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FAS Dean Details $220-Million Budget Gap; Working Groups to Address "Reshaping" Academic Activities

4.14.09

Updated April 15, 3:00 p.m. 

At a "town hall" meeting in Sanders Theatre on the afternoon of April 14--held in place of the regularly scheduled faculty meeting--Michael D. Smith, dean of the Faculty of Arts and Sciences (FAS), outlined what he called the "sizable and somewhat daunting challenge in front of us": a budget deficit that would reach $220 million in the 2010-2011 academic year, were FAS to continue on the operating and expense trajectories in place during the current year. Savings achieved during this year ($4 million) and those budgeted for the 2009-2010 year (a further $73 million) fill only about one-third of that gap, so Smith forecast a fundamental reshaping of the faculty's academic and intellectual activities, leading to a future in which "it is increasingly likely…that we will not have a need for as many faculty and staff " as FAS has today.

For perspective, Smith noted that the faculty's budgeted expenses for this year are $1.16 billion; that modest cost savings had been realized versus the current-year budget (through reductions in travel and food, and decisions not to hire personnel to fill vacant positions); and that a further, more substantial savings had been identified in the budget for the academic year just ahead (the University's fiscal year 2010, which begins July 1), through what he characterized as efficiencies and squeezing out of costs (but did not otherwise detail). That means that based on known revenues and expenses, FAS faces a deficit of $143 million in the succeeding academic year, far more than it has available in reserve funds (see here and the prior dispatches linked there)--so very significant changes in operations and expenses loom. That sum, Smith emphasized, is "not a one-time deficit that we need to overcome," but a recurring problem.

[These sums align with the estimate reported in late March for publication in "A New Economic Reality," the lead article in John Harvard's Journal in the May-June Harvard Magazine.  That article notes that, given projected endowment distributions for the fiscal year beginning July 1, "deans in the aggregate face operating their schools with nearly a third of a billion dollars less than they expected as recently as last summer. For fiscal year 2011, the difference between the distribution planned now and what might, until recently, have been anticipated widens to a half-billon dollars or more." The entire issue will be on line at harvardmagazine.com next week, when printed magazines should also arrive in the mail.]

Smith--in shirtsleeves on the Sanders stage, with just a stool to sit on and a table for his laptop--began by outlining the FAS budget. The $1.16 billion of current-year income derives from distributions from the endowment ($650 million) and from tuition and fees, research grants and contracts, current-use gifts, and other sources (totaling $510 million). FAS's large and growing reliance on endowment-derived income has been outlined previously. As its own endowment appreciated from approximately $10 billion in 2005 to approximately $17 billion at the beginning of the current year, distributions rose from $400 million to the current $650 million, and FAS's total spending swelled from $812 million to the current $1.16 billion. Even early in the decade, when the endowment dipped slightly, FAS was able to continue increasing its outlays, Smith noted. That largess enabled FAS to add more than 60 new faculty positions and 230 new staff members during the past five years; about one million square feet of new facilities; and substantial additional funding for undergraduate financial aid--about an extra $50 million annually. (As he noted later, FAS now has 1,100 faculty members--two-thirds are tenured or tenure-eligible "ladder" faculty--and 3,500 staff members.)

But now, with the value of the University's endowment assets expected to decline by 30 percent during the current year (and with current spending reducing that value further), FAS expects its endowment assets to decline to about $11 billion by year-end: the level of mid decade.

As reported, and now confirmed by Smith, the Corporation has determined that the endowment distribution will decrease by 8 percent for next fiscal year and--in a surprising announcement--by "at least" that amount the following year when, Smith said, for planning purposes, FAS had been directed to assume that the reduction would be 12 percent. That would reduce FAS's endowment distribution from $650 million now to $600 million next year and $525 million in academic year 2010-2011--a $125-million decline.

