June 23, 2020
Dear Johns Hopkins faculty members:
Thank you for your letter and for both joining and encouraging the ongoing dialogue at Johns Hopkins about the impacts of the COVID-19 pandemic and our collective response.
Your questions about the university’s finances and the role that faculty are playing in our COVID-19 response are important to us. We provide below information on the three concerns raised in your letter, and link to several additional materials that speak to these issues, including our letter of June 5 and a link to the video and materials posted as part of the June 10 town hall on university finances. Other pertinent information about the pandemic planning process and series of town hall events is posted here.
As reflected in these materials and the planning documents for return to research, instruction, and campus generally, the deans, academic and administrative vice deans, and faculty have been closely involved at all levels of university decision making from the beginning of the pandemic.
First and foremost, we are grateful for the advice of faculty with expertise in public health and medicine who have helped in our efforts to ensure the health and safety of our community and prepare for the immediate future. Our Health Advisory Group, in particular, is composed of faculty who work in the Office of Critical Event Preparedness and Response (CEPAR), Healthcare Epidemiology and Infection Control (JHHS/HEIC), and the Center for Health Security (BSPH/CHS). This group regularly reviews key metrics and modeling for the pandemic and provides a sound basis for our projections and planning.
With respect to financial decisions in response to the pandemic, we have benefited from the advice and insight provided by the 12 current faculty members of the Faculty Budget Advisory Committee (FBAC). FBAC, established in the 1970s, meets quarterly with the senior leadership of the university and serves “to communicate financial issues back to other faculty and to provide input to senior university administrators in an advisory role.” Since March, we have met twice with FBAC to discuss our response to the pandemic. At these meetings, per our usual practice, we shared extensive details of university and divisional financial performance and projections (see meeting summaries) and will continue to do so. We also benefited from more frequent consultation with an FBAC “rapid response” subgroup that was formed in late March to facilitate efficient interactions on a number of policy decisions. This group was particularly helpful as we weighed different policy alternatives leading up to the decision to freeze salaries and staff hiring and to suspend retirement contributions in FY21.
The 2020 planning workgroups that we have established for developing guidelines for the return of research, teaching and clinical activities across the university’s campuses have also benefited from the involvement of many dozens of faculty members, as well as students and staff, from every school, and we are grateful for the many hours of work and creativity they have brought to bear on university and school plans.
In order to further strengthen the faculty’s input into this planning process and its implementation over the months ahead, we have established an ad hoc University Pandemic Academic Advisory Committee. This committee consists of university leaders (president, provost, senior vice president for finance and administration, and all of the university’s deans) and representatives from each of the school-level elected and academic bodies, the Faculty Budget Advisory Committee, and the Diversity Leadership Council. This committee began meeting last week and will be consulted frequently and be integrally involved in university-level decision making through the course of the pandemic. The roster of the committee and its charge are posted here, and summaries of meetings will be posted as they become available. We regard this committee as an ideal forum for fostering effective governance of the university during a particularly challenging period.
Regarding the state of the university’s finances, we are happy to summarize and supplement here the information provided during the finance town hall on Wednesday, June 10, regarding the university budget, financial position and the impact of COVID-19.
Operating performance: Over the past decade, the university has undertaken an intensive and successful effort to strengthen our finances. In that time, we have achieved operating surpluses of approximately 1.5%-2.5% of revenues every year. This level of operating performance is consistent with expectations set by our trustees in their fiduciary capacity and consistent with external standards for a strong nonprofit institution such as ours. This operating margin reflects careful attention paid by academic leadership across the divisions to the need to achieve a healthy balance between investing operating funds in our mission priorities, such as faculty growth, research infrastructure, financial aid and campus facility renewal and expansion, and setting aside cash in reserve accounts to mitigate the impact of financial challenges like the one we now face.
Balance sheet: The university’s balance sheet is strong, and significantly stronger than it was during the 2009 global financial crisis. In addition to sustained positive operating performance (described above), we have carefully managed the size and pace of capital expenditures, successfully raised philanthropic funds for endowment and current use (more on endowment fundraising below), and managed our investment portfolio for solid returns. The university’s finances are closely monitored by the debt rating agencies, and our high credit ratings are consistent with those of our peer group. The comments of S&P in a report the rating agency published on March 4, 2020, are instructive: “JHU’s financial profile reflects our view of its excellent financial management policies, consistent and positive financial margins, good liquidity, and low debt burden.”
