Interview with Fred Bohen, Executive Vice President

At the end of February the university announced the closure of the New Media and Design Center. To understand the financial context of this decision, Natural Selections has interviewed Executive Vice President Fred Bohen, a senior member of the administration who has responsibilities in managing the university’s finances.

First a budget question. Part of the issue of closure of New Media and Design was due to a projected deficit in the university budget this year?

There’s an actual deficit this year. We put a plan together which the Board of Trustees approved in June that provided for a deficit of $2.4 million in the current year. That is the first deficit budget since 1993/1994. It is real, and we have done projections going forward.

How do you do these projections and how accurate are they?

We put our budget around certain policies. For example, with the endowment, which is a major part of our income, we have a Board of Trustees policy that defines what percentage of that we can plan to use to support the budget, and that is based on the last three years. For any budget, that number is established by June, and for any given year that amount is not an estimate, it is a specific. The number that we put in the budget for grants—that is an estimate. But since these grants are typically multi-year grants, we can estimate pretty closely. I’ve been here for fifteen years and we have a pretty good track record of projecting a budget that we typically come within a half to one percent of filling. Now when you go out three to five years, which we have done, there is obviously more uncertainty. But we have tested our projections with multiple members of the Board, and together the administration and the Board have agreed on this set of projections as a plausible statement of what our future looks like without corrective actions. We think that left completely unattended we would have not just a two and a half million dollar deficit this year, but bigger deficits going forward.

Do grants represent the greatest variability in the budget?

No, there are a variety of factors on the income and the expense side. On the income side, the most important factors are what you project for your investment income [the endowment], it is 25–30% of the total, and also the grants and contracts and income, because that is such a big number. We have to make assumptions about the growth of those going forward. In the case of investment income, we project an average return of 8% per year. That is pretty consistent with what other institutions project for investment capital.

When professors write grants, what percentage of the money goes to the university?

Government grants typically carry with them overhead recovery for which the university has been in the range of 67–69% of the direct costs. If you got a grant of $100,000 directly supporting research, the university would get an additional $69,000 to run the support facilities.

Does this income have to be allocated towards things like resource centers, or is it generally unrestricted?

It is absolutely unrestricted income and is allocated to the most critical needs that one has. Every three years we present to the federal government a picture of our finances and how they relate to the direct costs of research, and then they give us a recovery rate. The amount we actually recover through that doesn’t cover the full costs of our overhead. It does cover the costs of our physical plant—utility costs, repairs and maintenance, and support services, like custodial services. It covers some portion of such things as the Human Resources department, the Finance department, but not all of that.

In the 2004/2005 financial year, $13 million were allocated to resource centers [out of the overall annual university budget of $240 million]. Does resource center spending usually represent a fixed proportion of the budget?

If you went back five years or even longer, we didn’t have many resource centers, so that would have been a much smaller part of the budget. Beginning in the administration of Arnold Levine, Rockefeller adopted a strategy to build centralized resources in these needed services and not to fund these services within individual laboratories. We are still pursuing that strategy.

Has it worked?

Absolutely. But in some ways a centralized service center is more challenging, because you need to build management mechanisms where you get the benefits of the scientific leaders as well as administrative direction. Resource centers are taking a larger part of our budget. They are very valuable to the science here, but they are part of the element of stress and strain that we are feeling in our budget. They are growing and they all need to be subsidized. To charge to the users what it would cost to break-even on those centers, particularly on some of the newer ones, would make the costs to the individual scientist prohibitive. Some costs are recovered through charges, but the balance of costs that aren’t recovered are subsidized by the university.

Have lab costs increased as a percentage of the university budget?

Costs to the university for laboratory operations have risen because our philosophy and formulas for funding labs have related to size. If you take a five to seven year view, NIH funding has gone up during that period substantially. The university’s funding has followed it, so there is no question that there is a larger allocation for lab operations today than there was three to five years ago.

Has the university looked into lowering costs by sharing resource centers? There is some sharing already, for example with the Sloan Kettering Monoclonal Antibody center.

Sloan Kettering has a certain set of resource centers for its own needs. In some cases they have excess capacity, which they are happy to have us utilize. We have built resource centers around our science and our needs. There is a willingness to share, particularly if you have a bit of excess capability, but you have to be careful if you get into a joint agreement, if it is a center in the other institution, that your people will be treated fairly.

What was the timeline in the decision to close New Media and Design?

As recently as the late 1990’s, New Media and Design was essentially a break-even operation, but changing technology had led many people to desktop publishing and a lot of people had moved their business into the lab. Most of the activities could be done on the outside. In the fall of 2002, we thought part of the problem was the leadership of the department. We decided we would seek a new leader, we brought Pam Burns in to run the place. My own view is that Pam Burns did as good a job as anybody could have done, but business declined—it simply became an expensive luxury. We are not the only institution that has reached that conclusion. Mount Sinai, three or four years ago, closed down a substantial media center for some of the same reasons.

How long did the decision process take with respect to outsourcing the New Media and Design Center?

