Remarks by President John J. DeGioia
Faculty Town Hall Spring 2009
January 16, 2009
As always, I am grateful for the opportunity to meet with you today. We gather at an exciting time for our entire nation—as we will soon witness the inauguration of President-elect Barack Obama. These are extraordinary days, and we all look forward to the promise and potential of the new Administration. We, at Georgetown, are particularly proud that so many members of our community have served in roles preparing the transition of our new President. Alex Aleinikoff and Dan Tarullo of the Law Center chaired two important efforts, one focused on immigration policy, another, on transportation. Dan has been nominated to serve a term in the Federal Reserve. There are so many of you who have played roles, or who are preparing for service to our nation, that it would take too long to mention everyone, let alone alumni like General James Jones, who will also be part of this new Administration.
Of course, we also meet today during the largest financial crisis in our lifetimes. We are all well aware of this, and it was probably no surprise that when you opened your year-end statements from your retirement plans – like me -- you saw that the balance of your retirement has dropped by a third or more.
This is a time of almost unprecedented economic uncertainty, challenge, and difficulty—a time which is leaving no institution, academic or otherwise, untouched, unaffected—or untested.
I am going to spend the time we have together by focusing my prepared remarks on the financial crisis, but before I do that, I have some words about a few other important other matters that I would like to share with you.
First—in a transition that occurs every six or seven years—in December, our Board of Directors elected a new Chair, Paul Tagliabue, Class of 1962, to succeed Ed Villani, a member of the class of 1968, who has served with great distinction as our Chair since 2002. Paul has served on the Board for the past two and a half years, following his retirement as Commissioner of the National Football League. He has returned to Washington to the law firm in which he was a partner before his seventeen years as Commissioner, Covington & Burling. It was noted at the moment of his election that it was fifty years ago this past Fall that Paul arrived on campus as a freshman. He is currently serves as the Vice-Chair of the Board and will assume the Chair on July 1.
Second, we received the largest gift in the University’s history, a $75 million bequest from the estate of Robert McDevitt, Class of 1940. Mr. McDevitt was an extraordinarily humble man. Much of his wealth was inherited from his mother who was one of the very first employees of that company that became IBM. She began buying stock in the company more than 70 years ago and never stopped, leaving her certificates to her son. He and his lovely wife, Kay, lived a quiet and modest life in Binghamton, New York, where he owned a funeral home. Many members of our administration, over many years, visited with the McDevitts in Binghamton, but I can say truly, we never imagined the extent of his generosity.
Third, from time to time, we as a community are faced with a moment that requires the most careful discernment of our deepest values and convictions. We have been responding to just such a moment in recent days.
As you may know, next week, the Center for Contemporary Arab Studies in the SFS, and two student groups -- The Lecture Fund and the International Relations Club -- are co-sponsoring a satellite lecture and Q and A discussion with Muammar Qaddafi, the de facto head of state of Libya. He is, frankly, a dictator known for decades of shocking brutality, state-sponsored terror, supporting violent insurgents in other countries and, in recent years, positive actions like destroying the country’s weapons of mass destruction and voicing opposition to Al-Qaeda.
The purpose of the lecture is for Qaddafi to discuss his ideas for resolving the Israel/Palestine tragedy and to take questions from the audience on any topic, moderated by Professor Michael Hudson.
The event has sparked protests. The University has been criticized by members of the Libyan exile community who are survivors and witnesses of human rights violations by Qaddafi’s regime. And, we have been asked to cancel the lecture by some family members of civilians killed in the 1988 bombing of Pan Am Flight 103 -- for which Libya has paid compensation to families and formally “accepted responsibility for the actions of its officials.”
The requests from the families have been especially personal and especially painful, because they come from members of our community. These are families with longstanding, multigenerational ties to Georgetown, a respect for our values, and a history of engagement and support of the University.
I know that Condaleeza Rice, Tony Blair, and Nicolas Sarkozy have gone to Tripoli and met with Qaddafi. He is credited for making a turn toward the West in recent years and for improving the Libyan diplomatic stance.
