In fiscal 1996, revenues and unrestricted gifts were $1,266.1 million and expenses and transfers were $1,274.6 million. This produced a deficit of $8.5 million, and is slightly lower than the projected deficit approved by the Executive Committee in May 1995. The deficit was brought into balance by using the Research Reserve investment income, and partial decapitalization of the principal of that Reserve. This year's deficit resulted from reduced overhead recovery, lower Industrial Liaison Program fees, higher employee benefits costs, and higher than expected utilities expenses, in part due to the start-up of the cogeneration plant. The costs associated with the early retirement incentive that are being funded from existing assets including internal advances, certain unrestricted funds and funds functioning as endowment will not affect the deficit. On the positive side, unrestricted gifts received during the year were higher than budgeted, investment income and patent revenues increased, and the need for unrestricted support of undergraduate financial aid, and departmental expenditures were both lower than budgeted.
MIT had modest surpluses in the operating budget in fiscal 1984-1988, and modest deficits in fiscal 1989-1994. The deficit in fiscal 1995 was $10.1 million and, as noted above, the deficit for fiscal 1996 is $8.5 million. It is expected that over time reengineering will have a significant impact on the Institute's expenses and can bring financial operations into balance.
One of the highlights of the year was the upgrade of MIT's bond rating by Standard & Poor's to Triple A. They reported that this reflects MIT's "conservative management practices and very low debt," and stated further that it was "the only rating upgrade to Triple A in the education sector for almost a decade." MIT joins only 12 companies and 6 other universities with a Triple A rating.
It is important to note that MIT is a financially strong institution with its over $2.5 billion endowment at market value, and continues to add to its financial resources. Its total invested assets exceeded $2.9 billion at June 30, 1996. Over the past five years the market value of all general investments increased by 60 percent.
The Institute continues to control costs and has been engaged in a reengineering effort during the last three fiscal years. In financial operations this effort is focused on management reporting affecting all fiscal accounting and payroll procedures. The R3 financial accounting system developed by SAP AG in Walldorf, Germany was selected to replace the present applications. Work continues on this project, looking to implementation of Phase I in the central administration early in fiscal 1997 and Phase II in the departments, laboratories and centers by the end of fiscal 1997. Members of the administrative staff in financial operations, academic and administrative departments, centers and laboratories have been involved in all phases of this project. Their cooperation and valuable input assures the successful design and implementation of the management reporting system.
There are now 11 staff members in Financial Operations dedicated full time to the Management Reporting/Financial Operations Reengineering project, 9 of whom transferred from Institute departments. More than 60 Institute staff members are involved in this effort, most of whom maintain their primary affiliations with their home departments.
The following reports of each department (Comptroller's Accounting Office, Audit Division, Office of Financial Planning and Management, and Lincoln Fiscal Office) will highlight the activities in their respective departments during the year. Effective July 1, 1996, the Purchasing Department, previously part of Financial Operations, was transferred to the supervision of the Senior Vice President.
I am grateful to the Financial Operations staff for their dedication to the effective management of MIT's resources, and for their cooperation and support during this challenging time. It is my expectation that our new management reporting systems will bring us to a higher level of efficiency with the ability to provide improved financial information while also simplifying administrative processes. It will also result in career opportunities for staff.
The past year was a continuation of uncertainty relating to permanent staffing needs to fulfill the requirements associated with reengineering. In addition, the early retirement incentive offered to all eligible Institute employees resulted in 27 retirements. More than half of these positions are being eliminated in anticipation of implementing the new management reporting system. A small number of new hire replacements, and staff transfers, promotions and reassignments are meeting the financial operations needs. Women represent more than 50 percent of the staff in financial operations, and underrepresented minorities comprise about 12 percent. During the year there were opportunities to promote women and minorities, including promotions from support to administrative staff positions. Financial Operations remains dedicated to increasing the diversity of its work force at every level and seeks qualified women and minority candidates for all openings.
