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BCR's Daily Fishwrap Report for January 19, 2010

Project 20/10: Duke sees decade of growth -- and joins peers contemplating recession's pain (#6)

If NC Central was in a student-growth mode this past decade, Duke was in a physical-plant growth mode.

The student body stayed roughly the same size in the 2000s, but Duke's campus didn't, with significant new facilities seen in everything from research labs to a new museum to new facilities for public policy, nursing, law and other professional programs. By the Duke Chronicle's estimate, that worked out to hundreds of millions of dollars in construction activity over the decade.

Duke_chapel  The work helped to cement in bricks and mortar the university's growing national and international reputation, something that in the bigger context is quite remarkable for an institution less than a century old in its current form, and one constantly competing with institutions hundreds of years its senior and tens of billions of dollars wealthier for the top students, researchers and faculty.

It's a move cemented in a move that started last decade, with an ambitious $1.5 billion capital fundraising effort, the "Campaign for Duke" launched under then-President Nan Keohane -- and from a quadrupling of annual giving since mid-1980s levels.

At the same time, the 2000s saw Duke launch an ambitious international expansion effort. It joined the ranks of peer universities partnering with developing countries' schools and governments for efforts like the partnership for Singapore's national medical school. And as the new decade approached, Duke turned to an even broader set of overseas expansions, with Fuqua's MBA program poised to lead the way in London, Russia, Shanghai, India and beyond -- and with press reports noting the school's board considering a significant campus partnership on a 200 acre parcel in Kunshan, China that could break ground early this year.

The decade's end saw Duke break ground on a massive expansion of its hospital facility, with a new inpatient pavilion and cancer center adding nearly 850,000 sq. ft. of space between the original Duke South hospital (today's clinics) and the 1970s-vintage Duke North tower, for a total investment of nearly $700 million and the permanent addition of as many as 700 jobs.

The decade's end brought new worries for the university as, like its peers, the stock market's crash and declines in giving during the Great Recession led to cost-cutting and reductions in staffing, efforts still underway.

Even as news reports have filled with pessimism over Duke's financial position, however, its early and historic investment in a medical and research campus have left the university less dependent on its endowment than some of its counterparts in American higher education.

Duke's growth in the past decade, and the expansion in health care and international activity set for the 2010s, marks our sixth-biggest Durham story of the past decade.

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To understand the genesis for the physical campus growth in the past decade, one must start even earlier, in the 1990s, when the Campaign for Duke launched its efforts under President Keohane, and more broadly, with the growth and strength in Duke's fundraising and development activities.

In the late 1980s, the years after the legendary Terry Sanford presided over the campus, total giving to Duke from individuals, from foundations and institutions, and from corporations stood at less than $90 million.

Ten years later in the late 1990s, Duke was raising nearly $75 million -- from individuals alone. Total giving clocked in at $255 million that year.

Fast forward to ten years after that, and Duke's total giving stood at $386 million in fiscal year 2008. And the giving levels would stand between $300 and $400 million for much of the intervening decade, at one point joining only Harvard as a fellow institution to exceed the $400 million level for philanthropy in a decade.

Much of those dollars worked their way into the Campaign for Duke, which launched publicly at the end of a quiet period in October 1998, having already raised $684 million towards the $1.5 billion goal.

As it turned out, the goal was one that Duke would drastically exceed amidst a boomtime in wealth from equity markets' appreciation and the new-economy boomtime. The campaign ended up raising almost $2.4 billion, far outstripping its original goal, and opening the door to accelerate construction projects.

Among the projects that came to fruition in part with the funding that came from this fundraising effort -- this is a non-exhaustive list (a more complete list appears at the Duke Chronicle's web site):

  • Duke's Nasher Museum of Art, the eponymous facility funded in part by a naming gift by Dallas developer and art collector Ray Nasher;
  • The McGovern-Davison Children's Health Center, a speciality wing of Duke Hospital for the needs of the medican center's youngest patients;
  • Expansion of the engineering school, renamed the Pratt School of Engineering after a $35 million gift from alumnus Ed Pratt, including the blockbuster $107 million Fitzpatrick Center for Interdisciplinary Engineering, Medicine and Applied Sciences, named with a founding $25 million gift for photonics research from technology entrepreneur Michael Fitzpatrick and his wife;
  • A $115 million new facility for Duke's biology, chemistry and physics programs, funded by a naming gift from alum and Microsoft founder Bill Gates' spouse Melinda French in honor of her family;
  • A new school of nursing;
  • Seed funding for the expansion of Duke's public policy facility, expanded by decade's end to become Duke's newest school.

And as the campus grew, so too did the endowment -- the fund of investments that are the financial or real property assets of the university, and the income and proceeds from which contribute to annual operating expenses.

In 1999, Duke's endowment stood at $1.7 billion, ranking the school twenty-first among American universities. By 2008, that had soared to $6.1 billion, the fifteenth-highest in the US, eleventh among private universities.

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Endowments and buildings are two of the most tangible pieces of evidence of a university's existence, of course. But they both serve as mechanisms to meet Duke's mission of teaching, research and patient care -- and that mission clearly expanded in size over the past decade.

