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John Harvard's Journal

FAS's Progress—and Prognosis

November-December 2009

Michael D. Smith briefing faculty and staff members on September 15

Michael D. Smith briefing faculty and staff members on September 15

Photograph by Rose Lincoln/Harvard News Office

Faculty of Arts and Sciences (FAS) dean Michael D. Smith invited professors and staff members to an “FAS Financial Update and Other FY ’09 Accomplishments” briefing on September 15. His early-semester presentation in effect previewed his retrospective annual report and prospective letter on the year ahead before they are formally published this autumn (check http://harvardmagazine.com/tags/financial-crisis for updates). Against the backdrop of the sharp decline in the value of the endowment (see “$11 Billion Less,” page 50), Smith conveyed several pieces of encouraging news, based on FAS’s success in reducing its rate of spending during recent months, while keeping attention focused on the work still needed to stabilize the faculty’s finances in the years ahead. (A video recording of the briefing can be found at http://planning.fas.harvard.edu.)

He highlighted FAS’s “core” operations: the College, the Graduate School of Arts and Sciences, and the faculty itself (which account for about three-fourths of FAS revenues and expenses), excluding separate “tubs” such as the Harvard College Library, the School of Engineering and Applied Sciences, athletics, the museums, and so on. He also concentrated on unrestricted funds—which can be used flexibly, but where persistent deficits have threatened to hamstring FAS’s operations and ability to invest in new programs.

As a result of cost cuts (savings on utilities and from installing fewer new faculty members in laboratories) and revenue gains (stronger-than-anticipated unrestricted gift income and overhead-cost recoveries from sponsored research), a once-forecast $30-million deficit in the core operations’ unrestricted budget for fiscal year 2009 became a $6-million surplus.

Atop these gains, nonrecurring items enabled the faculty to boost its reserves substantially, rather than drawing them down: a valuable cushion against coming leaner years—one that might now last into fiscal year 2012, Smith estimated. Most consequentially, FAS received two unrestricted gifts (one a bequest) totaling $32 million. As he put it, the faculty helpfully managed to effect savings during its year of greatest income.

Because of the approximately $35-million operating improvement in FAS’s unrestricted core budget last year, he told his audience he had revised the outlook for both this year and 2011.

Adding the effect of approximately $75 million of cost reductions and restructuring actions identified during the past academic year and being carried out last summer and this fall (early retirements, layoffs, the reduction in hours and pay for contracted janitors, and so on), the projected deficit for the current fiscal year has been reduced dramatically. Though he did not disclose it then, Smith revealed that as of last April, FAS was facing a $130-million deficit. That now looks like a much more manageable $20-million gap—and he suggested that a balanced budget was in reach.

Applying the same savings forward into next fiscal year, ending June 30, 2011, the truly daunting operating deficit he had previously forecast—$220 million annually—now appeared, he said, to be a $110-million hole. Six faculty-led groups examining FAS’s mission, operations, and future are charged with addressing much of that remaining gap, with additional savings to be realized administratively, through improvements in information technology, for instance.

 

The Corporation has reduced the distribution of funds from the endowment by 8 percent in the current fiscal year (costing FAS, which received about $655 million in 2009, about $50 million this year, and dashing its earlier expectation that the distribution would in fact increase by as much as $100 million), and will impose a further reduction in fiscal 2011, as it gradually adjusts spending to the endowment’s reduced value. The full effect on FAS finances has been clear since last April (see “Finding a New Footing,” September-October, page 44).

University guidance suggests that the distribution will decline “at least” 8 percent further next year; FAS’s budget assumes a 12 percent reduction. (That budget also accommodates some salary increases, after this year’s freeze, but that is a University decision, not FAS’s, so there may be some cushion.) Smith indicated that the Corporation would not give final guidance until next spring, indicating continued financial caution and uncertainty: until last March, the decision had typically been made around Thanksgiving.

For all the “tremendous progress” that Smith was able to report, with understandable relief, the task of shaving the fiscal 2011 deficit remains daunting. And Smith reminded his audience that FAS is pursuing a multiyear process of getting its operations down to a new scale and pace: using its reserves and a gradual moderation of endowment spending (despite the swift depreciation in value of its invested assets) to buffer a deliberative process of reorganization, reduction, and rebalancing.

 


 

Commonwealth of Massachusetts

Leslie A. Kirwan

But the arithmetic is relentless: fiscal year 2009’s surplus yields to a modest deficit (or perhaps even a balanced budget) this year, assuming that $110 million of changes are adhered to; but similar savings and augmented revenues cut the deficit in the year beginning nine months hence only in half. In the current fiscal year, a $110-million deficit would appear to total about one-sixth of FAS’s discretionary spending (its total budget excluding undergraduate financial aid, sponsored research, and debt service)—and an unknown but likely higher proportion of the “core” operations. Smith and his new dean for administration and finance, Leslie A. Kirwan ’79, M.P.P. ’84, who starts on November 2 (after wrapping up her duties as secretary of administration and finance for the Commonwealth of Massachusetts), will be on a tight timetable. The working groups have plenty of work.

 

Smith nonetheless felt sufficiently encouraged on September 15 to reveal that he would authorize “alleviating measures” (amounts unspecified) to address some particularly acute concerns, including bridge funding for critical research projects; “pre-award” support for research, particularly by junior faculty members, in advance of sponsored-research grants; and development of new courses.

Looking ahead, he cited some other positive developments. Alumni have responded to appeals for gifts of unrestricted, current-use funds; Smith said he is emphasizing undergraduate aid, graduate fellowships, teaching and learning initiatives, and the undergraduate experience (including, in the long term, financing for physical renewal of the Houses). And Massachusetts has changed the state law governing “underwater” endowments (where investment losses have reduced the corpus below the initial gift amount). Such funds had been unavailable for any distribution to support operations, but once the University determines its rule for their “prudent use,” distributions may become available. Without specifying the sum, he indicated the annual revenue at stake for FAS could reach into eight figures—significant relative to the remaining deficit projected for this year.

Smith understandably focused on the current year and the reshaping of FAS necessary to rein in the still-large operating deficit projected for next year. Accordingly, he offered no hints about succeeding fiscal years.

Among peer institutions, Stanford and Yale have recently indicated that they will make major reductions in endowment distributions this year and next, and then both institutions project only flat distributions thereafter, extending into fiscal years 2012 or 2013 at least. Those two universities, with investment strategies and performance similar to Harvard’s, are, respectively, less and more reliant on endowment funding than Harvard as a whole, but both are much less reliant on endowment funding than FAS is (approaching 60 percent of revenue in fiscal year 2009). In a September 29 update, Princeton president Shirley M. Tilghman—who plans cuts in that institution’s endowment distribution similar in proportion to Harvard’s—raised the possibility of continuing to trim the budget in fiscal year 2012.

Harvard has not detailed its financial expectations beyond next year. President Drew Faust has said that the University aims to reduce the rate of distributions from the now-reduced endowment to a normal level within five years. Depending on external conditions and success in reducing costs internally, she has said, that could imply further reductions in the funds distributed in fiscal year 2012 and beyond.

Thus, alongside the uncertain prospects for revenue derived from the endowment, the dean and his financial staff and working groups must consider likely growth in future expenses: for financial aid and compensation, to cite just two large items. For the moment, the most threatening financial problems facing FAS have been whittled down. But as far as setting FAS on a sustainable path later in the decade, much still depends on continued momentum in fundraising, the future performance of the endowment, faculty success in winning research grants in a very competitive environment, and effective implementation of the cost reductions announced so far—and those yet to be identified.

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