MIT’s budgetary process
A look at the budgetary process, history, and current trends
MIT Treasurer's Report 2018
Provost Martin Schmidt
The budgetary process involves allocating billions of dollars in revenue to various operations at MIT, including instruction, research, and administration. The process for this year started in the early fall and will conclude in the winter when final budgets are approved for the 2019–2020 academic year. Determining how MIT’s money is spent requires the combined effort and careful decisions of everyone involved.
In 2018, MIT’s operating revenue totaled over $3.62 billion, with large portions coming from research, investments, and tuition. MIT’s operating expenses of over $3.57 billion used 98.6 percent of the revenue, up from 97.5 percent in 2017 and 94.1 percent on average over the past 10 years.
Balancing needs in the budgetary process
In order to decide each year’s budget allocations, the Office of the Vice President for Finance (VPF) looks at projected expenses, including salaries and financial aid, and compares this to revenue estimates, incorporating factors such as the growth of the endowment.
In an interview with The Tech, Provost Martin Schmidt PhD ’88 explained that in years when the projected revenue exceeds projected expenses, the Institute has the ability to make new investments and must determine how to spend this extra money. The process to determine this follows a hierarchical structure: each department prioritizes its own needs and then talks to their Dean — for example, each department in the School of Engineering talks to the Dean of Engineering — and each of the deans meet with the provost, who must balance priorities across each of the schools. Finally, the provost talks to the chancellor to incorporate other pressing concerns, which may include matters like the need for more competitive financial aid packages.
In addition to receiving additional budget allocations, individual departments can pursue other methods to acquire funds. In particular, they can write grant proposals to foundations and reach out to friends of the department for donations. In 2018, gifts and bequests for current use accounted for $220 million in revenue, compared to over $1.7 billion in total research revenue. Finally, in the case where departments are unable to secure additional funds, they can choose to reallocate by moving resources from a less important area to the one currently being considered.
Figuring out how to allocate funds and balance needs can be difficult, and there are times when the decision isn’t clear-cut. Schmidt said, “You have to have honest conversations with everybody and really try to get a sense of how painful [it is] … sometimes what we try and do, to see how big of a deal is this for you, is we cost you. If you’re willing to take what is your discretionary funds and put it on the table, then I’ll do some matching, because I know it’s important to you.” In such cases, the result can be a combination of department funds and additional support from the budget.
When looking at the process as a whole, the hardest decisions to make are the ones that involve trade-offs. Schmidt explained, “We have very diverse needs, so [we] have to figure out [how to] decide what’s more important: a microscope in a chemistry lab or another counselor in S^3.”
Revenue shifts and the growth of the endowment
As a percentage of the total campus revenue, contributions from various sources have remained about the same; however, the percentage of research revenue has declined and support from investments has increased.
The decline in research revenue can be explained, in part, by the change in composition between federal and non-federal funding. According to Schmidt, “The percent of [research revenue] that is federal research was quite large, and it’s been slowly declining … the percentage of [research revenue] that is non-federal, either foundations, foreign governments, or industry, has grown.” On a broader scale, the U.S. federal budget for research and development has declined from over 1.2 percent of GDP in 1976 to under 0.8 percent in recent years.
On the other hand, the increase in support from investments can be attributed to the significant growth of the endowment. As of 2018, MIT has the fifth largest university endowment in the U.S. at $16.4 billion. A large portion of the increase in endowment net assets comes from appreciation, which totalled just over $2 billion this year. Schmidt explained, “[MIT] moved into a different financial peer group than [it was in] back in 1981 … This peer group is Harvard, Yale, Princeton, Stanford, [as compared to] RPI, Lehigh, [and] Carnegie-Mellon.”
Deferred maintenance and the budgetary focus
During the past decade, there have been a few particular areas of focus in terms of the budget and investments. Schmidt described, “In 2008, we went through a comprehensive review of the condition of the physical campus … we went across the campus into every building and tried to figure out, ‘if I had to fix all those things … how much money would that cost?’” The total cost to fix these problems — including broken elevators and outdated electrical systems — came to a grand total of over $2 billion, in comparison to the $20 million per year that was being allocated at the time. Schmidt continued, “in 2010, we made a major commitment to the the Institute to address the deferred maintenance, and so basically, we took what was $20 million a year of spending on campus and we increased it to $200 million a year, so over a 10-year period, we will spend $2 billion.”
The recent budgetary focus has also included significant increases to student financial aid, student support, and research funding. For example, the focus on financial aid has allowed the average tuition for undergraduates receiving financial aid to be $23,539 for the 2018–2019 school year, with over 30 percent of all undergraduate students attending tuition-free.