Start with the growth in faculty lines have grown, for a start. 132 new named professorships -- each costing well north of $1 million to endow, or provide permanent funding to keep filled -- were added out of the campaign.

In the fall of 2003, Duke counted 2,477 tenured, tenure-track and regular rank faculty among its numbers.

By the fall of 2010, that number had risen by more than one-fifth to 3,031 -- a growth that includes 200 tenure-line faculty.

Each of those professors brings with them a teaching, scholarship, and research mission, of course, driving ancillary economic growth at the margins -- from more demand for local restaurants to the need for lab and administrative assistants to overall support services at a university.

Yet faculty also serve to bring research dollars into an institution, dollars that pay for direct costs like supplies, staff and equipment while also supporting the operating costs of any university.

And in that regard, Duke has grown enormously in the past ten years.

Take funding from the National Institutes of Health, one of the main sources of federal research funding for universities and institutions.

In fiscal year 1985, according to the NIH's web site, Duke received $60.5 million in NIH funding support. That number almost doubled by FY 1990, to $100 million -- and then doubled again by FY 2000, to $197 million awarded in 489 research grants.

By FY 2005, the number had doubled again -- to $391 million, earned from just under 800 research grants.

In the 1985-2000 period, Duke consistently ranked between eleventh and fifteenth in the US among non-profit institutions relative to the level of NIH funding received.

That ranking leapt to sixth place among all institutions by FY 2005, ranking behind biomedical research powerhouses like WUSTL, Johns Hopkins and UPenn.

Between 1998 and 2005, according to data from Arizona State's Center for Measuring University Performance, Duke saw its total research expenditures -- from sources including both federal and non-federal funding -- soar by 126%.

Among private universities with more than $100m in 1998 research spending, Duke ranked only after Vanderbilt in percentage growth over that period:

Growth_research_expend_1998-2005 

Percentage comparisons can be difficult, as they might give smaller institutions an edge when they start from a smaller base. (Duke's 1998 research expenditures were already twice those of Vanderbilt, for instance.)

Which makes it all the more impressive that Duke ranked second in both percentage increase and total dollar increase over that period among that same set of universities. Only research powerhouse Johns Hopkins exceeded Duke's take in that arena:

Total_research_dollar_growth-1998-2005
 

This kind of growth is too often overlooked in Durham writ large, with local media jumping in to report Duke's annual self-assessment of its economic impact on the community, but sometimes not looking at the broader picture of how the university stacks up against its fellow travelers where research dollars are concerned.

Sure, annual rankings of universities in publications like US News are "sexier" to report on and garner more eyeballs -- list-based articles often do, in a country where everyone likes to chant about being "number one."

But when you want to understand the ways in which an institution impacts its home community, research dollars are a good place to start.

Those dollars translate to jobs, and to fiscal support for the university writ large. And they occupy space on a campus -- something that we'd suspect, in Duke's case, has included the side-benefit of increased displacement of university administrative functions to off-campus spaces, a move which in turn has benefitted urban revitalization as the university gobbles up space along the Erwin Rd., Ninth St. and downtown corridors.

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Of course, the decade ended on a down note for Duke and many universities, as the recession's impact was felt across university campuses nationwide.

And certainly there have been public reports of Duke's own economic downturn, which has included an estimated $125 million reduction in spending, tapered down over a number of years.

Yet compared to the steps at other universities, Duke's standing seems to be no worse than, and often on relatively more solid ground, than some of its peers.

The best reporting to date on this subject has been done in Duke Magazine, where a fall article titled "Sizing Up Duke" by Robert Bliwise provides an interesting analysis of what's different in the Blue Devils' world from other institutions of higher education.

As Bliwise writes (emphasis added):

Largely because it's relatively young, with an endowment that doesn't reach back through the ages, Duke is less endowment-dependent than other universities. Endowment revenue funds about 15 percent of Duke's operating budget—tuition and fees, about 17 percent. Harvard's endowment provides 34.5 percent of its budget; Yale's, 44 percent; Princeton's, 48 percent.

Duke's relatively favorable circumstances also come from good timing, [executive VP Tallman] Trask says. "When this hit, we had just finished a very big cycle of construction. We had gone through an analysis a decade ago that said we hadn't done any significant building for the sciences for twenty years, for example. So we went ahead and did that building, we paid for it, and it didn't put a huge burden on the budget." By the time the Great Recession struck, "We had no holes in the ground. We had no buildings under construction that we didn't know how to pay for.

While Duke's endowment took a big hit percentage-wise when the markets fell in 2008 -- 25% in FY 2009 as a result, though averaging still a 10% annualized return over the past decade -- that didn't translate to as much of an economic impact (so far) as at some of its peer university.

As news reports have noted recently, Duke's been aggressively pursuing federal stimulus-based research dollars, something that plays to the campus' aforementioned strengths in research funding. But a lower reliance on the returns off of endowment accounts have meant Duke's financial pain has been comparatively lesser than that seen at other institutions.

