From the community | A primer on the Stanford budget or: how I learned to stop worrying and love the endowment, part II

April 13, 2022, 10:26 p.m.

Tim MacKenzie has been an academic worker at Stanford for nearly a decade. He worked as a graduate student in the Chemistry Department to earn a PhD and now works in the Genetics Department as a postdoc. Any errors in the description of the budget are the author’s own, and he welcomes a response from administrators – especially a detailed breakdown of the buffer funds and how they were (or were not) utilized during the height of the pandemic in 2020. Tim MacKenzie has been a member of the Stanford community since arriving to start his PhD in the chemistry department in Fall of 2013. He currently works as a postdoctoral researcher in the genetics department. This article is a part of a two-part series on Stanford’s budget.

Part IV: The Buffers

My previous article gave an overview of similarities and differences between the operating budget and endowment. Both are invested to generate revenue. The principal of the endowment is never touched; the money in the operating budget is contained in the expendable funds pool (EFP) which is, well, expendable. Unlike the endowment, EFP interest goes into university coffers rather than back to its own source.

Stanford guarantees the balances of all accounts in the EFP regardless of market conditions. If there is a year with terrible returns, Stanford is on the hook even if the value of the EFP is not sufficient to fund university obligations. How does Stanford guarantee all balances if there is a down year for investment returns when so much of the budget is put into the market?

The question of how to cover obligations during market downturns came into sharp focus during the Great Recession when endowment returns were hugely negative. Stanford has an obligation to cover payouts from the endowment and expenses in the operating budget. Following the scare caused by the 2008 recession, Stanford turned to a concept from chemistry to provide resiliency beyond the stability provided by the endowment smoothing formula: buffers. You may remember the concept of a buffer from high school in the context of acid-base chemistry; one hardly needs a PhD in Chemistry to grasp the concept. A buffer in chemistry is a solution that is able to resist changes in pH even when challenged with addition of acid or base. Stanford created a financial buffer to be able to resist changes in university operations when challenged with market downturns.

Every year, excess returns from investments of the EFP get invested into the Tier I Buffer until it is worth 35% of the total EFP. After that, excess returns are put into the Tier II Buffer. Anytime returns from the endowment or the value of the EFP aren’t enough to cover the operating budget, money is withdrawn from Tier I Buffer until it reaches 80% of its initial size. After that, Tier II Buffer is used up before returning to the Tier I Buffer.

The buffers also replenish individual accounts if returns are negative. If a professor taps into their grant to purchase an expensive instrument while the university’s investment of the funds has taken a downturn, the buffers make sure there are sufficient resources in a feat of financial legerdemain. In years with good returns, hundreds of millions of dollars are put into the buffers so they can fill this role; note the difference between the top line revenue and expenditures in the budget for this year (~$284M). By the end of the academic year, Tier I Buffer is projected to stand at $2.0 billion and Tier II Buffer will be $1.7 billion.

Page 9 of this year’s operating budget says “the buffers serve as a financial reserve in the event of an earthquake or other disaster.” In other words, Stanford has nearly $4 billion in a rainy-day fund. In the 2019-2020 budget, the last pre-COVID budget, Tier I and Tier II Buffers stood at $1.4 billion and $1.0 billion, respectively. The buffers actually grew by more than a billion dollars during the ongoing pandemic. Meanwhile, hundreds of workers were laid off and subcontracted workers went months without promised pay. Apparently, a global pandemic does not reach the threshold of “earthquake or other disaster” required to utilize financial reserves to resist changes in university operations when challenged with market uncertainty. Though to the university’s credit, I am unaware of efforts to hire professors on a “without salary basis” like UCLA recently attempted.

Part V: Creating Lasting Change

Hopefully this brief outline of the endowment and operating budget gives insight as to why withdrawing from the endowment is a non-starter. But that doesn’t mean there is no way forward. Rather than pointing towards the endowment as a source of funding, activists can suggest investment returns from the EFP or the buffers. Every year, interest from Tier II Buffer generates ~$50M for use at the discretion of the President. What administrators mean when they say there aren’t funds to cover a request is that Stanford is choosing to prioritize other things (say, growing the size of the buffers) over what is being asked for (say, salary high enough that you can afford to feed your family).

