Early-Retirement Program and Other Cost-Cutting Measures

The University unveiled incentives for staff members to retire early, and the president and Faculty of Arts and Sciences dean discussed other pending financial measures.

The University on February 10 unveiled a voluntary early-retirement program for qualifying staff members. In a broadcast e-mail, Marilyn Hausammann, vice president for human resources, noted that "staff members who are age 55 and over, have 10 or more years of participation service, and are participants in the Defined Benefit Plan are eligible for this program." The same afternoon, speaking at the Faculty of Arts and Sciences (FAS) faculty meeting, Dean Michael D. Smith and President Drew Faust provided more details of the University's forthcoming efforts to reduce expenses in light of the projected 30 percent decline in the value of the endowment assets. (The endowment, valued at about $36.2 billion last June 30, would end the current fiscal year valued at about $24 billion if that decline in investments occurs, given that $1.4 billion is simultaneously being paid out annually to support operations.)

The retirement program had been hinted at in recent months, following earlier steps to freeze compensation for nonunion employees and to sharply limit hiring. Dartmouth announced the results of its own retirement incentives on February 9--coupled with layoffs to achieve that institution's cost-cutting objectives (70 people took early retirement, and 60 more lost their jobs).

Hausammann's message noted, "As we work to meet the fiscal challenges that confront us, University leaders have been taking a hard look at all of our operations and capital planning to determine how we can reduce overall spending while still investing in the vital academic programs that will ensure Harvard's excellence in teaching and research for years to come. At every step of the way, we have been acutely aware of the needs of our staff whose work supports the University's mission every day. We are sensitive to the effect of our decisions on those who have helped make Harvard great, and who rely on the University for their livelihoods. With these objectives in mind, a generous early retirement program has been under consideration since December.  Through the program, we aim to design a voluntary program that will both offer generous incentives to qualifying employees who may wish to retire and help the University make progress in reducing overall compensation costs."  

The program will be offered first to staff in FAS and Harvard Medical and Dental Schools--the two academic units with the largest individual endowments, and the greatest exposure, in absolute terms, to any constraint on endowment distributions (see here for a description of each school's endowment, and the share of its current budget composed of endowment distributions). Other academic units, and presumably central administration staff members, will be offered the program in March, the e-mail said. All eligible personnel will receive benefit statements and will be offered financial counseling.

The notice did not detail how many staff members are eligible for early retirement, nor did it specify the terms of what they will be offered. Typically, such incentives include a payment of additional employer pension contributions as if an employee had worked longer, and accumulated more years of service; and some mechanism to bridge the gap until the employee becomes eligible for retiree healthcare coverage. According to the University's 2008 financial report, Harvard had defined-benefit pension-plan assets valued at $880 million as of last June 30,  and a benefit obligation of $586 million; if that apparent surplus still exists, it could be a source of funding for the retirement incentives, without increasing the University's other expenses in the near term.

Faculty members and a small number of long-service administrators are covered by defined-contribution plans. When Faust was asked at the FAS meeting whether plans were being drafted for a faculty early-retirement incentive, she responded that the issue was being addressed, as senior vice provost for faculty development and diversity Judith Singer consults with each school's appropriate dean.

In the FAS meeting, Dean Smith told his colleagues that work continues to realize long-term savings on the order of 15 percent of the faculty's expenses (in anticipation of constrained distributions from the reduced endowment), with a short-term objective, for fiscal year 2010 (beginning on July 1), "not to run out of money," by which he meant the $100-million shortfall now anticipated in unrestricted funds. From suggestions forwarded by individual departments, centers, and other units, he said, FAS might be able to realize 70 percent of the desired $100 million in savings--although it is unclear, so far, whether all those suggestions are the right ones, or whether they can be taken without compromising other parts of the organization. In that light, he said, work would continue, in private consultations, "during the next months," with the goal of devising a proper budget for later in the spring.

