Sharing the Wealth

For the second year in a row, the President and Fellows of Harvard College have authorized a larger-than-usual increase in the distribution from the endowment to support the operations of the schools and the University. In November 1998 the Corporation approved an extraordinary 28-percent boost, worth $95 million, in the funds distributed for use in the fiscal year beginning July 1, 1999 (see “The Payoff,” January-February 1999, page 62). Reviewing finances again last December, the Corporation authorized a further 8-percent increase in endowment distributions for the succeeding fiscal year, beginning this July—at least a few percentage points above the expected long-term growth in the payout.

Even though investment returns slipped during fiscal year 1999 (“When Down Is Up,” November-December 1999, page 80), the value of the endowment rose by $1.25 billion, to more than $14.5 billion. Given rapid appreciation in the endowment in the past five years, fueled by strong financial markets and gifts received during the University Campaign, Harvard has recently fallen short of its intended “distribution rate.” This ratio—funds expended annually compared to the market value of the endowment—is targeted at 4.5 percent to 5 percent over the long term. That level is calculated to balance academic needs, expected investment returns, and the desire to maintain the endowment’s purchasing power over time. For the 1999 fiscal year, the distribution rate was only 4 percent. It had fallen to as low as 3.3 percent in the preceding year, following a period when cumulative investment returns exceeding 20 percent annually caused the endowment’s value to balloon.

In approving the large increase in the endowment distribution for the current fiscal year, the Corporation “charged the schools to invest strategically in the priority areas that needed resources,” according to University treasurer D. Ronald Daniel and Elizabeth C. Huidekoper, vice president for finance, in their most recent review of Harvard’s finances. Similarly, the more modest boost in spending authorized for next year comes with a Corporation request that the schools use as much as possible of the incremental resources—some $20 million—to help students by augmenting financial aid and restraining the increase in tuition bills, and to support faculty and staff by investing in recruitment, training, and adjustments in certain salaries (see “Taking Care of Junior Professors,” page 75).

As a result, in the next two years, income from endowment distributions and other investments, already the largest source of operating revenue for Harvard, will account for an even larger share of University resources.