So what can you do with this information? The most important thing is to get organized. The Budget Committee has already started work on next year’s operating budget – many major decisions will have already been made when the budget is sent out for approval by the Faculty Senate in the coming weeks and Board of Trustees in June. Now is the time to identify the needs of your fellow community members and present them to decision makers. If you don’t know who the decision makers are, the acknowledgements section in the executive summary of the budget is a good place to start. If you want to see the budget process in action, keep an eye on agendas for the Faculty Senate this quarter – faculty approval is a necessary step in the budget adoption process. Meetings are open to members of the Stanford community.

Strong organization and clear demands made of decision makers can make change happen. The Black Community at Stanford published clear demands to the President and Provost in the summer of 2020, laying groundwork for a successful campaign by the Black Graduate Student Association (BGSA) over the last year to departmentalize African and African American Studies. When hundreds of postdocs and campus allies signed a letter decrying the cost increases for dependent healthcare, the increases were phased in over a year rather than happening suddenly. Graduate students have protested for years to save dependent health insurance plans from being canceled by the university. Before the pandemic, administrators would hold town halls where organized students could pressure decision makers. When the practice of holding town halls was suspended by the pandemic, students organized an event of their own to share their plan for a just and equitable reopening of the university.

All of these approaches share a common thread: a committed core of organizers crystallizing the views of members of their community and building a coalition with campus allies, presenting a united front to administrators over a sustained period. The tactics from the graduate students were successful: while postdocs and service workers on campus saw dependent health insurance costs increase, plan rates remained flat last year for graduate students. 

But success is not guaranteed. Stanford resisted calls from organized students to expand mental health resources even in the face of a lawsuit over their existing policies and conditions. It was not until we lost community members to suicide that Stanford heeded calls to expand CAPS. Unfortunately, it is not uncommon for elite academic institutions to wait for the loss of community members to institute change. Building a broad coalition around widely and deeply felt issues is not a guarantee of success, but making change without doing so becomes exponentially more difficult.

Another piece of advice is to push for the creation of an endowed fund to cover the costs of your request in perpetuity. The examples of victories listed above often involved the use of one-time funds from the university. Any improvement of material conditions is an achievement worth celebrating, but the use of one-time funds guarantees the need to continue to rehash the same battles in the future. With the anticipated 5% payout, a one-time investment of 20x the yearly costs for your request will ensure there will be funding for it as long as Stanford exists. Interest from the operating budget could serve as a source of funds. The development office could commit to fundraising for a specified purpose. Alumni can withhold donations unless they are put towards a specified endowed fund. Instead of asking to take money from the endowment, it is better to ask to grow the endowment by creating a fund that will cover your request for the foreseeable future. Stanford recently canceled the CalTrain GoPass for graduate students because the program was supported by one-time funds each year rather than being guaranteed through an endowed fund. 

But all the money in the world won’t guarantee you a seat at the table with decision makers, who may choose to vaccinate themselves before physicians treating COVID patients on the front lines. However, a strongly organized community that can rapidly mobilize in response to its needs can cause the university to backpedal and listen to demands. Existing power structures exclude many of us from decisions Stanford makes as an institution even though they will materially impact our lives. The failures of the university during the pandemic crystallized that realization for medical residents, who have since unionized

The new resident union can look to CRONA, the union that has been representing nurses at Stanford since 1966. CRONA provides an example of how activists can use union pressure and strikes to achieve their goals: for the first time in over two decades, more than 90% of organized nurses voted to authorize a strike after Stanford failed to respond to demands, including better mental health coverage. Nurses and residents share working conditions and could strengthen their power by supporting each other. Ideally a labor stoppage can be avoided, but the rest of the Stanford community can show solidarity with the workers by reaching out to leadership in the administration and calling on them to provide for the frontline healthcare workers who have borne the brunt of the pandemic. My mom is a nurse. If picket lines end up forming, I know which side I am on.

This article has been updated to change the headline from “A primer on the Stanford budget, part II” to “A primer on the Stanford budget or: how I learned to stop worrying and love the endowment, part II” at the request of the author.

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