On July 1, 1995, the MIT Press was transferred from supervision of the Associate Provost for the Arts to the Office of the Vice President for Finance and Treasurer. The Press had a good year, as described in their separate report which follows. Book sales exceeded the original sales target, with 180 new titles and 48 reprints. Foreign sales continue to represent an important segment of its business. The Press is developing a web site operation that includes its complete catalog, digital books and electronic journals. In the journals area, the Press launched 4 new print journals and 3 new electronic journals last year, remaining a leader in emerging forms of the electronic media.
The MIT Press Management Board, chaired by the Vice President for Finance and Treasurer, met twice during the year. Discussions continue toward developing a clearer business arrangement with the Institute and defining the long term role of the Press. The expansion of the Board has brought new strength and insights to all aspects of the Press's business.
Glenn P. Strehle
As the entire Institute faces dramatic changes in the delivery of administrative and other support services through reengineering, audit focus and techniques are rapidly adapting to the impact of the new SAP integrated financial system, restructuring due to early retirement incentives, and major operational changes.
Internal auditing remains an integral part of MIT's overall internal control environment. To maximize effectiveness, our focus adjusts to the ever-changing risk levels of the Institute, while maintaining our fundamental role of providing reasonable assurance to management that adequate internal controls are being maintained, policies are being adhered to as intended, and assets are properly safeguarded. This is accomplished through reviews, both on campus and at Lincoln Laboratory, which encompass diverse aspects of MIT operations.
Our audit coverage is coordinated with Coopers & Lybrand, the Institute's external audit firm, and the Defense Contract Audit Agency (DCAA), MIT's cognizant Federal audit agency. Internal audits are conducted consistent with the Standards for the Professional Practice of Internal Auditing that guide us in the discharge of our duties to ensure proper objectivity, independence and quality control of our audits.
Our compliance audits address both government compliance issues, as well as adherence to Institute internal policies and guidelines. From a financial compliance perspective, about one-third of the 150 departments, labs and centers received a visit from the Audit Division during the past year, kicking off our third Institute-wide review cycle. These "Departmental Reviews" remain one of our most visible and effective compliance audit initiatives developed to assess the level of financial accountability and basic internal controls within each operational unit. With the introduction of a refined audit program, improved financial accountability across the Institute, and a significant reduction in effort needed to develop supporting workpapers, the allocation of audit effort to these reviews has decreased markedly. These freed-up audit resources have been reallocated to a widespread collaborative effort with the Office of Environmental Medical Services, undertaken to assess the Institute's compliance with OSHA's Laboratory Standard relating to the implementation of written Chemical Hygiene Plans.
Over the past year a large segment of our reengineering-related audit effort was oriented to operational issues. An operational focus analyzes processes within administrative functions with an eye to strong internal controls, operational effectiveness and efficiency. Audit Division involvement with the introduction of reengineered processes has raised, and will continue to raise cost efficiency, effectiveness, and control related issues. Also of concern is MIT's increased reliance on key outside service providers. As we consolidate our supplier base, the reliability of vendor operations, and their supporting information systems, become integral to maintaining smooth Institute operations.
Evaluations of financial accountability and control remain a significant commitment of audit resources each year. Consistent involvement in construction activities, Institute inventories and cash operations, in addition to a varying selection of other financial audits, help to maintain and continually strengthen MIT's overall financial control environment.
Staff highlights include one member's completion of all four parts of the Certified Public Accountant examination. It is expected that all audit staff will pursue professional certification as a CPA, CIA (Certified Internal Auditor), or CISA (Certified Information Systems Auditor). Collectively, the Audit Division now holds 3 CPA, 4 CIA, and 2 CISA designations.
Charles A. Shaw
Testing to receive Graduate Student Appointments electronically from the Student Information System has been completed. Five departments have been selected to initially participate in the pilot process with an expanded process to be offered to the remainder of the community pending the results of the pilot program.
Internal Revenue audits continue to proceed both from the regional Internal Revenue Service (IRS) office as well as the Coordinated Examination Program audits at the national level. The calendar years 1985 and 1986 audit is in the hands of an IRS Appeals Officer (following our meeting with the IRS in May 1996) who has indicated that he will render a decision promptly.
