Government's Deficit Spending

A deficit at the Kennedy School of Government (KSG) that in October was projected to reach $2.9 million for the academic year 2001-2002 (see "After the Boom," March-April, page 72), and prompted the elimination of five staff positions at that time, is now expected to reach $5.6 million. Administrators say they hope to achieve fiscal stability by 2004. In response, the school has eliminated 30 more staff positions, as well as 17 adjunct and annually appointed full- time faculty positions, says executive dean Bonnie Newman. The layoffs have understandably created a "difficult situation," she says, "and we are very sensitive to how it is impacting our people." Half of the cuts were realized through normal attrition. Newman is hopeful that as many as six of the remaining employees with "transferable skills" will be hired into other areas of the school (centers with their own independent budgets unaffected by the most recent cutbacks); laid-off employees were to be given priority for other job openings elsewhere in the University, and at an upcoming Harvard job fair.

The Kennedy School was leasing more than 100,000 square feet of office space in Harvard Square at the height of the real-estate boom, but has since cut back on its obligations—sometimes at a considerable loss.

Harvard Planning and Real Estate

Newman said the initial $2.9 million deficit was largely "structural," and that its recent increase is due to "circumstantial" factors. The events of September 11 contributed to a $1.7-million shortfall in revenue from the school's executive education programs (Harvard Business School's executive education programs were also affected), and a retroactive, University-wide reclassification of certain employees' jobs led to a $650,000, one-time payment to cover past overtime worked. A precipitous drop in the value of long-term commercial leases held by the school during a time when it was cutting back also forced it to absorb contractual losses. (In 2000-2001, at the height of the real-estate boom, the KSG held leases on more than 100,000 square feet of commercially owned office space in Harvard Square.) On one of these properties with an exceptionally long lease option, the school is taking an annual $800,000 loss over the next five years in order to settle its commitments.

Beyond these circumstantial factors is a structural deficit, partly planned, which grew out of a five-year effort—financed in part by decapitalizing the school's endowment—to increase the number of faculty members. The faculty has grown 38 percent over the period. "I think the Kennedy School is considerably stronger in an intellectual sense," says Newman, citing the breadth of experience that new professors have brought to the institution. (In fact, applications to the MPP program are up 53 percent this year, with many applicants reporting that September 11 inspired or revived an interest in public service.)

But as the faculty grew, she says, revenues for their research did not increase at the rate forecast. That is partly because the school has become much more reliant on foundation grants, which do not allow as much money to be used for overhead costs as federal grants do. That meant that high rental costs, for example, increasingly had to be paid out of unrestricted endowment income. (Only 10 percent of KSG's endowment income is unrestricted.)

Because many of the school's students are modestly paid, career public servants, 10 percent of its total unrestricted budget—the highest percentage of any school within the University—has been allocated to financial aid. Tuition is among the lowest of any Harvard degree program, and has risen only 3.9 percent annually on average for the last five years. Next year, however—with distributions from endowment University-wide growing a mere 2 percent, down from a recent high of 28 percent—tuition will rise an average of 6.9 percent to help close the school's budget gap. Combined with such cost-cutting measures as reducing faculty research accounts, as well as travel, entertainment, and food budgets, the 2002-2003 operating deficit should fall to $2.5 million. "The last thing we wanted to do," says Newman, "is cut into the qualitative aspects" of the school's programs, "and we believe we are going to succeed."

Among the factors affecting next year's budget, Newman cites implementation of new wage guidelines for the University's lowest-paid workers, which will cost "several hundred thousand dollars." Leases, including one for the school's now-closed Washington offices (savings: $500,000 in operating expenses), remain an unpredictable variable. Consolidation of the school's activities within its main campus after some of the personnel cuts have taken place may allow some additional savings on leases next year. This year's $5.6-million loss will be paid for, as the planned expansion was, by decapitalizing a portion of the school's $565 million endowment.        

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