The $3-Billion University

Harvard came within an eyelash of crossing the $3-billion threshold in annual revenues and expenses for the fiscal year ended last June 30—and closed its books just barely in the black, after generating strong financial surpluses during the past several years. Revenues totaled $2.9996 billion—up $198.6 million, or 7.1 percent, from fiscal year 2005—but expenses grew even faster, to $2.9995 billion—up $242.1 million, or 8.8 percent. (The full annual financial report, published in November, appears at

Reviewing the results, vice president for finance Elizabeth Mora highlighted the signal importance of continued good investment performance on Harvard’s $29.2 billion of endowment assets during a year of management and personnel change. (“Money-Management Makeover,” November-December 2006, page 68, details the 16.7 percent investment return during the fiscal year.)

This focus is understandable for the University’s chief financial officer (she was appointed to the post on a permanent basis by President Derek Bok on November 20). The $933.3 million distributed from the endowment for University operations rose 9.2 percent from the prior year—more rapidly than other major revenue sources (such as tuition and fees or gifts for current use), and more rapidly than during the prior year. (These figures exclude the additional $123.6 million distributed for the “strategic infrastructure fund,” an assessment on all schools’ endowments for property acquisition, planning, and ultimately development in Allston.) At the same time, other significant revenue streams are slowing.

Elizabeth Mora
Stephanie Mitchell / Harvard News Office

Notably, direct federal support for sponsored research rose barely 3 percent to $378.5 million—down sharply from 7.5 percent growth during fiscal year 2005, and a cautionary sign of stagnant appropriations for the National Institutes of Health at a time when Harvard’s population of scientific researchers competing for grants continues to expand. “We’re certainly worried about that,” Mora said. “NIH has dropped off the cliff,” with the result that some investigators with long-term grants are suddenly finding renewals denied, or even rescinded after they are awarded. In some cases, that has forced the medical and public-health schools to use internal funds to support faculty members’ laboratories. “When very strong people aren’t being funded” because of federal budget constraints, Mora said, “it isn’t good.”

All categories of expenses rose, some sharply. Harvard’s salary and wage bill grew 3 percent, to $1.13 billion, but employee benefits shot up 11.7 percent, to $350.6 million. Certain one-time items led to larger wage and lesser benefit growth during fiscal year 2005, but Mora said the trend in healthcare costs remains at 10 to 12 percent, foreshadowing continued pressure. Space and occupancy costs rose 15.6 percent, to $342.3 million, reflecting both new facilities coming on line and the punishing increase in energy costs during the past year. The “other expenses” line rose $106 million, 19 percent, to $663 million, despite the presence of a nonrecurring item in the 2005 financial statements (the $26.5 million payment to settle federal litigation over the Harvard Institute for International Development’s advisory work in Russia). The largest new factor Mora cited for 2006 was $29 million in payments to MIT and the Broad Institute, a genomics-research joint venture managed and supported by Harvard and MIT (see “Bigger Biology,” November-December 2006, page 72). That sum reflects both reimbursements to MIT and new gift funding directed to the Broad Institute through the University.

Close readers of footnotes will find a $17-billion reduction in holdings of various financial instruments purchased under hedge transactions, substantially offset by a reduction in cash collateral held under security-lending agreements. Both reflect the departure of fixed-income personnel from Harvard Management Company and the concomitant winding down of their arbitrage operations.

Looking at the balance sheet proper, the University’s debt grew nominally, to $2.92 billion from $2.85 billion at the end of the prior fiscal year, a seeming respite from recent increases totaling at least a few hundred million dollars annually. But this may be simply a matter of timing: Harvard issued $417 million of new debt in July, just after the close of the fiscal year. Cash interest payments rose from $94.6 million in 2005 to $119.5 million in 2006.

Construction in progress in the Faculty of Arts and Sciences (see “House-Poor,” page 58) and elsewhere assures further reliance on borrowing in the future; capital projects and acquisitions cost $422.5 million during the year. Mora said that the University has the capacity to borrow significantly more without jeopardizing its AAA bond rating; depending on the pace of Allston construction and renovation of the Fogg Art Museum, among other large projects, it may do so soon. As projects have come on line, she said, Harvard has been able to negotiate slightly more favorable reimbursement rates for indirect costs (facilities and other overhead) on federal research contracts, a crucial assumption underpinning FAS’s financial projections.

Financial statements, of course, are merely a snapshot of operations. For Harvard, Mora stressed, this is a very dynamic era. Beyond the current construction sites, she cited extensive planning for new kinds of scientific research and new facilities to accommodate it—notably in the initial, large Allston complex (see “An Allston Metamorphosis?” November-December 2006, page 66).

She also noted the initiatives, from financial aid to adding faculty, that the schools have undertaken using the “supplemental” endowment distributions that they have been given in the past few years (see “Sharing the Wealth,” March-April 2006, page 70). In fiscal year 2006, alongside “base” increases of 4 percent in their annual endowment distribution, schools could receive 4 percent more for priorities negotiated with the central administration and approved by the Corporation. In the current fiscal year, those figures rise to 5 percent and 6 percent respectively, followed by 5 percent and 7 percent in fiscal year 2008: very considerable sums on a base of more than $900 million, and crucial in an environment where gifts and federal research funds are uncertain.

In the midst of all these activities, Mora said, President Bok is driving hard to put in place policies and guidelines governing everything from seed funding for new science ventures to the use of the Allston infrastructure funds and the transfer of buildings owned by schools or units that will ultimately move there. The aim is to leave a clean slate for his successor, expected to be in place later this year.

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