In terms of what's happening at other universities, it's hard to hear talk about the concept of "holes in the ground" without seeing the pain that struck my own alma mater this fall, in what's perhaps the most stirring at least description of financial impact facing American universities in the current crisis:

Harvard University will halt construction of a science center in Boston’s Allston neighborhood after completing the building’s foundation, while it reassesses future development options.

The university had big hopes for its $1 billion science complex. The massive collection of buildings was supposed to anchor a sprawling new campus. University officials said the modern lab spaces would attract top scientists. But those dreams were tempered earlier this year, after Harvard lost a good chunk of its endowment and the recession dragged on.

Now, Harvard officials are putting the plan on hold. The announcement, which had been expected, was made Thursday in a letter to the Allston community from Harvard President Drew Faust. She said the decision to pause construction of the state-of-the-art facility was made earlier this week by the school’s governing body, the Harvard Corporation.

It's the most dramatic example, but by no means the only one. Involuntary layoffs struck Harvard and Yale, with Stanford having hundreds of employee layoffs as well.

(In Harvard's case, the meddling of a controversial university president in interest rate swap decisions seems to have played a role in their malaise, too, including a staggering $1.8 billion loss of cash in 2008. Not to worry, folks, that former president is off saving the country as one of President Obama's key economic advisors. Er, yay?)

Duke has been affected in this space as well, but much of the reduction has taken place through early retirements and incentive packages, along with targeted elimination of vacant positions. Similarly, the university did not give raises last year to employees earning over $50,000, Duke Magazine noted.

Even amidst the economic travails affecting higher education generally, however, Duke has managed to increase investment in student financial aid, and to continue recruiting top faculty in a range of fields.

Duke Magazine noted the following in 1998 at the kickoff of the Campaign for Duke:

[I]n the past academic year, Duke saw "raids" on forty-three professors, or nearly 10 percent of its tenure-track liberal-arts faculty. Only ten professors left to accept other offers. Still, as The Chronicle of Higher Education put it, "fending off that many sweet deals from prestigious institutions is a lot to handle in one year--more than Duke handled in the four previous years combined, in fact." Strohbehn told the newspaper that Duke brings in about as many faculty members as it loses, and from some of the same institutions. But, he notes, Duke is less likely than its peer schools to have a named professorship that might lure--or keep in place--a prized professor. Overall, Duke has less than half the number of endowed professorships of many of its competitors, university officials estimate; and a big aim of the campaign is to bridge the gap. A named professorship might bring extra research support or similar perks. More basically, it represents a certain stature: If you're inhabiting a named professorship, you're considered to be at the top of your profession.

Contrast that position 2009, when even amidst recessionary pain, Duke's recruitment of new faculty was down only moderately versus levels seen during the height of the boomtimes, with four faculty jumping over from Harvard alone -- and at a time when full-fledged hiring freezes were in place at many campuses. From a Duke news release:

Duke University is doing something that’s become less common among the nation’s elite universities amid the economic downturn: It’s actively wooing new faculty members....

Often used as a barometer of growth in the academic world, faculty searches at Duke will total about 63 this year, not including those at the medical and nursing schools, which also continue to recruit. That’s a decline of only 20 percent compared to the average of the previous three years.

“We’re making the most of opportunities in a difficult job market,” said Provost Peter Lange, who, as Duke’s chief academic officer, is deeply involved in faculty recruitment. “Duke was already an attractive option for many scholars and we got more than our share of the best people when we competed with other top schools. But as some of those schools have slashed their hiring, some amazing people have been saying yes to us faster than they might have before. Appointments like these further accelerate the momentum of improvement we were already seeing in the faculty.”

Similarly, the financial aid initiative fundraising that occurred later in the decade has also allowed the university to maintain its need-blind admissions, and to continue and augment its work to increase the socioeconomic diversity of Duke's campus.

Of course, there's no telling where the recession could end. The Chronicle of Higher Education is not lacking for stories of worry and concern from the industry on where universities could end up, and while state universities are the most particularly at risk -- given the lagging impact of tax receipts on state budgets, and the fact that higher ed often gets cuts in state capitols even as demand for public four-year and community college services surges -- there's question marks out there for private universities, too.

Will federal research funding continue at the increased levels seen in recent years? Will federal support for education through subsidized student loan programs and grants -- a key factor in making private universities affordable -- continue? Will health care reform create new markets and opportunities for medical systems like Duke's, or open the door for revenue shocks? 

Will philanthropy kick back in with macroeconomic improvement? And will markets themselves stay strong, allowing endowments at schools like Duke to grow and enabling those donors to feel prepared to donate?

The questions are already out there -- and for a city as married at the hip to its university as Durham is to Duke, the answers we find in the coming decade will has as much to do with the Bull City's future as with the university's.

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(A disclaimer on this report: As noted on the About BCR page, I do not report non-public information related to my employer. I do work at Duke, but all information and analysis herein is drawn from web-accessible sources and media reports, not from the context of my job responsibilities. Similarly, as also noted on my About BCR page, this post, like everything else at BCR, does not necessarily reflect the opinions or conclusions of my employer or anyone except myself.)

Photo credit: Chuck Bargeron, University of Georgia, Bugwood.org, used via permission via Creative Commons Attribution 3.0 United States License. Original work accessible via web. 

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