But that doesn’t change the fact that Qaddafi has destroyed lives and ruled unjustly, and that his tele-presence in fact causes pain and dismay to people of principle and integrity.
The question of what constitutes appropriate speech and expression is among the most important questions that an academic community faces.
I am pleased that we have handled the matter with real care and attention. The Committee on Speech and Expression has looked carefully at the event and found it falls within our guidelines. The organizers of the event have responded to legitimate expressions of concern and coordinated closely with colleagues on matters ranging from security to our expectation that Qaddafi take questions on any topic. Vice President for Student Affairs Todd Olson will be at the event and will ensure that the forum remains open and civil. We will continue to make clear to our various publics that the University does not endorse the speaker or his ideas.
In fact, I will go further now and say that I will be disappointed if members of the audience fail to ask Qaddafi about Lockerbie and other matters of historical record and grave concern, because he should and must be held accountable. That is very definitely part of a University’s role -- to ensure that crucial questions get asked and that falsehood and evasion are shown and seen and differentiated from truth.
Looking forward, I expect that the event will be conducted openly, effectively, and with academic integrity. I can anticipate that, as a result of this event, there will be other fora on terrorism, Libya, or free speech itself. Our deep conviction here is that the best antidote to offensive speech is more speech.
I also know that our convictions will be of no consolation to the families of the Lockerbie victims, and to others Qaddafi has harmed. And that is something we all need to remember too.
Now I would like to turn to matters right here, related to our finances.
When we were last together, I offered some thoughts regarding what we were confronting in response to one of the most extraordinary months in financial history. We met on September 25th. How could we have known that the months of October and November would even be more extraordinary? Over these months, we have been intensely focused on working to respond to this unfolding financial crisis by seeking stability for everything we have all worked so hard to build over these decades, and to identify where we might have opportunities to strengthen our university in this moment of such unprecedented turbulence.
I’ll place this in some context:
• In 2008, at the national level, we lost more jobs than in any year since World War II.
• Twenty-five banks failed –including Washington Mutual, the biggest bank failure in history…and another 171 institutions went on the “troubled bank list.”
• Goldman Sachs reported that net revenue for its fiscal fourth quarter of 2008 was a negative $1.58 billion—a year ago, the firm had a net revenue of $10.74 billion.
• AIG—one of the world’s largest international insurance organizations—as well as the mortgage giants Fannie Mae and Freddie Mac, all had to be bailed out of impending bankruptcy by the U.S. Government.
• Single family home prices at the end of 2008 were off 23.4% from their peak in 2006.
• Between December of 2007 and December of 2008, the Consumer Confidence Index fell from 90.6% to 38%.
• And the Dow Jones lost almost 34% of its value in 2008; its worst year since 1931, while the decline in other world markets ranged from 31% in London to 65% in Shanghai.
So in this context, on December 9, we went to the Board of Directors, as we always do, with planning parameters for the Financial Plan for the year that will begin on July 1, 2009. As you know, that’s part of our typical planning cycle. Since then, consider the following:
• Toyota said it expects to have its first operating loss since 1950 when its current fiscal year ends in spring 2009. Toyota said it expects to sell about 16 percent fewer vehicles worldwide in its current fiscal year.
• The index that tracks manufacturing had its weakest reading since June 1980, and it fell below the benchmark that indicates a contraction of the overall economy.
• Data released last Friday indicated that national employment fell by 524,000 in December, with revised data showing even greater losses for the two prior months. In 2008, our nation lost 2.6 million jobs—this is the most since World War II.
• The NBER--who officially calls a recession--confirmed what many of us have already guessed: A peak in the economy occurred in December 2007 – and we are now in recession.
• Borrowing by U.S. consumers dropped a record $7.9 billion in November, the biggest dollar amount since the series began in 1943.
• And as I was preparing these remarks, sitting at my desk, another indicator came across my computer screen – retail sales plunged 2.7 % month on month in December, pushing the declines over the 2008 calendar year to 9.8%.
It’s clear that we are in a very dynamic environment, where it is impossible to know how things are going to unfold. Planning parameters set in December for a year that will begin seven months later are not commensurable with the volatility of the environment in which we now find ourselves.
