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Two of the biggest financial challenges facing the University are reduced budget flexibility and diminished federal funding for research, provost David Lee GS’99 said in a Council of the Princeton University Committee meeting on Monday afternoon.

Lee, who chairs the Priorities Committee, presented the committee’s annual report, which included an operating budget of $1.59 billion, at the meeting.

During the meeting, Lee explained that the University used a significant portion of its reserve funds during the recovery from the 2008 economic crisis, and that this move reduced the University’s ability to reallocate resources in the event of a crisis.

Due to changes in the economic outlook, the University is now in a “new normal” where it can no longer rely on market growth to sustain the budget equilibrium, Lee explained.

“We’re a little bit closer to having to think about trade-offs,” he added.

Lee explained that congressional gridlock and the looming need to reauthorize the debt ceiling limit in February could increase economic instability and result in further cuts to federal agencies’ budgets. A default on the country’s debt obligations could trigger an economic recession, which could harm the University’s endowment, while diminished funding for agencies could reduce the availability of federal funding for research.

Researchers and faculty at the University saw the tap of federal funding run dry in mid-October, when the government shut down for 16 days after Democrats and Republicans failed to pass legislation to continue funding federal operations.

He added that the availability of research funding plays a role in the recruitment and retention of faculty members, since many faculty members are enticed by the research opportunities that the University provides.

University President Christopher Eisgruber ’83 also addressed the potential effects of a decrease in federally-sponsored grants, particularly for research funded by the National Institutes of Health. “We’re currently forecasting a decrease of two percent in the research category. I hear a lot of discussion about [National Institutes of Health] being in peril, and it’s a lot harder to get those grants,” he explained.

Eisgruber added that the threat of another sequester weighed heavily on the minds of many presidents of colleges and universities around the country in light of most institutions’ inability to replace federal grants with alternate sources of funding.

When asked about potential diversification strategies to increase budget flexibility going forward, Lee answered that the University was looking into making changes to faculty salaries and tuition.

Lee pointed out, however, that Princeton has successfully responded to the challenges brought about by the economic recession, emphasizing that the University was able to implement and maintain a plan to achieve budget equilibrium. He added that together with strong endowment results, which returned 11.7 percent in fiscal year 2013 to grow to a total of $18.2 billion, the University’s actions in response to the recession successfully stabilized its budgetary situation.

In 2008, the University cut $300 million from its 10-year capital plan in response to the recent economic downturn, postponing projects such as the construction of a new building for the Arts and Transit Neighborhood, a renovation of Green Hall and the creation of a storage facility for the Princeton University Art Museum.

On top of the continued strong results of Annual Giving, which raised over $57 million from its latest campaign, the University has also benefited from decreases in natural gas costs and more moderate growth rates when it comes to healthcare costs, Lee explained.

Under ideal circumstances, the University should spend four to five percent of the University’s endowment every year, Lee said.

He added that net payout per unit should also ideally increase by five percent every year, but that the University has had to compensate for the lack of market growth in light of the economy's slow recovery from the recession.

Despite the financial challenges facing the University, Lee said that the University still maintains its status as a premier research institution. “We are one of the best research institutions in the world,” he said. “Even throughout the recession, the priority was to maintain that level of quality, and I think we’re still there because we have the resources to deal with this downturn.”

Carolyn Ainslie, Vice President for Finance and Treasurer, explained that the University was looking into new sources of revenue to make up for the lack of federally-sponsored research. She explained that they were looking into the private sector, with added emphasis on corporations, as potential sources of partnership for funding.

Lee added that the University was always looking for new ways to be more efficient.

“Can we develop a sustainable model where we allow a little bit of a wedge to accommodate new priorities?” he said. “That’s one of the challenges, to keep examining what we do.”

The Priorities Committee will present the report to the University Board of Trustees on Jan. 24, 2014, together with a proposed budget for the fiscal year 2014-15.

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