Several personnel from this area continue to participate on the Reengineering Financial Management Team, Configuration Team, and Management Reporting Team as well as participating in training sessions. Personnel instruction in the basic SAP courses was begun and will continue into July 1996 and then instruction in job specific areas of the SAP system is scheduled to begin.
The project to modify the Pension Accounting System to recognize a monthly valuation for the Variable Fund was implemented in July 1995.
Significant effort was directed to handling the processing of the Early Retirement Incentive Program. This involved the manual processing of data for the first two months of the program until the electronic transfer capability was implemented to process the July 1, 1996 retirees.
The Property Office is responsible for the accounting and asset management of more than 100,000 items of equipment which are both MIT-owned as well as sponsor-owned. During the year, 13,700 newly acquired items of moveable equipment were identified and tagged. The reconciliation of the equipment biennial physical inventory is almost complete. Two hundred five final inventories were submitted as part of closing out the contracts, grants, and agreements. There were 488 financial reports prepared and submitted to various government agencies. Three hundred fifty-six items of excess government equipment with an original acquisition cost of $2,028,891 were acquired. Six hundred forty-seven items of equipment with an acquisition value of $485,250 were transferred between MIT departments as part of a reutilization program. Equipment, unneeded or unusable by the MIT Community, was sold for $145,182 providing funds for replacement equipment. One hundred forty-eight items of equipment were donated to non-profit organizations.
The costs of capital space changes, major renovations, and new building construction continue to be tracked.
A Property Application (SumPROP) was delivered by the Comptroller's Accounting Office programming staff which gives Property Office users additional system functionality and SumMIT users the ability to query and report on equipment data.
Requests from various academic and administrative departments for equipment information resulted in over 500 reports being generated and distributed to the departments.
In partnership with Group 48 (Computer & Telecommunication Systems), version 2.7.2 of the Lincoln Executive Information System (LINEIS) was completed and the Lincoln Information System (LFOINFO) was discontinued. The new Cash Till system was implemented. The new Northwest ticketing chargeback system has been installed into production. Disaster recovery planning and preparation efforts were continued. The Accounts Payable and FRAP checks were incorporated into the new Check Writing System that was introduced in the Cashier's Office. The Electronic Time (E-Time) Sheet System was modified to allow for the input of both regular and overtime percentage distribution.
Automation of the Technical Certification System which will allow for electronic approvals is well underway. OS/400 V3Rl will be installed on LFO400 early in July 1996.
Philip J. Keohan
To assess the impact of changes in the internal and external environment that affect MIT's financial position and to advise senior management on the influence these changes will have on MIT's current and future programs; to support the educational, research, and public service programs of the Institute by providing financial management information and recommendations necessary to make resource allocations, and to execute operating and capital programs, both current and future in nature.
The major functions of the office include: (1) the annual operating budget (preparation, monitoring, and closing); (2) the capital budget (construction, renovations, and financing of completed and future projects); (3) financial planning for ten years into the future, (4) systems design and operation to support these three basic functions; and (5) special studies.
In addition to the normal duties and reports associated with the annual operating budget, we developed 2 new formats for presenting the budget. The first new format was prepared for the Provost. The normal budget profile for each department was expanded to include comparative information from the prior year, explanation of year to year changes, and descriptions of any special programs or funding arrangements. The second new format was requested by the Executive Committee and shows the total of all activities by department.
The Institute's capital and major renovations budget is $330 million for 22 active projects. These figures include land acquisition, construction, financing, and, where appropriate, funds to cover the unrestricted portion of building operating costs for ten years. The capital budget also includes $310 million for 31 completed projects with debt outstanding, and $935 million for 26 proposed projects.
The office was involved, along with the Deputy Treasurer's Office, in the preparation and sale of $125 million of medium term notes. This effort included dealings with underwriters, lawyers, auditors, and MIT departments in the preparation of legal and offering documents. In addition, it included researching questions from and providing information to both Moody's and Standard and Poor's Rating Agencies. Moody's sustained MIT's Triple A rating and Standard and Poor's upgraded MIT's non-collateralized issues from AA+ to Triple A.