What I would like to do today is, first, to provide further context by describing how we have responded to date; second, to place Georgetown into the context of American higher education; and, third, to provide a framework for how we intend to move forward in the coming months.
I. Background Context
There are two basic themes that have focused our work in the past year – the credit crisis and the recession.
I mentioned a moment ago that we began focusing intensely last January. Why was that the case? Just about a year ago, we found ourselves in a position we had never experienced. Georgetown carries a debt portfolio in the range of $700 million dollars. We have accumulated this debt over the past decades, primarily to finance the construction of buildings on our campuses. We sell debt to investors, repaying them with interest in addition to principal. The manner in which we arrange the sale of that debt varies, but through the past decade, one approach that was very attractive for us was to sell our debt was through an auction process. What this means is that while the debt we sold were “thirty-year” notes, they would be more “liquid” for the investor – the investor could actually re-sell the debt in an auction every 7 to 30 days. So our “thirty-year” notes were in a context that had a lot of flexibility for the investor. What was important about this approach is that it was a very low-cost way for us to finance projects. We paid a rate in the range of 1 to 3 % for several years. And, in the event that on a particular day there wasn’t a buyer for someone bringing the debt to the auction, our banker stepped in and purchased the debt, holding it until the next auction.
Last January, we found ourselves in a position where there were no buyers for debt in the auction. There were no buyers, and our banker did not step in. This was our first indication that it was no longer business as usual. In the following days, a number of institutions failed in what had been very stable credit markets. It was at that time that we knew that we were facing a crisis in the credit markets, a crisis that ultimately would see the complete collapse of a $100 billion auction securities market.
There are two ways in which a credit crisis impacts Georgetown. The first I have already described – we need the credit markets to sell our debt…debt that we use to finance construction. Second, our families use the credit markets to secure loans to pay for the cost of a Georgetown education. Once we had stabilized ourselves following the January event, our attention went to the student loan market. Let me put the issue of student loans in perspective. We have an operating budget of $1 billion. Approximately $600 million of that operating budget comes to us as revenue from tuition and fees. Of that $600 million, approximately $200 million—or 20% of our operating budget—is covered through loans. These loans are provided by funds made available, and in some cases subsidized, by the Federal Government and processed through student loan companies.
Last Spring, we had two concerns: First, would the Federal Government be in a position to continue to make the funds available? On May 21, Secretary Spellings presented a framework that assured students access to federal loans. The second concern: Would student loan companies continue to stay in the business and process loans? This made for a very uncertain summer. By early July, 119 student loan companies had decided that they would not stay in business any longer to provide federal loans to students. It just wasn’t profitable enough. This volatility was a concern for us. We count on predictability in the market to ensure that we receive our funds in a timely manner to meet our operating expenses. As we reported in our Fall meeting in September, we did experience a problem with the performance of one of our lenders this year.
In order to address this volatility, we made a decision to apply to the Federal Government to become a “direct lender.” Through this program, the Federal Government will provide Georgetown the funds that they previously provided to the student loan companies, and we will serve as the processor of the loan. We have been approved, and Chris and his team working with the campus financial aid directors are taking the steps to position us to move forward as a direct lender.
The first eight months of the year were obviously defined by concerns about credit. Now we add a second dimension—the implications of the recession. Both are exacerbated by the financial crisis of the Fall. The fundamental issue is to ensure that we are able to meet the expenses we incur in operating Georgetown University. To address this issue, I’d like to place Georgetown in the context of American higher education.
