The Fiscal Crunch

With no relief since the University’s early-December announcement that the endowment’s value had declined sharply (see “Harder Times,” January-February, page 47), Harvard faces significant spending reductions—likely to affect both employees and perhaps even high-priority capital projects (see left). Budgets were scheduled for review in February. Announcements about cost-cutting measures made after this issue went to press will be reported at (see the “University Financial Crisis” section).

During the winter, further details about the University’s financial challenges emerged (all reported in much greater detail at the website):

• Faculty of Arts and Sciences (FAS) administrators assume its endowment will shrink to its 2004-2005 value—about $11 billion. This would be in line with the projected decline in the endowment overall, from $36.2 billion last June to about $24 billion at the end of this fiscal year, reflecting a 30 percent loss in asset values on top of the $1.4 billion distributed to pay for current operations.

FAS’s budget has grown from $812 million to $1.2 billion during the past four fiscal years; the share funded by endowment distributions has risen from 35 percent a decade ago to 56 percent now. And with debt doubling to $1.1 billion since 2004-2005 (largely reflecting an $800-million investment in laboratories), debt service has nearly tripled to $85 million.

Dean Michael D. Smith distributed briefing materials detailing these figures on December 5. In a faculty meeting on December 9, he said that—given an existing deficit; certain increases in financial aid; rising personnel costs from recent faculty appointments; added expenses for new facilities now operating; and further increases in debt service—FAS faces a $100-million shortfall in the fiscal year beginning July 1. That assumes the Corporation holds FAS’s endowment distribution level, for the first time in memory, at $650 million. The gap would widen if the Corporation feels compelled to reduce the distribution (its decision is expected in March)—or if research funding or current-use gifts decline.

FAS thus faces removing $100 million to $130 million from anticipated spending of slightly more than $1.2 billion. But debt service and work funded by sponsored-research grants can’t be cut, so the real problem is shedding 10 to 15 percent of a nearly $1-billion budget. Smith acknowledged this would require more than one year of restraint, while simultaneously putting pressure on $100 million or so of unrestricted reserves.

FAS will try to keep its problems from worsening by canceling two-thirds of current faculty searches; freezing most compensation; restricting hiring of new staff; trimming visiting faculty and non-tenure-track teachers; exploring retirement incentives; and possibly reducing graduate student admissions.

• The professional schools are cutting, too. At the Harvard Kennedy School, where the endowment funds only one-quarter of the budget, Dean David T. Ellwood forecast flat revenue, rising financial-aid needs, and problems for foreign students as the dollar strengthens. The school’s budget for fiscal year 2010 will incorporate expense reductions of 5 to 10 percent, with salary freezes, sharp limits on hiring, and deferral of capital projects. He also expects to “revisit current expectations regarding teaching loads.”

Harvard Medical School directed all departments to plan for 10 percent expense reductions during the next 18 months. Sponsored-research funding (about 40 percent of the school’s budget) and debt service are untouchable.

• After the financial announcement by President Drew Faust and Executive Vice President Ed Forst last December 2, Harvard moved promptly to borrow $2.5 billion. Public reports suggest the University will incur annual interest costs on this debt (before principal payments) of $128 million to $138 million, offset in part by the repayment of existing shorter-term debt. That substantial expense may be defrayed by using the “strategic infrastructure fund,” an administrative assessment on endowment capital now designated to offset costs for Allston campus development. Thus Harvard gains liquid resources that may help it manage the endowment (which invests in many illiquid assets); reduce the risk of refinancing shorter-term debt; terminate existing, expensive interest-rate swap agreements; and bolster the internal “central bank,” through which cash receipts and working capital are administered.

As each school readies its budget, the administration is also running task forces to identify new sources of revenue, explore more efficient operations (from better use of information technology to real estate, procurement, and even shared library functions), and examine personnel policies and practices. The results will likely unfold over the longer term; in the immediate future lie whatever actions are necessary to shrink compensation costs and trim other expenses.


Harvard’s problems are not unique. A survey prepared for the National Association of College and University Business Officers (NACUBO), published on January 27, indicated average declines in endowment values of 22.5 percent—$94.5 billion in total—from July 1 through November 30. The losses could widen when private-equity and real-estate asset values are reported, accounting for the University’s estimate that Harvard’s endowment could be off as much as 30 percent for the fiscal year.

How are other institutions responding? In December, Yale estimated a 25 percent endowment decline and a $100-million budget shortfall for fiscal year 2010. Saying that it was important not to “overreact,” President Richard C. Levin prescribed closing half to two-thirds of the gap in the first year. Yale will restrain but not eliminate compensation increases, continue faculty searches, and pursue new science programs—albeit at a measured pace. It will cut expense budgets 5 percent annually and continue current construction, but defer all new projects until they are financed.

Princeton president Shirley M. Tilghman in early January forecast endowment results similar to Yale’s, and laid out similar responses: reduce endowment distributions by $50 million in the general budget and cut nonpersonnel expenses proportionally; maintain searches, but review requests for new ones carefully; and continue to design planned capital projects, but defer construction until financing is in place. Princeton will raise tuition and fees for the next academic year 2.9 percent, its lowest increase since 1966—an indication of the revenue constraints schools face. And Princeton echoed Harvard, turning to the capital markets to borrow $1 billion.

In a painful symptom of the times on campuses generally, NACUBO’s website in January offered members a webcast on “understanding underwater endowments”—funds whose value has fallen below a gift’s principal amount, making distributions illegal in many states. (At Harvard and elsewhere, some programs created by benefactors in recent years are already operating, with expectations, now dashed, of cash payouts from the endowment.) Also available was “new guidance on layoffs.” 

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