Smith next projected the grim arithmetic of the accumulating deficit:

•a current, continuing $30-million deficit accruing from FAS's decisions earlier in the decade to make more faculty appointments and to hire more staff, to build new facilities, and to augment financial aid; plus

•the $125-million reduction in endowment distributions; plus

•$10 million in lost income from "underwater" endowments (endowment funds that have declined in value below the gift amount, from which, under Massachusetts law, distributions may not be made; this amount of lost income will obviously depend on actual year-end asset values); plus

•$5 million of other lost revenues; and

•$50 million in anticipated expense growth (from prior faculty appointments already in the pipeline; debt service, utilities, and operating and maintenance costs on new facilities; and presumably--Smith mentioned this factor in earlier presentations, but not in Sanders--increased financial-aid costs).

Against that steady-state deficit looming in the fiscal year beginning just 15 months from now, Smith said FAS had achieved the $4 million in current savings and identified the $73 million of budgeted savings. Those steps in total reflect $43 million in savings from administrative and academic-support costs; and $34 million in savings in the core academic units. The only tangible example he gave, from the latter category, was not making visiting faculty or fellow appointments.

The relative size of the savings achieved or scheduled to be realized in the next year only underscores the remaining $143 million in annualized cost reductions to be identified. Smith said FAS had to move from "reduc[ing]" to "reshap[ing]"--that is, to go beyond trimming costs of current operations to rethinking, fundamentally, what it is able to do in its core academic and intellectual enterprise. Passively awaiting better economic conditions is not an option, he said (particularly since the faculty's reserves are only about $100 million), and merely resizing its affairs--the savings identified to date--would not be adequate to the task. Given the challenges, Smith said, he was encouraged that FAS and all its constituents--faculty, staff, and students--were driven by the "power of ideas." Nonetheless, he emphasized, the challenge was "daunting."

To proceed, he will, during the next two weeks, appoint six working groups: one each for the social sciences, arts and humanities, natural sciences, School of Engineering and Applied Sciences, College life, and College academics. They will be charged with defined financial goals, and responsible for proposing "changes to our academic programs and our intellectual activities," not just squeezing out existing costs. Given the institution's intellectual priorities, the working groups will identify current activities that cannot be sustained. The Graduate School of Arts and Sciences is so intertwined with all of these working groups, Smith said, that it will simply engage with each of them, rather than forming a separate working group.

What are the implications for FAS's people? Smith pointed out that slowing hiring and offering an early-retirement incentive were elements of a program to control costs while giving current FAS staff members a way to sort out their own needs and opportunities. (Half of FAS's costs are for people: salaries and benefits total $553 million this year.) The retirement program had been extended to 521 eligible FAS employees; as of the town hall gathering, 153 opted to participate, or 30 percent--slightly more than 4 percent of FAS's total staff cohort. Those two measures combined would create some flexibility, Smith said: not all those who retire or leave Harvard will be replaced--nor will all of their functions be filled in the future.

Summarizing his half-hour presentation before taking questions, Smith said the faculty faced an "important and fairly large financial challenge." He hoped for cooperation among all FAS constituents, and for the advancing of "wonderful ideas" to improve the faculty's finances and to improve and strengthen the organization itself as everyone works to "continue to push forward our excellence" within the reshaped entity that would evolve. While some further operating efficiencies remained to be achieved, he said, principally through collaboration with other schools and the central administration (there are University task forces working on revenues; business operations--information technology, real estate, procurement; "endowment liberation," seeking to determine whether funds can be redeployed; and human-resources practices), the emphasis is clearly shifting now to rethinking FAS in more fundamental ways.

Questions and Answers

Wertham professor of law and psychiatry in society Diana Eck, the Lowell House master, said that House masters had been asked to cut their budgets 15 percent, a target that had been raised to 25 percent that morning. Houses are critical to undergraduate academic life, she said, in maintaining academic records, preparing letters of recommendation, and so on. These cuts were draconian, were little understood by the teaching faculty, and seemed disproportionate to the growth of staff elsewhere in FAS--in the new divisional deans' offices and supporting staff, for instance. Cutting House staff further, the week after the College released its report on House "renewal," was "really a disaster," she said, urging that new administrative positions be cut before House staffing, which had long been stable, was reduced.

