"Resizing," before "Reshaping"
No weekday hot breakfasts in House dining halls. Continued constraint on faculty appointments (a total of just 15 to 19 junior-faculty searches in 2009-2010, down from as many as several dozen in recent years), and severe limits on visiting faculty, lecturers, and appointments from other Harvard schools: all pointing to more limited course selections. Reduction of junior-varsity baseball, basketball, and hockey to club status. Teaching-fellow and external teaching-assistant “allocations” under “close scrutiny,” to “ensure compliance with new and existing guidelines on section sizes”—presaging larger discussion sections. A previously announced decrease in doctoral-student admissions—adding to pressure on the future supply of teaching fellows. Thermostats lowered in winter and raised in summer. Lessened reliance on consultants, and tighter travel and entertainment budgets.
These are among the measures listed on the Faculty of Arts and Sciences (FAS) cost-saving website, unveiled on May 11 (www.fas.harvard.edu/home/planning). The academic, administrative, and extracurricular changes are merely those expected to be readily apparent come fall. Neither the economies linked to each measure nor the implications for employees are disclosed, but the actions are meant to realize $77 million in annual savings.
Unfortunately, these steps, characterized by FAS dean Michael D. Smith as a “resizing” through “better use of resources and increased efficiencies,” close only one-third of his faculty’s budget gap. In a community meeting on April 14, he disclosed that Harvard’s largest academic unit (the College and Graduate School of Arts and Sciences)—and the one most hard-pressed, in absolute terms, by the sharp decline in the endowment—faces a $220-million shortfall by the 2010-2011 academic year. FAS received $550 million in endowment distributions to fund operations in fiscal year 2008 and $650 million this past year. It had expected $750 million in the year now beginning, and more thereafter—but instead will be reduced to about $600 million now, and still less in fiscal year 2011. (“A New Economic Reality,” May-June, page 48, reported both the Corporation’s decision to reduce distributions from the endowment for the fiscal year begun this July 1 and again for the following year, and the pressure on other revenue sources.)
The $220-million gap is nearly 20 percent of FAS expenditures in the year just ended. Complicating any economies in the roughly $1.1-billion budget for the new fiscal year, perhaps $375 million is for items that cannot or, for reasons of University policy, will not, be cut: financial aid, sponsored research, and debt service. In fact, each of those items is increasing in the new fiscal year. That still leaves FAS to reduce the cost of its core academic activities by nearly 20 percent.
Smith announced at the meeting that he would charter six working groups (their financial goals yet to be disclosed) to produce cost-cutting proposals from now through spring 2010: arts and humanities, science, social science, College life, College academics, and engineering and applied sciences. Their goal, he wrote bluntly in a May 11 letter, is “a reshaping of the FAS in support of our teaching and research mission through a careful consideration of our academic and programmatic priorities.”
What “reshaping” will entail—perhaps closing or consolidating research centers, or retirement incentives for faculty members—is the subject of anxious speculation, even as the first round of efficiency measures is implemented (see “Looming Layoffs,” page 56). At the May 19 faculty meeting, Francke professor of German art and culture Jeffrey F. Hamburger asked what was meant by “structural change,” as a prelude to the working groups’ assignment. “It’s difficult to make constructive suggestions without some kind of meaningful framework,” he said. He wondered whether there were plans to merge or eliminate departments, and if so, to cut faculty or staff.
President Drew Faust said she hoped that where multiple University units addressed an issue—such as healthcare policy—ways might be found for intellectual collaboration and administrative efficiency. Smith said that the faculty had to examine the intellectual areas it most wished to tackle in the future, and to focus on how to pursue them with the available resources.
Pellegrino University Professor Peter Galison, an historian of science, said he could identify only two “ten to the eighth” (i.e., hundred-million-dollar) opportunities for meaningful savings: debt service and buildings, which were already incurred and in place; and the size of the faculty, which has grown by more than 120 positions this decade. In the end, he said, FAS would “have to be a smaller faculty than we are now,” so it made sense to stop talking about that prospect “in code.”
By planning for a 12 percent reduction in FAS’s endowment distribution for fiscal year 2011 (the Corporation has indicated a cut of “at least” 8 percent), Smith has seemingly built in a budget margin. But financial aid may rise further; past decisions have yielded a still-growing faculty and costly new labs; and faculty and nonunion staff are already going without salary increases.
Although attention focuses on FAS, similar issues play out across Harvard: for example, the Radcliffe Institute for Advanced Study, proportionally the most endowment-dependent academic unit, has reduced by 20 percent its number of fellows in the coming year. The same story is unfolding at comparable institutions that grew increasingly reliant on copious funding from their endowments—until last fall.
On April 1, Moody’s Investors Service, the credit-rating agency, issued a report maintaining its Aaa and associated ratings on the University’s debt, while taking into account “the deleterious effects of the global financial crisis and recession” on its finances. Moody’s reviewed Harvard’s remedial actions, observing that in the next few years “the University will face constraints in its capital program while also dealing with a significant reduction in revenues available to support its operations from endowment.” That said, the credit analysts advanced a “stable” outlook, in the context of one large risk: “[T]he University is more exposed than other organizations (outside of higher education)…to rapid and large additional declines in investment markets, given the magnitude of its balance sheet and equity exposures and the high reliance on endowment income over the long term for operations.” (For more perspective, see “Liquidity and Leverage,” page 52.)
Some other universities with diversified, complex portfolios report on their results throughout the year. In documentation for a bond offering this spring, Cornell disclosed that its investments, down 27 percent as of December 31, had depreciated to a 31 percent loss two months later (an estimate that did not include updated, quarterly valuations of private-equity and real-estate investments). In the meantime, it has more than quadrupled relative holdings of cash from the beginning of the year. The University of Virginia Investment Management Company’s March 31 report also indicated a sizable increase in cash, in part to be ready to make mandated future investments in private asset pools.
Both reports suggest what will attract notice when Harvard Management Company reports fiscal year 2009 performance in late summer: how defensive the portfolio has become (insulating against current losses, but depressing potential returns), and what results large holdings of illiquid and hard-to-value assets have produced.
In the meantime, Princeton president Shirley M. Tilghman on April 6 notified her community that the financial markets had “unhappily” not improved from the beginning of the year, compelling a further round of budget cuts for fiscal years 2010 and 2011—following similar rounds of deeper cuts announced by Yale and Stanford. Tilghman forecast uncomfortable pressure on endowment spending extending beyond 2011, even as Princeton pursues its capital campaign, and concluded, “The steady growth in both faculty and staff that we have enjoyed over the last 10 years will end, and the university will have to contract in size.”
The same is likely for much of Harvard. At the May 19 meeting, Faust said the community faces “very hard choices” and acknowledged, “We have to give some things up.” She urged the faculty to “focus not on what we have lost but on what we still have”—superb libraries, laboratories, students, and professorial colleagues.
For Smith, the immediate problem remains: FAS’s large financial chasm could not be closed in one year, so his working groups face months of effort to find additional cuts. In the future, he said on April 14, “it is increasingly likely…that we will not have a need for as many faculty and staff” as today. How the College and graduate school are reshaped looms as a particularly daunting set of issues for Harvard.
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