Over these past few months, the world has seen the best of Duke. Every member of our community has risen to meet extraordinary difficulties that none of us expected when the academic year began with such promise last August. For all that, and on behalf of your colleagues around the world, I thank you. I have never been prouder to be a Blue Devil.
Even as we rise to meet the public health challenges and navigate this new world of social distancing and working from home, we must also rise to meet the financial headwinds now confronting us, both individually and collectively. As I noted last month, the fallout from the pandemic has had a significant negative effect on almost every aspect of our operations. Indeed, as predicted, every one of our sources of revenue—tuition, research grants, clinical and patient care services, private philanthropy and income from our investments and endowment—has already suffered large reductions or is expected to be quite substantially diminished in the months ahead.
At the same time, many of our costs continue to rise as we grapple with expanded needs precipitated by the pandemic. The full impact will not be known for several months, but we can estimate that the total decline in revenues will be somewhere in the range of $250 million to $350 million next fiscal year and could range as high as 15% of our annual operating budget.
In anticipation of this downturn, we implemented last month a series of steps to mitigate our worsening financial circumstances, which—except for the Duke University Health System (DUHS)—apply to all of Duke University:
Reducing expenditures: All schools, units, departments and programs have suspended all new non-salary expenditures, with any ongoing expenditures greater than $2,500 requiring pre-approval by the Executive Vice President, Provost or Chancellor for Health Affairs or their designees.
Hiring freeze: All staff hiring has been paused until further notice, except for those positions deemed essential and approved by the Executive Vice President, Provost or Chancellor for Health Affairs, or their designees.
Suspending salary increases: For the fiscal year beginning July 1, 2020, there will be no salary increase for university employees making more than $50,000 per year. Employees earning up to $50,000 who earn satisfactory performance evaluations will receive a one-time, $1,000 payment. The only exceptions to this policy will be certain academic promotions and positions governed by the terms of contracts with collective bargaining units.
Holding construction: All new university construction projects are on indefinite hold, except those related to safety, repairs, infrastructure, virus research and a small number of obligations to new faculty.
These cost-saving measures are helping to meet part of our shortfall. However, since salaries and benefits for our employees represent about two-thirds of our overall operating budget, a deficit of the magnitude we are anticipating cannot be addressed without curtailing some of these costs. We continue to believe that our health insurance programs must remain intact, especially at this time. However, we have reluctantly determined we must also reduce our salary and benefit expenses in order to weather successfully the financial storm.
Duke is only as great as our people, and as we adapt to this new reality, we must never lose sight of our commitments to our people and our purpose. Every university employee continues to be in a fully paid status regardless of their current location and duties, and we intend to keep that in place as long as it is financially feasible and responsible. But doing so will require some changes and sacrifices that, while uncomfortable and unpleasant, will help secure continued employment and retain vital economic resources in the Durham community.
Consequently, the following will apply to all university employees. (DUHS employees will receive separate communications.) Effective July 1, 2020, we will:
Temporarily suspend university-paid retirement contributions. To avoid cutting direct compensation, we will instead temporarily suspend all employer contributions to the Duke Faculty and Staff Retirement 403(b) plan for a period of 12 months. This action does not affect any employee investments—that is, anyone enrolled in Duke’s retirement plan can continue to make contributions from their salary—only the university’s separate contributions to these plans will be temporarily suspended. Nor will this impact the Employees’ Retirement Plan for our nonexempt employees, which is administered separately.
We take this step only after very careful study and deliberation. While painful, it appears our best way forward for two reasons. First, it affects only deferred income and only for one year, meaning that regular salaries will continue to be paid throughout this temporary period. Second, this will ensure that Duke can continue to support our employees, their families, and the Durham economy.
This action, and the other cost-saving efforts noted earlier, will result in an estimated savings of approximately $150 million to $200 million next fiscal year and provide, we hope, the necessary resources to sustain and advance our academic programs for the near-term.
We are also taking additional steps to that will affect the approximately 300 university employees earning above the retirement-contribution threshold:
Temporary reduction of salary for highly compensated employees.University employees who earn more than the federally mandated 403(b) contribution threshold ($285,000) will also see a temporary reduction of 10% in the portion of their salary above that threshold, for a period of 12 months. Specific details will be communicated before June 30 directly to those who will be impacted.
Additional voluntary contributions by senior leadership. As President, my reduction above will be doubled to a total of 20%, and the Provost, Executive Vice President, and Chancellor will have a reduction of 15% for this period. The deans and vice presidents will also make additional contributions to support our highest priorities in addition to the mandated reductions.
We take these steps only after considerable study of all the options, and with confidence that this is the best and most equitable path for us at this difficult moment. We will continue to monitor our circumstances carefully, and have engaged a comprehensive Team 2030 Strategy process to determine what further actions may be needed.
Some may wonder why we don’t simply draw additional funds from Duke’s endowment to address these deficits. You are probably aware that the endowment, which in times of growth is a source of funding for priorities such as student financial aid and faculty chairs, is not a “rainy day” savings account. Rather, it is a permanent fund intended to provide ongoing support over the life of the university, and most of it is legally restricted for specific purposes. The steps we are taking to secure Duke’s financial future are already predicated on spending as much as we responsibly can from our endowment. Indeed, even with the actions outlined here, we expect in the coming year to spend from our endowment—which has suffered considerably by recent declines in the market—at rates that will not be made up for by investment growth, thus further reducing this vital source of long-term income.
Our circumstances today are daunting, but we will get through them. We are a strong and resourceful community guided, especially in challenging times, by our shared values of mutual respect, trust, inclusion, discovery and excellence in all we do. Our work is great and good, and it continues in the face of the pandemic. Last weekend, we conferred degrees on almost 6,000 new Duke graduates. And while we could not share their joy on campus, thousands of you, joined by alumni, friends and families around the world, came together to mark the moment of their transition from citizens of Duke to citizens of the world. It is for them, and their succeeding generations of scholars and doers, that we take these steps now to secure our future.
Thank you for all you do to make us the Duke we have always been, and the Duke we are destined to become.
Vincent E. Price