The Institute, in accordance with the Financial Accounting Standards Board guidelines, revised the schedules used in the Report of the Treasurer for 1995 (report prepared in Fiscal 1996). The new schedules required the development, and implementation of a plan to properly reflect the use of unrestricted funds for capital purposes in the financial statements.
The staff also developed a capitalization policy for non recoverable projects based on the requirements of the Federal Office of Management and Budget Circular A-21.
Major new developments to our financial system have been suspended while reengineering of MIT's accounting and management reporting processes are under review and redesign. The choice of SAP as the new accounting and reporting system will inevitably require changes in both accounting structure and philosophy. These changes will require reworking of the office's budgeting and planning methods and processes.
The addition of new reports for use by senior management or the Executive Committee requires some development work to support the production of these reports. The Comparison of Fiscal Operations report was added this year which compares financial information at the end of any month with comparable data for the last two years.
SPECIAL STUDIES
Reengineering was the dominant focus of management work during the year and will result in new processes for budgeting and reporting. The results of reengineering should hold expenses to modest increases or show a decline in terms of constant dollars.
The staff participated in the Institutional Reporting Requirements Team (IRRT) and the Closing Process Team for the Management Reporting/Financial Operations reengineering project, and served on the committee for the Student Services Reengineering team. The staff was also heavily involved as resource persons as requested.
John A. Currie
The Press had a very busy and satisfying year. While the performance of the superb front list in the book division got our hopes up about exceeding sales forecast, unusually heavy returns from the chains in late spring dampened expectations. The Press did, however, meet its original sales target at $14,090,000 and once again reported a profit from operations: $252,000 compared to the original forecast of $163,000. This included an adjustment of the way interest on Pool C reserves and the payment of interest on the capital debt to MIT are reported. The contribution to graduate student education by way of RA/TA this year was $429,000, resulting in a deficit of $177,000 carried forward on the balance sheet. This amount was lower than the forecast deficit of $267,000.
Front list sales, at $5,592,000 were the best in many years and it will be hard to beat in terms of the quality, depth, and reception. The Press published 180 new titles compared to 153 for last year and 48 reprints compared to 44 last year.
The MIT Press Digital Projects Lab (the renamed web group) made some impressive advances. It manages a web site which includes the Press's complete catalog, digital books such as City of Bits, and 6 electronic journals. It will oversee the research and development of CogNet, the proposed definitive website for the cognitive and brain sciences.
Foreign sales continue to be robust with sales to the export markets totaling 37 percent of total sales. The MIT Press bookstore continues to grow within its confined space, recording a record $745,000 in sales in fiscal 1996 compared to $610,000 in fiscal 1995.
The Press has reorganized the marketing operation, revising job content and promoting staff, and has also reorganized the acquisition department. The journals division continues to make significant strides, launching 4 print journals and 3 electronic journals last year.
Faculty serving on The MIT Press editorial boards in 1995-96 were Harold Abelson, Julian Beinart, Oliver Blanchard, Josh Cohen, Anita Desai, Peter Diamond, Deborah Fitzgerald, Samuel Jay Keyser, Albert Meyer, and William Mitchell. Dean Mitchell served as Chair. Frank Urbanowski, Glenn Strehle, and Anne Wolpert were ex-officio members.
On the management front, Glenn Strehle, MIT's chief financial officer, continues to play a key role as chairman of the Press management board. The MIT Press Management Board met twice during the year. Members of the board were: Joseph Esposito, Publishing Consultant; Brewster Kahle, President, Internet Archive; Steven R. Lerman, Professor in the Civil Engineering Department; William J. Mitchell, Dean, School of Architecture and Planning; Richard E. Oldenberg, Chairman, Sotheby's; Dr. Richard Rowe, President, RoweCom; Jerome S. Rubin, former Group Vice President of Times Mirror; and Jack Schulman, former Director of Cambridge University Press. William Mitchell and Frank Urbanowski served as ex-officio members of the management board.
Book sales for this fiscal year were very good, with an increase of 6.6 percent over the previous year. Bookstore sales through the large chains increased dramatically, by about 23 percent, while sales through independent bookstores were essentially flat. Unit sales increased by a modest 2.1 percent. International sales were again very strong, accounting for almost 37 percent of our total sales.