II. Georgetown in the Context of American Higher Education
I mentioned a moment ago that Georgetown University is a $1 billion a year organization. I also indicated that $600 million of our operating revenue comes from tuition and fees. In the context of American higher education, we are a tuition dependent institution. Our $1 billion breaks down into four major categories:
1. Tuition and Fees: 59%
2. Federal Sponsored Research: 18%
3. Endowment: 6%
4. Operating Gifts from Philanthropy: 5%
I’m sure you’ve all read about the steps that other universities are taking in response to the financial crisis. No institution has remained untouched, but the extent and nature of the problems created by the declines vary between institutions. Harvard, Princeton, and Yale have—not surprisingly—received a lot of attention. And as three of the greatest universities in the world, their situations are particularly instructive for us. However, it is important to note two main differences between Georgetown and institutions like Harvard, Yale, and Princeton. The first is the sheer size of their endowments. The second is a factor that has made their situations very different than ours at this time. While we are tuition dependent for annual operating costs, these institutions are more heavily reliant on their endowments. At Yale, 44% of their annual operating costs are supported by their endowment…and at Harvard, 35%. This is 44% and 35% compared to our 6%.
Endowment performances have received considerable coverage in the media. Harvard’s nearly $37 billion endowment is now $29 billion, a decline of 22%. Yale’s almost $23 billion endowment is now $17 billion, a decline of 25%. The University of Virginia reported losses of $1.3 billion, a 25% decline in the value of their endowment. We expect a similar year end performance when the numbers are finalized for December. Through the end of November - for the first five months of the fiscal year – we stand at $851 million, a loss of 22%.
That said, while we are not as dependent on endowment spending as some of our peers, we are more heavily dependent on tuition payments—and this will be our fundamental challenge as we move forward into 2009. We are closely watching factors that will affect students’ and their families’ ability to meet tuition commitments. Perhaps the most significant is unemployment.
Each university will have its own challenges and each of us will develop responses to our own situation. Let me describe how we propose to move forward at this time.
III. A Framework for Moving Forward
We have risks that we need to manage. As I’ve said, we are operating in the most unstable and uncertain financial context in our lifetimes. No one truly knows how this is going to unfold. For an organization with our financial framework, clearly the most important issue is whether our families will be able to meet the cost of a Georgetown education. Our undergraduates pay $53,000 this year, our Law students, $63,300 our Medical students, $69,000. We are partners with our families. For our undergraduates, we assist more than 35% of our families by contributing $65 million in need-based financial aid through our policy of meeting the full need of our students. This is a crucial academic priority because it allows us to compete for the very best students against the most competitive universities.
As we move into this year, the issue on which we will focus most intensely is how the recession is impacting the ability of families to cover the cost of education here at Georgetown. If you look at the increasing rates of unemployment, particularly in states where we draw many of our students, you will see why we are concerned:
New York: 6.1
New Jersey: 6.1
These are big states feeding us. And unemployment is a significant factor we are watching as we plan for the future, and the ability of families to meet their financial commitments.
A second area of risk is philanthropy. We had an outstanding year in fiscal year 2008. We raised more money in 2008 than any year in our history, but one. And we brought in more cash than in any previous year. We are increasing steadily and significantly, the amount of commitments and cash from philanthropy to support our mission here at Georgetown. But in this environment, I believe we need to be prudent about our expectations for sustaining this level of growth in philanthropy. If you will look at this slide you will see that as we track “Operating Gifts by Campus,” which reflects one dimension of philanthropy—cash gifts raised for current operations – in this category we are off for the six months from July 1 to December 30, 2008. We will continue to do everything possible to sustain and increase philanthropy, but in planning for the coming eighteen months, we believe we need to prudent.
A third area of risk is the federal commitment to sponsored research. Eighteen percent of our budget is supported by the sponsorship of our research by the federal government. And we don’t know what this environment is going to mean for area of funding.
A final area of risk remains the capital markets. These markets are still not functioning in a predictable and reliable manner. The restructuring that we have had to engage in since the collapse of the auction market has resulted in increased debt service of 20%. Yesterday, Moody’s released a statement indicating that the credit ratings of colleges and universities will be given very careful scrutiny in the coming months. Well, we were upgraded in September. Chris is in regular contact with our colleagues at the rating agencies. This is an area we are monitoring closely.
What are some of the steps we are taking?
We are building a very conservative budget. We will assume a smaller increase in tuition than usual for this year. We are still determining what our tuition will be for the coming year, but consider that Princeton announced its tuition at the undergraduate level would increase at a rate of 2.9%. Over the past 4 years at Georgetown, undergraduate tuition has grown at a rate of 6%, and tuition at the Law Center at 6%. We will be limited in how much we can raise our tuition.
