Pasadena Star News   Sunday, June 9, 2002

Caltech grapples with deficit

By Becky Oskin
Staff Writer

PASADENA - Caltech is unique. No other school in the U.S. succeeds so well with so few students, so many faculty and a mandate against growth. This past year, Caltech again set itself apart from MIT, Harvard and other schools at the top of annual college rankings the exclusive institute operated at an $18 million loss.

The deficit, deliberately created by Caltech's board of trustees and administration, reflects efforts to revamp the school's financial practices and make it more attractive to donors. A major fund-raising campaign starts this fall.

But the campaign won't help with the deficit.

"We have made a commitment to Dr. (Gordon) Moore that we will not use these funds to avoid the financial discipline needed to reduce our structural deficit," Caltech president David Baltimore wrote in the April 2002 e-mail to students, referring to a $600 million gift from Moore announced last year.

Instead, the focus of the balanced budget is Caltech's $1.3 billion endowment.

"Simply put, we have been paying out more than we have been taking in," Baltimore wrote.

An annual payout from the endowment helps fund Caltech's budget, as for nearly every university in the country.

In years past, when the school would run a deficit they were able to meet the shortfall with additional endowment revenue thanks to stock market gains, said vice provost David Goodstein.

"We would go to the board of trustees and say we are in the red and the trustees would grumble and say we could," take more from the endowment, Goodstein said.

At more than $1.3 billion, Caltech's endowment isn't shabby. But the stock market drop last year shrunk endowments across the country Caltech's lost about 18 percent last year, said vice president of business and finance Al Horvarth.

As the endowment shrunk, so did the payout, contributing to the $18 million deficit.

Caltech has a relatively small endowment compared to other elite schools. Harvard University tops the Chronicle of Higher Education's list of endowments at $17.95 billion. Stanford University's $8.25 billion and MIT's $6.1 billion endowments also place them in the top 10. Caltech consistently ranks in the low 20s, close to Johns Hopkins University.

Over the past four to five years, the school has focused on lowering the amount of money siphoned from the endowment, down to about 6.5 percent, Horvarth said.

"We did a fairly thorough study and came to the conclusion 6 percent was a reasonable payout rate given the rate of growth," Horvarth said.

The efforts to reduce reliance on the endowment also reflect another of Caltech's unique qualities its main source of income.

At Caltech, research contributes a much higher percentage of the school's total revenues than any other university, according to its 2001 annual report.

Considering that research is Caltech's main cash cow and its most visible product, the administration decided to cut itself to meet the shortfall.

"A 5-percent target was established and each (administrative) unit was asked to go back and decide how to best implement that," Horvarth said.

Faced with cutbacks, many departments turned to their most flexible source of revenue Caltech students.

On top of tuition of about $21,000, Caltech started charging students $10 for a copy of the annual course catalog, raised the health-care deductible to $150 and instituted a $50 fee for non-emergency visits to the emergency room, charged for off-campus Internet access and scaled back some student programs.

Students complained on Web sites they felt the administration was nickel-and-diming them for relatively small savings.

Other cutbacks not visible to students included layoffs in some administration departments and hiring freezes in others.

"We have a modest administration here, size-wise, and everybody is committed to have the best at the lowest cost, and that's not always an easy mix to achieve," Horvarth said.

Institutional support basically, administration takes only 16 percent of Caltech's 2001 fiscal year budget. According to a February report from Ann Patterson, the senior budget and planning officer, Caltech's expenses for the 2001 fiscal year are $452 million. Research is the biggest expense, at 41 percent. Academic support and teaching take 36 percent and auxiliaries another 7 percent.

Of the $434 million in revenue for 2001, 58 percent comes from research and 23 percent from gifts and Caltech's endowment. Student tuition is one of the smallest revenue sources, providing only 4 percent of the annual budget.

It's difficult to compare Caltech's budget to other schools, since few focus so strongly on research. MIT has a similar reputation for ground-breaking work, but has four times as many undergraduate students and almost 1,000 more faculty members than Caltech. It also charges $5,000 more than Caltech for undergraduate tuition $26,050.

Those numbers are reflected in MIT's $1.46 million in revenues for 2001. Only 27 percent came from research grants, though research was MIT's largest expense at 45 percent of the $1.4 million budget.

Harvard takes 28 percent of its budget from its endowment and 23 percent from tuition, now $22,694, according to the school's 2001 annual report. And Stanford, with tuition at $24,441, also relied on tuition and endowment, with 19 percent of its 2001 budget from from the endowment and 15 percent from tuition.

But even with Caltech's stream of research revenue, the school still doesn't make enough money to meet expenses.

"One of the great truths I think many outsiders don't understand is all money doesn't have the same color and flexibility," Koonin said.

"For every federal dollar that comes in the institute has to match it by supporting indirect costs," he said.

Those indirect costs are about 13 to 15 cents for every dollar, which grows to a significant amount when research money supplies $270 million in the 2001 budget.

On the other hand, every research grant from the federal government includes overhead to match those indirect costs, set by each university. Caltech charges 60 percent, higher than many public universities but comparable to private schools.

Overhead pays for utilities, secretaries, office equipment, administration and so on, Horvarth said.

"Everything that just sort of makes the infrastructure around which the institute works," he said.

But because the productivity of Caltech faculty is about 30-percent higher than most schools, it also creates a need for higher levels of support, said Tom Schmitt, assistant vice president of human resources.

Horvarth added that because the number of faculty has stayed relatively flat for decades, the school has had to add more staff to support their research. For example, the number of postdoctoral scholars approaches 550, nearly twice the number of faculty.

"The growth (in staff) has really been what's enabled us to encourage the talents of the faculty," Horvarth said.

-- Becky Oskin can be reached at (626) 578-6300, Ext. 4451, or by e-mail at

© 2002 Los Angeles Daily News, Los Angeles Newspaper Group