He reiterated the risk to the faculty. What did it matter if the endowment were reduced in size to the 2005 level? In the succeeding years, Smith noted, the faculty had grown by 63 additional professorial slots; FAS's buildings had grown by a million square feet of new space, for which it now bears debt-service and operations-and-maintenance expenses (which are especially high for laboratories, the bulk of the new space); and undergraduate financial aid had risen $55 million annually, from $81 million in fiscal year 2005 to $136 million now (reflecting increases in aid for students from lower- and middle-income families; the recession will only increase that sum).

Faust put the "remarkable financial developments" since last fall in institutional and historical context. The prevailing reality, she said, is uncertainty about economic and financial circumstances--but Harvard has begun to digest the reality and react to it. She said the University's financial landscape had changed, and might remain on its current footing for some time, so members of the community had to hit a "reset" button--no easy feat after a period of growth and "expansive opportunities." Doing so requires everyone to act in ways that they may not be particularly well suited to. Although there is neither a world war nor a civil war raging, she noted, this moment may, over time, come to be seen as "rank[ing] up there with Havard's historic moments of challenge." She urged the faculty to bear in mind that they "share a sacred trust--this institution is ours" to protect and sustain--for the good of Harvard, higher education, and, more broadly, free inquiry, discovery, learning, and scholarship.

Much as FAS is examining priorities in search of cost savings, Faust said, the administration is doing the same in its areas of direct responsibility--and then she hinted at the severity of potential cuts. Campus expansion in Allston, she said, is under review in terms of scope, pace, and cost, "including for the building now under way." That would be the billion-dollar, first science complex rising across Western Avenue from the Harvard Business School campus. Subsurface construction has advanced, and steel is being installed for the first of the four laboratory structures. At peak activity, the project will easily cost multiple millions of dollars per week, outside the University's operating budget. (Renovation of the Fogg Art Museum, scheduled for construction beginning this fall, would be another large-ticket item, with an expected cost of $350 million or more; Faust did not comment on that prospective construction.) The challenge, Faust said, is finding ways to sustain programs within the new constraints on capital costs--including limits on what debt financing the University can place and can comfortably afford (after the recent $2.5 billion of borrowing); tenants identified for the Allston science complex are the Harvard Stem Cell Institute, systems biology, and bioengineering initiatives. Beyond this specific building, she said, Allston remains Harvard's ultimate future, but "arriving a lot more slowly than we thought."

More broadly, she said, "resetting" Harvard finances requires a careful weighing of how to allocate distributions from the diminished endowment between current and future needs. The Corporation normally sets the next fiscal year's distribution in late fall. This year, it has not yet done so, Faust said, as it awaits further clarity on the effects on each school of living with "diminished resources" as administrators evaluate flat to slightly reduced endowment distributions. The current endowment distribution for operating purposes is about 50 percent greater than in 2005, when the endowment was most recently worth approximately its newly diminished value expected at the end of this year, she said. (According to University financial reports, the endowment was valued at about $25 billion in 2005, and operating distributions totaled about $855 million that year.)

As cuts are made, Faust said, they have to be put into a longer-term context and a strategic vision of Harvard's commitments to having the best faculty, enabling the most talented students to enroll, and supporting superb research and teaching--all goals that transcend financial measures. She did not expect everyone to be happy with the forthcoming changes. In light of the bicentennial birthdays of Abraham Lincoln  and Charles Darwin on February 12, she hoped the faculty members would react to change in the Lincolnian spirit of the "better angels of our nature," rather than in a Darwinian struggle of tooth and claw.

During subsequent discussion, Graduate School of Arts and Sciences dean Allan Brandt acknowledged that a smaller cohort of entering doctoral students would be admitted this fall: approximately 600 to 610 students, compared to the record 650 admitted last year. Making that change would make it possible to award appropriate stipends without further taxing unrestricted funds, he said. Brandt noted that, in light of the growth in the faculty ranks, the current graduate-student enrollment is smaller than it ideally should be. The smaller entering cohort was also an adjustment to the job challenges that future graduates might face, as higher-education institutions like Harvard restrain their academic appointments. Both he and Dean Smith, who rose to speak after Brandt, said they remain committed to enrolling a larger graduate student body in the future, to reflect the faculty's size, peer opportunities for doctoral students to learn from others in their programs, and the continuous need for undergraduate teaching fellows.




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