Dean Smith said that he shared Eck's commitment to a strong House system, a commitment he said FAS donors shared as well. During the past six months, he said, FAS's staff had grown by about 50 positions, 40 of which reflected growth in sponsored-research funding, clearly a positive for the faculty. He would have to investigate prior growth in the staff between administrative and research-related or other academic positions. As for the divisional deans, he said, he had given them administrative support to ensure that the commitments they make to the faculty are implemented; other staff members were merely moved from prior positions, and did not represent new personnel or slots.

Professor of Greek and Latin Richard Thomas sought assurance that budget cuts were not being circumvented by personal lobbying by star faculty members or favored coaches--morale, he said, depended on equity of treatment. He further asked whether the budget reductions Smith outlined needed to be taken as swiftly as he proposed, given the likely damage to FAS academic programs, to the library collections, and so on. He wondered whether Corporation members fully understood the damage being done on the ground--the Corporation had not been fully aware of conditions on campus earlier in the decade, he suggested. Finally, he urged that department chairs be made members of the working groups, since those charged with making judgments on the worth of programs to be retained or eliminated would no doubt bring to their decisions evaluations shaped by the eye of the beholders.

Smith said his decisions were driven by having the best available data, supported by a strong staff, so that personal preferences would not be a factor. Nonetheless, he said, reductions would not be equal across FAS. They would vary, based on FAS's strategic assessment of its priorities and goals. Smith hoped that it would be possible to have salary increases in the year after next, because the freeze now in place was difficult for everyone; he recognized that Princeton and Yale, for instance, had chosen to freeze upper-level salaries so that lower-paid faculty and staff members could have increases this year; while FAS chose a different course, he was glad that it had not had to change its plans, as those other institutions recently did.

As for the pace of budget cuts, dictated by the Corporation's decision on the endowment distribution, Smith said his "hands were tied," but that he had advocated FAS's needs and perspectives forcefully before the Corporation and the president, with whom he had a good relationship. He had described "exactly how painful things are."

Malkin professor of public policy Robert Putnam said that FAS, like the country at large, had spent phantom wealth from the "bubble" during the years of ebullient endowment performance. That decision was not made in bad faith, he said, but he did wonder what incremental spending had been made since fiscal year 2005, and whether understanding those decisions would inform the present cost-cutting.

Smith said, "I'm a very forward-looking person." The present circumstances, he said, were "a new time," with problems different from those FAS faced five years ago, and even a changed student body. He defined FAS's challenge as reshaping its future from its present circumstances. Nonetheless, looking back, he noted:

•Harvard was under substantial outside pressure, from Congress and elsewhere, to spend more of its appreciating endowment.

•FAS had its third great spurt of facilities growth in the decade now ending, following the 1930s spurt (when the Houses were built, during the Depression) and the 1970s (also a weak economic time, but one when science facilities were spurred on). He acknowledged that Harvard had in the distant past been "much more conservative than we are now" in undertaking such building projects; then, fundraising was paramount; of late, buildings were financed with debt, on the assumption that a rising endowment would make it possible to bear the costs. Henceforth, he said, debt would not be used for capital projects; they had to have funds in place to proceed.

•Of the 230 additional staff people, the largest number were added in academic centers, whose endowments presumably appreciated, too; computers and information technology required new personnel; and expanding scientific and sponsored research were the third principal impetus for hiring.

An undergraduate representative of the Student Labor Action Movement unfurled a "Greed Is the New Crimson: No Layoffs" banner from the balcony (a wry reference to the "Green is the new Crimson" banners hung in Tercentenary Theatre last October for the sustainability celebration keynoted by Al Gore '69, LL.D. '94, and left in place throughout the academic year) and asked why Harvard had not tapped student ideas--as MIT, Princeton, and Duke did, she said--to save money and reduce layoffs. She mentioned Arizona State's decision to put senior administrators on unpaid leave; and she noted senior-management salary cuts (at Stanford and elsewhere) and pay freezes for upper-tier workers as ways to divert funds to lower-paid employees or to avert layoffs among cherished dining hall, janitorial, security, and library staff members.