Cash reserves: Over the last 10 years, the university’s operating cash more than doubled, while its indebtedness did not increase at all. This is no small feat. As noted in President Daniels’ April 21st detailed letter to the community, we intend to draw down some of these cash reserves during the period of financial strain caused by the pandemic and our subsequent recovery. Were it not for our strong balance sheet—within which cash reserves accumulated by the divisions are an essential component—the mitigation measures we would need to take now would be far more severe. However, cash reserves are intended for short-term financial shocks and must be replenished in order to maintain a strong balance sheet and ensure preparedness for future operating disruptions (such as a government shutdown). The depth and highly uncertain duration and severity of the pandemic mean that we can’t simply use accumulated cash to cover projected shortfalls. Doing so would be a dereliction of our responsibility to ensure the financial resilience of the university.
Responsibility centered management (RCM) model: University finances are structured on what is known as a “responsibility centered management” model, which is a decentralized approach that relies on disciplined financial management by divisional and departmental leaders across the university. The university delegates accountability for financial performance to the deans and the leadership teams of each division. When divisions perform well, their surpluses are “owned” by them and can be reinvested in core priorities of their academic mission. When divisions have operating losses, they must cover their own shortfalls and adjust their multiyear budgets and financial plans. The university finances are rolled up from the divisions into a whole, but the university does not charge or transfer funds from those divisions that generate surpluses to cover those that experience losses.
This means that when budget savings result from the actions taken by the university (such as those described below involving salary freezes and retirement contribution savings), these savings are returned to the division generating these savings (or in the case of sponsored research grants, the PI for reallocation within grants as allowable under sponsoring agency guidelines). In other words, the savings are not “swept” by the university; instead the funds saved are retained by the relevant division to be used to support the division’s highest priorities.
Given both the urgency and uncertainty of COVID-19, the university leaders and deans committed to the strategy described below.
COVID financial implications: Every division of the university faces potentially significant losses in revenue across all funding sources (e.g., tuition, sponsored research, philanthropy, and clinical sources) and increases in expenses from the operational and economic disruption created by this pandemic. Divisions cannot easily adjust their costs or find new funding sources, and when mitigation actions are rushed and lurching, they often result in unforeseen impacts that are costly or harmful to the mission in the long term. Financial modeling of COVID implications, without significant mitigations, projected unprecedented potential operating losses across the university with expenses exceeding revenues by over $375 million for fiscal year 2021 versus a pre-COVID projection of revenues exceeding expenses for that year by $81 million.
Details on this projected operating loss were presented in President Daniels’ April 21 letter to the community. He also noted that the uncertainty of the pandemic is compounded by our close affiliation with the Johns Hopkins Health System (a legally separate entity from the School of Medicine, which is part of the university) and the extraordinary impact of COVID-19 on their clinical operations and finances.
COVID-19 financial mitigation plans
Within the context described above, university leaders and deans, with full support of the board of trustees, decided on a multi-stage, multi-year approach to ensuring financial sustainability through the pandemic, while not compromising our core academic mission.
First, we needed to take immediate action to reduce expenses for fiscal year 2021. These efforts—including the hiring and salary freezes and suspension of retirement contributions—were not going to be sufficient to cover all the projected shortfalls but were designed to address a large enough portion of immediate losses to allow the deans and their divisional teams time to make more considered adjustments to their revenues and expenses and return to financial sustainability while ensuring continued mission excellence.
We considered a number of options (described below and in the town hall materials). We focused intensively on protecting jobs¸ driven by concerns for the well-being of our employees and their families, as well as our broader responsibility as an economic anchor for the city of Baltimore and the state of Maryland.
Unlike many peer universities and academic medical centers, Johns Hopkins did not execute widespread furloughs in the early weeks of this crisis. We determined instead that we would be prepared to accept potentially significant near- to medium-term operating losses and related reductions in cash in order to avoid institutionwide furloughs and reductions in force. And we sought to preserve current salary and benefits levels, particularly health benefits, in the face of a prolonged pandemic and given our long-term focus on improving pay competitiveness for faculty and staff. We see this approach as manifesting our core commitments to equity (particularly protection of the most vulnerable members of our community) and to the city and state of which we are part.
