office of the vice president for financemassachusetts institute of technology an overview on...

Office of the Vice President for FinanceMassachusetts Institute of Technology

An Overview on University’s Finances

and Leadership Lessons

Israel Ruiz ([email protected])December 3th, 2007


Warm-up (I)

• What are the biggest challenges facing your Institutions today?

• What should be your role as IT leaders?• How would you define your budgetary

allocation?• How would you compete more effectively

for resources?• What type of resources would you ask

for?


Warm-up (II)

• Types of Costs – Fixed vs. Variable– Nominal vs. Real– Direct vs. Indirect

• Financial Overhead – Secondary Costs

– Gross costs vs. Net Costs• Incentives• Tuition and Financial Aid

– Operating vs. Capital


Agenda

• Leadership Lessons• Financial Overview

– The context for fiscal decision-making – Key Concepts

• Financial Flexibility• Financial Strength• Financial Equilibrium

– Recap: Project Financing Options


My Leadership Lessons (I)

• Leadership– Reflecting on Transitions (I)

• HP vs. MIT• Leadership vacuum

– Strategic vs. Tactical– Long-term vs. Short-term– Autocratic vs. Democratic

• Engineering the University Leader


My Leadership Lessons (II)

• My role as VP for Finance @ MIT– Reflecting on Transitions (II)

• From Staff of 7 to ~170• From Strategy to Operations• Critical first 100 days:

– Assessing the task and coping with multiple priorities– The path to credibility and trust

– The importance of Communication and the leader’s role and style

– The foundation for Effectiveness: Excellence and Investment in Individuals


A Different Investment Model

Attract Hire

Develop

Engage & Connect

Partner

Influence

On-boardingprocess

BuildPipeline

@ all levels

General Training CurriculumSpecialized Training

VPF EventsSpeaker SeriesWorkshopsRevamped R&R Rotational Assignments

Project OpportunitiesAcademic ExchangesDevelopment Programs


• The mission of XXXX is to provide society with superior products and services by developing innovations and solutions that improve the quality of life and satisfy customer needs, and to provide employees with meaningful work and advancement opportunities, and investors with a superior rate of return.

• We believe our first responsibility is to the doctors, nurses and patients…We are responsible to our employees…We are responsible to the communities in which we live and work…Our final responsibility is to our stockholders. Business must make a sound profit.

• Produce high-quality, low cost, easy to use products that incorporate high technology for the individual. We are proving that high technology does not have to be intimidating for non-computer experts.

The context for fiscal decision-makingWhat about the mission?


The mission of MIT is to advance knowledge and educate students in science, technology, and other areas of scholarship that will best serve the nation and the world in the 21st century.

The Institute is committed to generating, disseminating, and preserving knowledge, and to working with others to bring this knowledge to bear on the world's great challenges. MIT is dedicated to providing its students with an education that combines rigorous academic study and the excitement of discovery with the support and intellectual stimulation of a diverse campus community. We seek to develop in each member of the MIT community the ability and passion to work wisely, creatively, and effectively for the betterment of humankind.

The context for fiscal decision-makingFinancial perspective - A missing link?


Key Concepts

• Financial Flexibility

• Financial Equilibrium

• Financial Strength


Financial Flexibility


• Institutions of Higher Education rely on the following revenue sources:– Student Income (i.e. Tuition net of financial aid, Executive Education, Special Programs, etc)– Direct and Indirect Costs/Revenues associated with Research– Gifts and Income from Endowment– State Appropriations

• Balance of revenue has shifted in the last decade– Pressures on Student income

• Less Revenue from Net Tuition, after accounting for Aid• Higher tuition increases to compensate for declining state appropriations

– More Reliance on Gifts and Income from Endowment• Expenses funded with this revenue stream are subject to previously unseen volatility• Endowment distribution policies came under pressure to distribute more/less

– Limited and unpredictable growth in State funding– Research Growth, but…

• Is the funding frenzy of the 90s over?• How much more diversified is the research portfolio? Federal vs. Industry?

• In summary, how much flexibility is left to fund your projects?

A closer look at the revenue sources


MIT Research by Discipline FY2006

Yale Research by Discipline FY2006

Computer Sciences$49,500

8%

Physical Sciences$98,367

16%

All Others$82,802

13%Engineering$220,043

35%

Life Sciences$172,631

28%Physical Sciences

$21,8675%

Engineering$13,343

3%

All Others$24,810

5%

Life Sciences$402,060

87%

Sponsored Research


A closer look at the expenses

• Higher Education Institutions are undeniably intensive in human capital and physical facilities:– 50-60% Personnel expense– 5-10% Depreciation– 5-10% Utilities– 20-40% Materials and Services

• 5-10% IT related expenditures• 5-10% Consulting (Human Capital?)


Financial Equilibrium


CAPITAL BASE

POLICIES

OPER

ATING R

ESO

URCES

Tuition PricingEnrollmentFinancial AidHousing

DiningStudent Life

• Unlimited demands competing for limited resources– Short-term funding priorities must ensure long-term viability of

Institutional mission

InstitutionalMission and Values

Annual FundingPriorities

Sustainable FundingPriorities

Long-Term

Intergenerational Balance / Financial Equilibrium

Short-Term

Budget & Planning: A Balancing Act


Defining Financial Equilibrium

ENDOWMENT DISTRIBUTION RATE

5.73%

7.62%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

April 2000 6.5% 5.7%6.0% 6.1%6.0% 5.9%5.9% 5.8%5.7% 5.5%5.4%

Projected 6.2% 5.9%5.5% 5.4%5.6% 5.7%5.9% 5.9%5.9% 5.9%7.6% 6.0%5.8% 5.5%6.5% 5.7%5.2% 5.8%6.5% 6.6%6.7% 6.7%6.5% 6.2%6.1% 5.9%5.7%

Actuals 6.2% 5.9%5.5% 5.4%5.6% 5.7%5.9% 5.9%5.9% 5.9%7.6% 6.0%5.8% 5.5%6.5% 5.7%5.2% 5.8%

'86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

Effects of FY00April 2000 Projection


Financial Strength


AAA Credit rated Institutions AA Credit rated Institutions (Details below)

Note: AA credit rated Institutions detail: Duke (AA1), CMU (AA-), and Penn (AA3)

14.1

10.6 8.9

3.9 3.82.1 1.7 1.3 0.8

3.4

02468

10121416

PrincetonHarvard

Yale MIT

StanfordColumbia

Duke CMU PennCaltech

Broadest Measure of Financial Strength

Fin

an

cia

l Ass

ets

/ O

pe

ratin

g E

xpe

nse

s (F

Y2

00

5)


Project Financing


Project Financing

• Project decision-making context– Alignment with Institutional goals and priorities– Project definition and assumptions review

• Cost, operating efficiencies, existing funding, etc

– Project funding alternatives…

• Financing options for your project


Build – Buy – Lease

• Why would you lease in the first place?– Buying a house– Word Processing– Is it truly more expensive? In what terms?

• Institutional Debt Capacity Constraints• Space Constraints• Cost Analysis

– Make sure to include Opportunity Cost and Present Value


Internal External

Assets Endowment

Expendable Funds

Operating Budget-Earmarked (i.e. Service fee)

-Undesignated-Recurring-Non-recurring

Fundraising-Individual Donors-Foundation Grants-Company Grants

Research-Equipment Grants

Liabilities Internal Loans -Working Capital

-Interest free

-Interest Bearing

External Loans-Taxable

-Tax-exempt

-Commercial Paper

Project Financing - Summary

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