Smith said the College working groups would have student members, and that FAS sought partnerships "with them." Because faculty and nonunion staff would not receive salary increases in the coming year, he said, that was effectively a cost-saving pay cut. And students were involved in other ways, he said, and would be, "before we are moving forward on any kind of drastic actions." He intended to do the best that he could for FAS's people. But "the size of our challenge is not going to be" changed by "collecting a few dollars here and there."

Further student questions, on membership in the working groups and on the decision to close the College during the weeks between semesters next January, rather than offering academic and extracurricular programs as had been hoped, elicited from Smith the statement, "You're hearing everything as we understand it."

Pforzheimer University Professor Robert Darnton, speaking as director of the Harvard University Library, noted that library staffing and collection funds had already been cut at the beginning of the decade, and that the libraries' position "already was slipping" well before the recent downturn. How did Smith see its prospects?

Smith emphasized his deep commitment to the library system. On the other hand, he said, the only investments FAS could make depended on redeploying funds from other purposes or places within the faculty. New spending, he said, meant "cutting more deeply someplace else. There are no incremental dollars."

A Lamont Library staff member, speaking on behalf of unionized employees, said rumors of job cuts were rampant, and that workers were "terrorized." The University endowment had been $4.5 billion when he joined Harvard. Last year, Harvard Management Company senior staff members were paid $3 million to $6 million each, "and the job those people did was to manage the endowment." It had adopted higher-risk strategies in 2000, and while they paid off handsomely in the short term, when the markets reversed, those strategies had failed. The University continued to receive huge donations, some of the largest in its history in recent years, and continued to buy multimillion-dollar properties for future development in Allston. In this perspective, "It is very hard for us as staff to feel that we should bear the burden here."

Smith said he knew friends and spouses who had been laid off, and appreciated deeply the disruption that caused. He had nothing to do with Harvard Management Company--it's "not part of my job description"--and so did not comment on the endowment. [The diversification of the endowment in fact began more than two decades ago, and it has outperformed less diversified portfolios, including in the recent downturn; the portfolio managers' pay, for the fiscal year ended June 1, 2008,  reflects performance during the prior three years, when endowment returns on investment were 16.7 percent, 23 percent, and 8.6 percent for 2006, 2007, and 2008 respectively. See here.]

This town-hall meeting, Smith said, showed that all members of the FAS community were affected by current events, and counted in the solutions. He said there was "no more blood to squeeze out" in staffing efficiencies or pure expense reductions; henceforth, FAS's core intellectual mission had to be reshaped, and the organization reorganized accordingly. He did not know right now about layoffs, but they were not off the table, either. The focus had to be on reshaping FAS's core mission, given the size of the budget deficit.

Sheila Rish, a member of the Fine Arts Library staff, asked if FAS was still being assessed for Allston costs [the "strategic infrastructure fund"], given that Allston construction had stopped.

Smith noted that each school had its own endowment, on which central assessments were imposed; all remained in place, including the Allston assessment. He was not certain how the funds were used. [For more discussion of the assessment, see here and here.] As for the science complex in Allston, construction had slowed but not stopped. 

FAS human-resources officer Joseph Levy thanked Smith for holding the town hall (and suggested repeating the event monthly, to which Smith responded with a chuckle), and said that staff members wanted "your priorities for the FAS as a whole"--that there was a hunger for "a real person with real priorities," and an understanding of where Smith placed layoffs among those priorities.

Smith said his priorities were supporting the undergraduate experience, academically, residentially, and extracurricularly; enhancing teaching and learning; strengthening Harvard's communities, by reaching out, for example, to the graduate- and professional-school faculties; and reshaping a unified campus in Cambridge and Allston. The working groups were not to set priorities, of which there were plenty; they will be charged with thinking creatively about how to do things differently, in intellectual and academic terms.

"I have no desire to do layoffs," Smith emphasized, "but it is increasingly likely as we adjust that we don't need as many faculty and staff going forward." The past lush years had given FAS the fortunate luxury of adding personnel; now, he said, FAS had to deal with the hand it had been dealt.

 

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