Economic outlook clouded by uncertain market forces

The university has worked deliberately since last fall to close a $125 million budget shortfall over three years, but unknowns exist: the depth of the recession, the future value of Duke's investments and the full effects of cost-saving measures underway.

"We have created a comprehensive plan to address the issues," said Kyle Cavanaugh, vice president for Duke Human Resources. "But there are several chapters yet to unfold."

Administrators are not mincing words when it comes to the forecast for 2010 and beyond, as they manage declining endowment returns from the market meltdown.

"I don't think next year is going to be better," said Tallman Trask III, executive vice president. "If I had to guess, it may be a little worse. Because of the way the money flows, we have not seen the full impact."

The flat $1.8 billion budget for fiscal year 2009-10 reflects cost-savings such as a moratorium on new construction for at least two years, and longer-term savings such as moving to paperless payroll for employees with direct deposit. But a large portion of savings has to come in labor costs, which account for 60 percent of Duke's operating budget.

To help reduce labor costs, Duke implemented a compensation freeze for staff and faculty earning more than $50,000 and drastically reduced the number of vacant positions being filled. Duke also offered a voluntary retirement incentive to 825 University employees participating in the Employee's Retirement Plan, a traditional pension plan for bi-weekly-paid staff.

Trask said the voluntary retirements, along with attrition and a careful management of vacant positions, could mitigate the potential for involuntary layoffs. "As much as I would like to say that workforce reduction is not a possibility, we are not ready to say that yet," he said.

"But we can say it will be one of the very last possibilities."

Duke will protect employee benefits as much as possible, Trask said. "We have no plans to reduce any of them next year."

While the full effect of cost-saving efforts is tough to predict now, administrators are fairly certain that income from Duke's endowment will remain low for another year or two.

"We have a policy of using a three-year average to calculate the amount of money we receive from the endowment each year," said Hof Milam, vice president for Finance. "Now that we are in a declining market, we are going to see this three-year average trend down over the next two or three years."

Administrators remain committed to employees, faculty excellence and the quality of the undergraduate and graduate student experience and programs, and will carefully monitor the endowment and implementation of cost-saving efforts. But no one has a crystal ball to forecast the unknown.

Said Trask, "We will have to see how a lot of things play out."