MIT Faculty Newsletter  
Vol. XX No. 5
May / June 2008
Financing Undergraduate Education
MIT Faculty Survey: It's About Time
Berwick, Lee, and Orlin Elected to
FNL Editorial Board
Reconsidering the Value of Service to MIT
Confidentiality in Recruitment, Promotion, and Tenure Reviews
Provost Announces Faculty Renewal Program
Endowment Spending Policy at MIT
A New Approach to MIT's Financial Planning
A Primer on Indirect Costs
Changes in Engineering Education
Anthropologists Express Concern Over Government Plan to Support Military-Related Research in Universities
Reflections on Nominations and Elections for Faculty Officers and Commmittees at MIT
Initiative on Faculty Race and Diversity: Research Team and Effort Launched
The Man I Killed; Lise
Creating a Culture of Communication: Assessing the Implementation of the Undergraduate Communication Requirement
The Vision Thing
Lerman Now Dean for Graduate Education
The Spellings Commission Backs Off
Who Should Be Allowed to Speak
at Faculty Meetings?
from the 2008 Faculty Survey: Reasonableness of Workload
from the 2008 Faculty Survey:
Satisfaction with . . .
from the 2008 Faculty Survey:
Sources of Stress
Printable Version

A New Approach to MIT's Financial Planning

L. Rafael Reif, Terry Stone

In recent years, the Provost and the Executive Vice President’s teams have been working with faculty leadership and the administration of the academic units to develop financial planning processes and policies which provide greater and more predictable support for the needs of the Institute. Based on this ongoing work, a new Financial Framework has recently been adopted and discussed with faculty, department heads, Academic Council, the Executive Committee, and a full meeting of the Corporation.

The Financial Framework provides a financial planning platform for the Provost’s development of the annual General Institute Budget (GIB). Importantly, the Financial Framework sets the course for achieving a balanced GIB in 2009. In addition, the Framework provides the basis for informed future discussions about addressing the longer-term capital funding needs of MIT.

Due to investment returns exceeding 20% in recent years, Endowment payout has become a greater contributor to Institute funding. We estimate that support from Pool A will constitute 19.2% of GIB funding and 10.3% of total revenues in 2008; hence the importance of a greater degree of stability from this source for the GIB and for designated fund holders. A central component of this Financial Framework is the adoption of the new Endowment spending policy described in the article by MIT Investment Company President Seth Alexander. This payout approach, called the Tobin rule, is designed to provide a less volatile year-over-year pattern in Endowment funding to unit holders and to the GIB.

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In 2009, MIT will increase the Pool A payout rates by 31%. This payout increase follows similar payout growth in 2008. These funds will not be subject to rebalancing. [Briefly, rebalancing is the "zero-sum" strategy MIT implemented in FY08 to increase the Institute’s long-term financial flexibility. It consisted of the elimination of the additional Endowment distribution by increasing the voted Endowment distribution by an equivalent amount. Whenever possible and allowable, the additional funds that academic units received in FY08 from the increased voted distribution payout was exchanged with General Institute Budget funds. As a result, the aggregate funding (GIB and Endowment distribution) to each academic unit in FY08 was at least the same as before. The significant increase in Endowment distribution the academic units will enjoy in FY09 will not undergo this rebalancing process and will add to the units’ annual resources. The rebalancing strategy was only carried out in FY08. Please see “Financial Foundation of MIT’s Future” in the MIT Faculty Newsletter, Vol. XIX No. 2, November/December 2006 for greater detail.]

The result of the 2009 payout will be $521M in distribution from Pool A. We will inaugurate this new policy at a payout level in the 5% range. In future years, the principal driver of year-over-year change in payout amount will be the Higher Education Inflation Index: HEPI inflation will determine 80% of the payout change. A lesser determinant will be the change in the value of the Endowment: 20% of the payout amount will be set at 5.1% of the Endowment value – whether greater or less than the previous year’s level. This payout policy is described in detail in Seth Alexander’s article.

The rebalancing effort in 2008 provided another key building block in strengthening the financial foundation of the Institute. The exchange of around $70M of funding between the academic units and the General Institute Budget was facilitated by the 31% Endowment payout increase in 2008. It is important to note that rebalancing did not affect research related funds, nor awards or funds for education.

These two key steps involving Endowment payout – rebalancing in 2008 and adoption of the Tobin rule in 2009 – release significantly greater levels of Endowment returns for support of Institute endeavors.

In addition, other funding policies and practices were examined and updated to create greater budgetary flexibility. For example, the costs of servicing Institute borrowing are now estimated more precisely and can be prudently reduced.

In both 2008 and 2009, recurring programs or needs that had been reduced or covered with one-time allotments are incorporated into the GIB (e.g, Technology Review). The restoration of $5M of previously reduced CRSP (Committee for the Review of Space Planning) funding in 2008 will be maintained in the 2009 GIB. In addition, the need to strengthen faculty and student competitiveness has been recognized in increased allocations for support of faculty mortgages and in increased student financial aid. The 2009 GIB will provide $4.3M of incremental research assistant funding as the RA tuition subsidy moves from 45% to 50%. Also, $2.0M in additional funding will be available to cover overhead (under-recovery) on foundation grants. Both of these decisions demonstrate a belief in the importance of research growth to MIT’s mission.

Over the next few weeks, the Provost, in consultation with the deans, will finalize what will be the first balanced budget for the Institute in recent years. And, over the rest of the semester, the deans will be engaged in a visioning discussion with the Provost and the President about their priorities for the Schools and for MIT. The Financial Framework will be an important element in gauging the feasibility and timing for implementing those visions.

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