Within these parameters, we sought a measured and thoughtful approach to the fiscal disruption of COVID-19. Extending the staff hiring freeze that began in fiscal year 2020 and freezing fiscal year 2021 salaries at 2020 levels were projected to generate roughly $60M in savings. While these were important and painful policy moves for our employees and their families, they were not enough to address the immediate need for cost savings (recognizing, as stated above, that we knew that other savings and a prudent drawdown of cash balances would also be part of our strategy). Other important actions, such as reducing nonpersonnel expenses and nondonor-supported capital expenditures were adopted, but were also insufficient.
After consulting with the deans and the FBAC’s rapid response group about additional steps we might take, including reductions to nonhealth benefits, such as the university’s tuition grant program, we determined that a one-year suspension of retirement contributions (the savings from which benefit the various university divisions relative to their payroll costs) was the least damaging of a set of difficult options for our community. This suspension generates approximately $100 million in fiscal year 2021 savings and has been adopted by a number of peer universities as well, including Duke, Northwestern, Georgetown, USC, and the University of Chicago. While we believe this action is preferable to large-scale job cuts (achieving similar savings would have translated into one year’s salary and benefits (median of approximately $84,000 excluding tenure and tenure track faculty) for nearly 1,200 employees or salary reductions that place strain on many families, we nonetheless recognize and are deeply appreciative of the sacrifice involved in terms of long-term employee wealth-building in preparation for retirement.
Even after the difficult mitigation steps described above, as well as some improvements in assumptions regarding projected revenue losses (also described in the town hall), the university faces continued uncertainty from the pandemic and is still projecting a deficit of $156 million for FY21. Therefore, in the current, second stage of our financial mitigation efforts, schools and other units are working through the summer to develop five-year plans to address their specific financial challenges. We anticipate that the schools will make progress in addressing their financial challenges in FY21 but that a full recovery will take more time, during which the university expects to need to draw down cash.
It is understandable that members of the university community would ask why we do not simply take funds from our endowment to cover any losses during the financial strain of the pandemic. Regrettably, we do not regard such a measure as an appropriate way to address the university’s financial challenges.
Endowments are necessarily and legally limited by donor designation as to the use of those funds; they are largely dedicated to specific purposes and all but a small portion are precluded from funding broad operational needs. In addition, donor expectations and state law limit institutions, including universities, from spending at nonsustainable levels relative to the commitment to preserve these funds for their stated purpose into perpetuity.
Even if spending down the endowment were technically possible, we believe that for a university having as low an endowment (in relative terms to our peers) as Hopkins, any effort to trench upon these funds beyond stipulated payout rates would be imprudent and detrimental to the long-term interests of the university. Over the last decade, President Daniels and our trustees have been very intentional about growing the endowment (which has grown by $4B in the period) via new professorships and financial aid funds in an effort to narrow the gap between Johns Hopkins and its peers and to ensure that our mission is not as vulnerable to shifts in federal research support (sponsored research, most of which is federally funded, represents roughly 55% of the university’s total budget), clinical revenues and tuition.
We want to close by noting that President Daniels’ April 21 letter committed the university to periodically assess the financial mitigation measures taken for fiscal year 2021, as well as the course of the pandemic, and to make adjustments as warranted. Should the university face a sufficiently favorable variance to projected operating losses in the coming year, academic leadership will readily revisit fiscal year 2021 financial policy decisions, including the salary freeze and/or the suspension of the institutional contribution to employee retirement plans, and we will keep you apprised of the university’s progress.
But we caution that we are still a very long way from feeling confident about the total financial impact of the pandemic on our position. Future surges in the level and intensity of COVID infection and/or long delays in the development and widespread administration of a safe and effective vaccine almost certainly will exacerbate our financial challenges. What matters is that we manage our way through this pandemic in a way that is least injurious to the core values and academic mission of the institution. We understand that fulsome and frequent communication is a critical component of our efforts to achieve this goal.
Thank you again for your letter and your ongoing work and commitments to Johns Hopkins. We welcome your further questions and comments as we continue to navigate these difficult times.
Provost and Senior Vice President for Academic Affairs
Senior Vice President for Finance and Administration