FAS Budget: Better, Bit by Bit
The Arts and Sciences dean explains steps toward budget balance in fiscal year 2012--and concerns from financial aid to deferred capital projects.
At the last regular faculty meeting of the year, on May 11, Dean Michael D. Smith told the Faculty of Arts and Sciences (FAS) that its unrestricted deficit for fiscal year 2011, beginning July 1, had been reduced from an estimated $80 million last winter to an estimated $50 million to $55 million—and that he hoped to reduce that gap still further, to about $35 million, by the time he submits a final figure to the Harvard Corporation at the end of the month. (Smith's May 12 letter to the faculty summarizing his presentation is now available at his website.) In comparison, at the beginning of the academic year, last September, Smith had forecast a deficit of $110 million for FY 2011. His initial, genuinely alarming projection of a $220-million gap was made at the depths of the financial panic and recession in the winter of 2008-2009 (before any efforts were made to freeze the salaries of faculty and nonunion staff members, rein in hiring, provide retirement incentives, institute layoffs, and curtail capital spending).
Smith reminded colleagues that FY 2011 might be the toughest year for FAS operations. The Corporation reduced the distribution of funds from the endowment by 8 percent (about $50 million for FAS) in the year now ending, and a further 12 percent (about $70 million more) for next fiscal year. His goal, he reported now, was to achieve a structurally balanced operating budget for FAS in FY 2012. Doing so, he said, was becoming no easier as expenses have been progressively tightened: entering FY 2010, the estimated deficit for this year was $21 million; it will now end up roughly balanced. The $35-million gap entering FY 2011 is larger. If FAS can meet its goals, it will bridge the remaining shortfall in the next fiscal year by drawing down reserve funds.
Smith characterized the past 18 months of belt-tightening and rethinking how FAS operates as “quite a difficult period” but also as “remarkably productive.” He thanked the entire community for contributing ideas and effort toward reducing operating costs while maintaining “incredibly successful” educational experiences for students and sustaining faculty members’ research. The reductions that have been effected, he said, were “prudent, structural, long-term adjustments” in how FAS conducts itself. The overall approach “is working,” he added, but simply requires more time to bring the budget into balance.
Achieving balance in the FY 2012 budget rests on two critical assumptions, Smith said:
• that the world economy will not be further destabilized or weakened; and
• that the Corporation will authorize a level or slightly positive endowment distribution beginning in that year.
The first of those assumptions of course affects the second. When results for this fiscal year are reported, it is likely that distributions from the endowment will equal more than 5 percent of its value, and perhaps nearly 6 percent. The latter is clearly well above the Corporation’s desired long-term distribution rate. That implies that Harvard Management Company (HMC) has to earn perhaps 8 percent on invested assets to cover the distribution and some allowance for inflation simply to maintain the real value of the endowment. Then, it has to sustain that performance long enough to bring the distribution rate down to a more normal level, so the Corporation will begin to feel comfortable authorizing flat and eventually increasing distributions.
(HMC does not report or forecast results quarterly, so its FY 2010 results will become publicly available in late summer or early autumn. Other institutions, such as Yale and Princeton, earlier in the year hinted that returns on endowment assets had improved—but those suggestions preceded the recent financial crisis in the Euro zone and the weakening of emerging-market stocks. Other assets important to such schools’ endowments, such as natural gas and other commodities, and commercial real estate, have remained weak. Stanford, among other institutions, has projected a resumption of increases in endowment distributions, if its other assumptions are met, perhaps in the fifth fiscal year after reductions were first begun. Williams has projected a return to 2008 levels of spending in 2018.)
As evidence of stable and even improving conditions, Smith reiterated that FAS would, in fiscal 2011, restore modest increases in compensation, tied to performance, and that the faculty ranks are in fact larger than when the crisis began in 2008. He cited some growth in Graduate School of Arts and Sciences admissions for the fall, after reductions last year; continued expansion of undergraduate General Education course offerings; and the introduction of new undergraduate courses of study, such as the biomedical engineering concentration. He also said that reviews of administrative operations, centrally and in the departments and academic divisions, would continue, with efficiency gains tied to the specific needs of each function and discipline.
For the year ahead, Smith is chartering several new working groups. Two will be ad hoc groups intended to flesh out financial opportunities identified by earlier faculty teams: one on how professors earn credit for sabbatical leaves; and one focusing on efforts to apply sponsored-research funding to faculty salaries during the academic year, not only during the summer. The fruits of the latter are not expected to be realized until fiscal 2012.
Smith is also reconstituting a Dean’s Faculty Resources Committee. An earlier Resources Committee, which was a powerful force in FAS deliberations in the late 1990s and into the new decade, lapsed during the efforts to respond to the current financial crisis. The new group will examine FAS priorities, fundraising, financial policies, and overall resources, he said. Separate curricular committees, like those already operating in the life sciences and foreign languages, will be chartered to examine introductory courses, students’ curricular paths, and related matters (and may, it was suggested earlier, help to consolidate courses that today have tiny enrollments). Finally, Smith told the faculty, in the next academic year, concerted work would begin on planning a capital campaign (in step with University planning efforts). Details on these initiatives are available here through the FAS planning website.
Cost Cuts—and Continuing Cost Pressures
In a subsequent conversation, Smith attributed the reduction in FAS’s deficits from the original forecast to a variety of factors: the salary freeze; workforce reductions; the compounding effects over time of those measures; energy costs that were lower than projected, and savings from conservation measures; faculty members’ greater-than-anticipated success in winning sponsored-research funding; unexpected access to endowment distributions from “underwater” funds (below the gift value) as a result of new Massachusetts legislation; stronger unrestricted giving from alumni than originally estimated; and very focused efforts to apply restricted funds to appropriate core functions such as teaching support. It was, he said, “ a lot of things,” the full explanation for which he intends to provide in his fall annual report to the faculty.
He stressed the continuing importance of reviews of administrative functions. Some experiments—combining support services for the history and history of sciences departments, for instance—are being evaluated for broader application in the humanities and across the social sciences as a whole. Within FAS administration, communications, physical planning, information technology, and sponsored-research support have been similarly reviewed (sometimes in conjunction with University-wide initiatives). Further efficiencies are expected, but no assumptions of general or across-the-board layoffs are in the budget plans, he emphasized; if any adjustments are made, he said, FAS will look for internal employment opportunities for affected employees.
Among the unknown factors is the number of professors who will take up FAS’s offer of enhanced retirement plans; their responses are due June 30. Similarly, the number of searches for new faculty members to be undertaken in FY 2011 is still being negotiated, but as between increasing or shrinking the FAS ranks, Smith said, “We’re trying to err to control growth.”
What cost pressures does FAS face? Smith identified financial aid, as students’ families continue under pressure. Undergraduate financial aid increased from $136 million in FY 2009 to $145 million this year, and is budgeted to increase 9 percent further, to $158 million, in FY 2011. Salary and wage growth, though moderate, is always “worrisome,” given that personnel costs are the largest factor in FAS’s budget. And he said that in current circumstances, FAS faces a large list of deferred capital projects that “we would love to work on”—none of which he wished to specify. (These are known from prior reports to include information-technology systems; unspecified building renovations; the overhaul of the undergraduate residential Houses—estimated to cost well more than $1 billion; and, because existing laboratory buildings have been filled quickly to accommodate the researchers who will no longer be sited in the deferred Allston science complex, new facilities for the School of Engineering and Applied Sciences, which has ambitious plans for growth, but is, according to its dean, completely out of space now.)
In all, Smith said, he was “very happy” about the efforts that faculty, staff, and students had made to operate FAS more efficiently and to conserve its financial resources.