be active participants in such discussions.

My own views on what we can and should do reflect the following priorities:

We should continue to focus on the problems of deferred maintenance. Even with the budget increases of recent years, the physical facilities of MIT show more "wear and tear" than is appropriate. Admittedly, a large part of our recent investments in maintenance have been in improvements in crucial life safety systems that aren't cosmetically visible but are clearly of the highest priority. These improvements need to continue, but we also need to ratchet up the more general maintenance activities above and beyond the sizable increases that have already been put in place. As Dean Schmalensee [School of Management] put it, "In good times, you should fix the roof." This should be a period where we catch up with the deferred maintenance of all our buildings, or at least those buildings we plan to keep. It would be irresponsible to commit to new programmatic initiatives at this point in time while we still have facilities that might be charitably described as shabby.

MIT also needs to re-examine the formulas we use for undergraduate financial aid. One of the disturbing trends in our undergraduate enrollments is that we are drawing an increasing fraction of our student body from the upper end of the socioeconomic spectrum. Data from the Admissions Office suggests that our offers of financial aid are in many cases lower than those of the universities with which we compete most intensively.

I have always been proud of the fact that, compared to our peers, MIT has always attracted a larger share of first-generation college students, many of whom do not come from affluent families. We need to put the resources into financial aid to ensure that we remain a place that is accessible to every talented high school student. This may well mean that we must shift more of our resources into helping students and their families.

There are several ways in which we might make an MIT undergraduate education more affordable. One approach is to hold the actual tuition (or what we might think of as the sticker price) for undergraduate education level for some period of time. We might even consider decreasing tuition. This approach has no effect on the costs of education for the poorest students since they never pay the full tuition. Another option is to reduce what is called the "self help level" - the amount of money every student is expected to be able to provide no matter what his or her financial circumstances are. A third approach, taken by some of our peers, is to remove some assets, particularly home equity, from the calculation of a family's assets when computing the amount of financial aid we will offer. Yet another option is to shift the mix of types of aid, reducing the fraction in the form of loans and work-study funding to more outright grants. There are discussions underway within the administration about this issue, and we may well end up with some blended strategy.

Whatever we do in this area, it is important that our actions be guided by three core values. First, we must continue to attract absolutely the best students who want to study the types of curricula we offer. This is unequivocally one of the things that makes MIT great. Second, we must ensure that an MIT education is financially accessible to all qualified students regardless of the economic standing of their respective families. Lastly, we need our financial aid system to attract a student body with the diversity of backgrounds that reflects our entire society.

It is quite likely that, barring a very large downturn in the value of the endowment, all of the above can be done within our new resources. If the capital campaign continues to remain ahead of schedule and the financial markets simply return to their historical levels of growth, we may well be able to afford one or two other major initiatives. I propose that we wait a year or two to see if this is what actually happens. If we can afford it, my own priorities would suggest two new initiatives.

First, I believe that the original complex of MIT buildings, particularly the Infinite Corridor, are an under-exploited resource. We should think about transforming this centerpiece of MIT's facilities into a sort of MIT Main Street. Imagine this corridor as a row with coffee houses, sitting areas where students, faculty and staff meet and talk, and facilities that serve visitors and members of the community alike. The lobbies of Buildings 7 and 10 have huge unrealized potential that, with appropriate design and a substantial sum of money, would be spectacular focal points for the creation of a sense of shared community.

The second item on my wish list is a new facility designed to promote better teaching and learning. Such a building was originally conceived of as part of the Stata Center but was unaffordable at the time our plans for that facility needed to be put into place. I view it as far more than a place with first-rate classrooms and teaching laboratories. It should also serve as an incubator site for innovations in teaching, a place where faculty and students with interests in the process of learning might come together, and a site where key educational services such as video production, digitizing, media creation, educational Website design, and distance learning support for alumni would be located. This facility would give us some surplus of classrooms, making it far easier to renovate our existing classrooms during the academic year. It would also provide some rooms designed as flexible, reconfigurable places that could be used for experimental modes of teaching.

This is truly a time of real opportunity for the Institute. As President Vest has pointed out, we are in a period of historic change in the way the university is supported. In the coming years, far less of our costs will be borne by sponsored research and far more will be supported by gifts and our endowment. If we manage our resources well, MIT will be a much better place to study and work.

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