We had an intense examination of New Media and Design organization over a period of sixty to ninety days, looking at all elements of the costs and the services and the outside alternatives.

In closing the New Media and Design Center, who actually gets involved in the decision?

We felt we got input from a variety of quarters, but I’m the chief operating officer with responsibility for oversight of all the administrative and support services. The ultimate decision rested with me.

Were all the operations in New Media and Design losing a lot of money—for example, what about the campus store?

Absolutely, it was a loser. It was a convenience, but from the university’s point of view it was a subsidized operation. Everything that was outsourced was definitely losing money. Things that we have retained were things that either were more or less break-even, or that we didn’t think we could outsource with confidence in both costs and reliability.

There had been an independent review of the resource centers in the summer by John Tooze…

The university engaged John Tooze, a former colleague of the president, to come in and look at resource centers in general. The thrust of his report was that resource centers are extremely valuable aspects of the environment that the university offers to laboratories. He had a variety of specific suggestions for improving their operation, which we have been pursuing.

Did he make any recommendations for closure or outsourcing?

I’m not going to get into anything more specific. In general his report was extremely supportive about the strategy of resource centers, and then made specific suggestions about how to strengthen and improve them. It was a supportive report.

Some costs at New Media and Design were quite high—for example, when enquiring about printing Natural Selections, we were quoted a rate three times higher than what we are paying on the outside. Also, for scientific posters the prices seemed quite high.

If you were running New Media and Design, the challenge was overwhelming. On one hand, to keep their business they had to price reasonably similarly to Kinkos, although not necessarily exactly the same—people will pay for convenience. They tried to keep costs within some reasonable relationship to the outside. For the university, the costs are always higher. When we employ people as staff, we don’t employ them on an hourly basis with no benefits. They get competitive wages, health benefits, and everything else you don’t find in outsourcing. So on a comparable basis, the costs within the university will always be higher. I didn’t hear a lot of complaints about the costs of individual services. At a time when we have to make a lot of very tough decisions, for example, we are making changes in the ways that we are funding laboratories, what I did hear was criticism, “why are you subsidizing that [New Media] so heavily?”, and that was a very good question.

Do you think there will be further layoffs or cutbacks in the department?

There is not a second wave of cutbacks anticipated.

Have there been other cutbacks or layoffs elsewhere?

In spring 2003 we reduced costs in the full range of overhead departments by $3.5 million, and we brought the budget into balance in the year 2004. In spring 2003, not so much through layoffs, but through attrition and through elimination of staff positions, we took about twenty positions out of the total of overhead support. These were either empty positions, or people retired or left and their positions weren’t refilled. We also did an across the board cut of five percent of current university allocations to laboratories. We wouldn’t be doing those things unless we think that we have a real budget problem.

Does the university prefer to outsource everything at once instead of phasing things out? The closure of the DNA Sequencing Center and New Media seemed sudden.

When you reach a decision that you are going to end something, you have to end it. You can’t say we are going to end something in three months because there are people involved, and it’s fairer to them to have it be direct. In terms of the people with the jobs that were lost, we have taken a lot of care to work out their separation from the university.

Yet with all these cutbacks, the university is starting a faculty search for new labs.

The president’s strategic plan for the next five years talks about the recruitment, roughly speaking, of two new heads of laboratories per year for over a five or six year period. That strategy is basically to hold the university constant because we have people retiring and leaving.

Will these new labs increase expenses? If you are recruiting a new person, there must be a lot of start-up costs and the issue of providing infrastructure?

Sure. You have to go out and raise money to attract and recruit these new labs. That is part of our financial and fundraising plan. We are very confident that we can raise the money to support this level. Since 1994 we started 37 new laboratories, all of which have all been started with private funds raised for that purpose. On the issue of infrastructure, if we were proposing to substantially increase the number of labs here, we would have additional infrastructure costs. But with the concept of pretty much steady state, we don’t see big infrastructure implications. Now, there is a space scarcity, and we have very limited space to put new labs in. We have some open space here and there, and we have some old space on the north end of the campus. The president’s plan emphasizes restoration of the north campus buildings, particularly Flexner and Smith, over five to seven years, and with that space coming along we will have plenty of space.

Right now in some areas of the infrastructure, the university seems to be bursting at the seams, for example with housing for students and postdocs. Is that causing extra costs, with people living off-campus in housing that the university rents?

So far, the housing that we have been able to access that is owned by third parties has not required us to heavily subsidize it, any more than we subsidize housing we own. The latest figures I have seen, we have 35 individuals or families living in housing that we don’t own. We are still talking about relatively modest numbers, and we have been able to arrange that pretty skillfully without a lot of subsidy. The demand for housing has plateaued over the last twelve months and is about the same today as it was for March 2004. I get numbers every month to try to judge demand. Right now it is very constant.

In general, the university size is at a comfortable level?

It is a manageable level.

Are there plans to scale back? People often raise that question.

Related Articles:

• Sequence of Events
• Media Circus: Resource Center is Outsourced