The impact of this will be that, for the first time in a decade, we will not be able to hit the targets of the faculty salary plan that we began in 2000. As you know, for the past nine years we have been able to fund our salary pool for faculty at a rate of 2.25% above inflation. This plan was designed to develop a salary structure that was more competitive with our peers. This year, we will not be able to grow salaries at 2.25 % above inflation. Chris is working carefully with Jim O’Donnell, as well as Alex Aleinikoff and Howard Federoff, to develop the strongest possible framework for faculty compensation in this very difficult set of circumstances we’re operating within. In December, we proposed to the Board of Directors a pool for increases of 3.5%. Given the facts that I outlined earlier, we are very concerned about our ability to achieve this goal. I have asked the campus leaders to develop all options as we move forward in the coming weeks. Additionally, given that within our own community, the impact of the recession is very serious, special attention will be given to our lowest paid employees.
We have sought to be extremely disciplined in managing our spending. Chris sent a letter out to the university leadership in the Fall, indicating the importance of discipline in our spending. As a small step, I have asked the senior leadership, including myself, to freeze our own salaries at their current levels through the next fiscal year.
We will move more slowly on our Capital Projects. We have continued on the regular pace with the new Business School building, but we are monitoring closely the conditions for other projects. The most obvious is the new Science Building. As I shared with you in September, we need to borrow money to construct this building and the capital markets are not functioning in an optimal manner at this time. Today, we are exploring a new financing framework for the project that will include some additional philanthropy.
The Board of Directors, the Main Campus leadership and I remain committed to this project, and we are taking incremental steps when we can to advance it. For example, over the holiday break, we installed a new chiller that will enable us to provide air conditioning for the new science building. You will see some construction beginning in a few weeks that will result in the closure of Tondorf Drive. This work will be the next stage of infrastructure development necessary for the new science building, and continues the process of developing the conditions for this new building.
In December, the Investment Committee of the Board established new formula for asset allocation which recognizes the need for greater liquidity – more cash – in our endowment. We have also slowed new investments in the Private Equity markets.
I mentioned earlier that Chris has secured approval for Georgetown to begin serving as a Direct Lender. I expect that we will begin in a modest way in the coming year, developing a hybrid model that will continue our relationship with student loan companies and banks, and offering an option for federal barrowing that is facilitated by Georgetown. You should understand that being a direct lender does not mean lending Georgetown University dollars to students.
Chris will continue the efforts he began a year ago and continue the process of restructuring our debt. The cost of borrowing is now greater than before the financial crisis, and Chris continues to work that portfolio.
We have accessed our Lines of Credit, essentially to see if they were still available. We are considering borrowing to strengthen our overall cash position. You may have seen that Princeton recently borrowed $775 million and Harvard $2.1 billion. This is a moment when a number of institutions are borrowing to strengthen working capital.
We are engaged in very aggressive fund raising. One anecdote: Our Vice President for Advancement, Jim Langley, has conducted the most rigorous, in-depth, set of market analyses, and this work has revealed a deep passion in our philanthropic community for supporting financial aid. Just a few years ago, we were raising $8 million a year for financial aid. This past year, the year that ended June 30, we raised $32 million for financial aid.
But I don’t want to close these remarks without offering a few words about the larger context. We are on the eve of a truly historic Presidential inauguration. This is an extraordinary moment in the history of our country and the history of Georgetown University. The presidential transition comes at a pivotal national moment, and the young people we educate are as engaged in the idea of national renewal as perhaps any generation in recent history. It is important that we seize this moment and think expansively about the role that this university community can play.
We are certainly presented with very real challenges and difficulties. But if we respond to them properly, I believe that the potential to advance our interests…to make a contribution…and to take advantage of this challenging moment in time, is truly great. Because of our resources—our location, our community, our mission, our identity—Georgetown has always proven to be very resilient. The sign on our door says, “Since 1789.” We need to balance our challenges with our opportunities…and to come together and show how a people and a place can give back to the country in a time of national need.