Tightening the belt of administration

General Article
January 16, 2003

This year's cuts may reach 5 percent, but the center will weather weakened economy more easily than other institutions

The dollars available for administrative spending at Fred Hutchinson may be 5 percent smaller by the end of the current fiscal year, which ends in June. Photo illustration by Todd Mcnaught

By BARBARA BERG

With the nation's economic slump showing no signs of abating, it's not just retailers, airlines and manufacturers that are feeling the pinch.

Universities and research institutions - including Fred Hutchinson - are tightening their belts as well.

To keep the budget balanced, the center has begun to implement cutbacks of up to 5 percent in some administrative services, beginning with those expected to have minimal impact on research.

Despite the need to cut costs, the center, which is largely supported by government research grants and contracts, is faring better than institutions with much larger endowments, said Randy Main, vice president and chief financial officer.

"Institutions that have large endowments tend to depend heavily on investment income to support research and related operations," he said. "Most well-endowed institutions budget for investment income based on a three-year rolling average of investment returns. After three straight years of negative investment returns, they are now forced to slash the research projects supported by these funds."

Interest earned from Fred Hutchinson's endowment also has been lower than desired, Main said.

"We did budget for $4 million of investment revenue to support research for the fiscal year beginning July 1, 2002," he said. "After five months, we have realized total investment income of less than $200,000."

But the stakes for such a drop are much lower because investment income makes up only 2 percent of the center's budget.

Adding to the center's crunch is a drop in charitable giving, which represents about 10 percent of its budget. The drop is due in large part to the shrinking stock portfolios of donors. Main said that unrestricted donations, which are used to support faculty recruitments and other interim and ongoing research expenses, are below what was anticipated for this year.

December's donations

"We'll have a better idea where we stand on this later in the month after we get all of the December contributions tabulated," he said. "December is historically our most successful month for fund-raising and is a good indicator for how we will do for the rest of the fiscal year."

The center is hardly alone in its efforts to streamline costs. With the stock market posting its third straight year of declines - a situation that has not occurred since the Great Depression of the 1930s - even traditionally cash-rich nonprofits are experiencing tough times.

Even the Howard Hughes Medical Institute, one of the world's largest biomedical research philanthropic organizations, announced in November that it would cut about $100 million or roughly 10 percent from its budget over the next two years.

Unlike many universities and cancer centers, though, Fred Hutchinson's primary financial support is from research grants and contracts, mostly from the National Institutes of Health.

With numbers for investment income and fund-raising down at the halfway point of the fiscal year, Main said it is unlikely that those deficits will be made up.

Main has worked closely with administrative departments to identify roughly 5 percent of general administrative expenses that could be trimmed, and some of these cuts already have been implemented.

General administrative expenses account for about one third of the center's total indirect costs, which are covered through research grants and contracts. Facilities expenditures (including interest on debt, depreciation and lease expenses), shared resources and recruitment and interim funding for faculty make up the remainder of the center's indirect costs.

"We may cut up to the full 5 percent we've identified," he said. "Where we make those cuts depends on the department. Some are already operating in as lean a manner as possible. The key thing is that everything administration does must be in support of research."

Much of center administration is devoted to compliance with federal, state and local regulations that range from maintaining patient privacy to meeting local fire and safety standards. Such activities can't be cut easily without putting the center in jeopardy of violating regulations and contracts.

Main said that in the short term, the initial round of budget trimming might not be noticeable.

"We'll have to delay some initiatives, there will be no new hiring for administrative positions, and we'll be doing some restructuring of positions to combine some roles that are now separate," he said.

"If these cuts continue indefinitely, staff could see some long-term reduction in quality and responsiveness."

While the cuts affect the current fiscal year, Main said paring down the administrative budget is likely to be part of the center's future strategic planning.

"Our administration has been focused on building the South Lake Union campus to consolidate our research activities, and we've been growing rapidly," he said. "Now, instead of growing, we need to focus on providing research support as efficiently as we can. It's a long-term proposition.

"We're a large, federally funded institution without a large safety net. We need to be as lean and efficient as we can be."

Leaner NIH increases

Adding to future economic uncertainty is the fact that a doubling of the NIH budget, a commitment made by Congress in 1998, will be completed in 2003. Leaner increases in the NIH's budget in the next few years will impact the number and size of investigator research grants that can be funded, although Main predicted the impact will be felt more strongly at other institutions.

"What gives me confidence is that we have excellent scientific leadership and vision and strong researchers who will successfully compete for grants," Main said. "We may have to increase our interim funding requirements for faculty, but we will still do better than most."

Despite a gloomy economic forecast, Main remains optimistic about the center's financial health.

"We're unique in that we've assembled first-class research facilities on a single, large campus without benefit of or support of a large endowment or major benefactor," he said.

"We've done it primarily through tax-exempt bonds, which is the cheapest form of debt there is. By the standards of most nonprofits, it's been an aggressive strategy that's paying off. We've developed the space and resources to make possible the recruitment of top-notch faculty.

"What's more, our board of trustees is committed to significantly increasing our endowment and long-term fund-raising goals, even in this tough environment," he said.

"I have no doubt that we will get through these tough times and continue to be a first-class cancer research center."

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