The subsidiary rights program has at its core the sale of translation rights to MIT Press books. The income generated by the licensing of foreign rights declined by 5 percent since fiscal 1995, although the number of transactions remains constant. Income in this category fell 7 percent below forecast for this fiscal year. Unlike previous years, when the Press had 1 or 2 prominent (and short) titles appropriate for translation, transactions during fiscal 1996 involved sales within a moderate range in terms of the advances offered by foreign publishers. Overall, subsidiary rights income in fiscal 1996 decreased by 3 percent since fiscal 1995. Income from the sale of electronic and audio visual rights in fiscal 1996 was over $8,000.
Income from the reprint program, which includes permission to photocopy and to publish excerpts from Press material, increased by 9 percent. A predictable drop in income, as a result of a 1991 court decision prohibiting unauthorized photocopying, has stabilized. Income from the reprint program exceeded the forecast by 12 percent.
Income from sales to book clubs decreased by 59 percent. This market is the least predictable for the sale of subsidiary rights; purchases by book clubs depend not only on the list, but also on the increasingly narrow margins that determine the net amount that book clubs are able to pay. The Press was able to place one main selection with the Library of Science, and for the first time in several years, Readers' Subscription is carrying 2 Press titles. Income in this category fell short of forecast.
Fiscal 1996 export sales increased by 11 percent and, for the first time, totaled in excess of $5 million. All major export territories except Canada produced percentage sales increases greater than the overall Press increase of 6.6 percent. Sales in Japan were exceptionally strong, increasing more than 25 percent over fiscal 1995.
Sales in Canada in fiscal 1996 were almost 5 percent lower than the previous year, and far below the peak of $565,600 reached in fiscal 1993. The strength of the US dollar against the Canadian dollar, and the permanent increase in book prices resulting from the imposition in calendar 1991 of a 7 percent national tax on books, continue to depress that market.
The MIT Press exhibited books with its own staffed booth or table at more than 50 US academic conferences in fiscal 1996, and displayed books at over 75 others through combined exhibits. Sales generated from exhibits were $200,692 in fiscal 1996. The Society for Neurosciences meeting was once again the standout meeting of the year. Book sales at the annual meetings of both the Allied Social Sciences Association and the College Art Association broke previous records. Also of note in fiscal 1996 were two small but highly successful meetings: the Towards a Science of Consciousness Conference in Tucson, and the North Eastern Linguistics Society Meeting in Cambridge.
Advertisements for MIT Press books appeared in 500 trade and scholarly journals and magazines, as well as conference programs. All of these ads were produced in-house. The amount and frequency of advertising increased over the year, and stayed under budget.
The Press's books and authors received prominent coverage in a wide array of general and scholarly media this year. Since last July, 6 MIT Press titles have been reviewed by The New York Times Book Review; in December, The Book Review's editors chose 2 additional titles as "Notable Books of the Year 1995."
The MIT Press won 5 awards this year in the Professional and Scholarly Publishing Awards Competition of The Association of American Publishers.
City of Bits On-line has been named one of the Top 5 percent of the Web by Point Web Reviews. Point provides descriptions and ratings of the Top 5 percent of all World Wide Web sites, while searching for the best, smartest, and most entertaining sites. Their rating scale reaches from 0 to a perfect score of 50 in the categories of content, presentation, and experience. City of Bits On-line received a score of 43 in Content, 38 in Presentation, and 40 in Experience.
The MIT Press on-line catalog has been listed as a 4-Star Site on the Magellan Internet Directory. This is the highest rating a website can achieve in Magellan, the McKinley Group's comprehensive Internet directory.
In fiscal 1996, the Journals program had gross sales of $4.4 million, a 12.8 percent increase over last year. The new journals added in fiscal 1996 were Harvard International Journal of Press/Politics, Journal of Functional and Logic Programming, Review of Economics and Statistics, Studies in Nonlinear Dynamics and Econometrics, Terra Nova: Nature and Culture and a print version of an electronic journal, Psyche. The division ends the year publishing 39 journals.
Frank Urbanowski
MIT Reports to the President 1995-96