Balanced Budget, Benefits Battle

Following two years of modest deficits, Harvard closed its books on fiscal year 2014, which ended last June 30, some $2.7 million in the black: operating revenue increased 4.8 percent to $4.409 billion and operating expenses rose 3.9 percent to $4.406 billion. In fiscal 2013, the University was $33.7 million in the red. This improvement, disclosed on November 7 in the annual financial report, is in fact understated because it includes aone-time expense of nearly $46 million related to accounting for pension obligations; excluding that charge, the operating surplus was about$49 million—a goodly gain.

The report contains interesting details concerning growth in tuition revenue and employee-benefit costs (discussed below). The broader picture was sketched by a new senior financial team of executive vice president Katie Lapp and University treasurer Paul J. Finnegan, who wrote in their overview letter that just as the prior deficit “was not a cause for undue alarm, so is this year’s surplus not cause for excessive optimism.” They foresaw “ongoing foundational financial pressures.”

Revenue. Gifts for current use, spurred by the capital campaign as expected, increased $80.6 million (24 percent), to $419.2 million. Less expected was the second engine of growth: tuition and other income derived from students was up sharply, rising nearly $60 million (to $877.6 million)—6.6 percent. The report highlights continuing and executive education, up a robust 10.6 percent. Undergraduate revenue rose 4.9 percent, and graduate and professional degree programs yielded 5.1 percent more revenue. More interesting is the net figure, with tuition and fee revenue after financial-aid awards up 7.3 percent in the aggregate. Scholarship awards applied against tuition and term bills increased just 3.7 percent, meaning that more of nominal tuition remained in the University’s accounts. Even as the Faculty of Arts and Sciences (FAS) and other schools seek endowment support for aid, if the growth of scholarships and fellowships levels out (after rising sharply for many years), deans’ financial flexibility will increase considerably. The endowment distribution, the largest source of revenue, rose $40 million (2.7 percent), reflecting prior years’ modest endowment returns.

Offsetting these gains in part was a decline in funding for sponsored research—down $13 million (about 2 percent) to $819.2 million; this category, long Harvard’s second-largest source of revenue, after the endowment distribution, was eclipsed this year by tuition and related student income. As federal funding declines and foundation and corporate sponsorship rises (a fundamental fact for Harvard Medical School’s capital campaign; see “The Campaign Computes”), the University recovers less “indirect” support for buildings, libraries, and other overhead, posing worrisome problems of how to pay for the surrounding, expensive University infrastructure.

Expenses. Salaries and wages rose 6 percent. Employee benefits, including the nonrecurring pension charge, rose about 5 percent—but otherwise decreased about 4.5 percent (as changes in retiree health coverage took effect, among other factors). Together, salaries/wages and employee benefits made up 49 percent of Harvard’s fiscal 2014 expenses, and accounted for about two-thirds of the $167-million increase in expenses overall. The catch-all “other” expenses rose by nearly $44 million. Nowhere does it say so, but costs associated with the capital campaign (University and school launch events, extensive travel to alumni functions around the world, and collateral materials) certainly affect expenses, too.

Capital spending. The University is helping to keep local construction workers fully employed. Capital spending was $465 million, up about 15 percent from fiscal 2013. Notable projects include the Harvard Art Museums (reopened in November); Harvard Business School’s Tata Hall, for executive education; and the continuing undergraduate House renewal.

The report noted, intriguingly, that Harvard “engaged in no new debt issuance over the past fiscal year, and is currently limiting the use of new debt in order to allow for future flexibility in the financing of major initiatives.” During fiscal 2014, interest costs declined, as Harvard benefited from prior restructuring of some debt obligations, and maintained borrowings at about $5.6 billion. Fundraisers would be loath to show their hand as they seek support for House renewal and the new School of Engineering and Applied Sciences complex planned for Allston (in the aggregate, hundreds of millions of dollars are being sought). But it is certainly conceivable that the University will tap the capital markets to complete such huge projects.

An evolving business model. Lapp and Finnegan put the year in the context of the capital campaign, and no wonder. Beyond the leap in current-use gifts, the report details $513 million in endowment gifts (up 130 percent from the prior year); and an increase of more than one-third of a billion dollars (to $1.59 billion) in pledges for future gifts.

More broadly, they pointed to the campaign’s role in yielding “fundamental improvements in the University’s finances and financial prospects.” (Such gains are especially pressing for FAS and the medical school: both are incurring substantial deficits.) In addressing those “foundational financial pressures,” they outlined an evolution in Harvard’s business model. It would be better insulated from “continued volatility in capital markets”; less reliant on federal support, given the darkening prospects there; and better prepared to cope with “increasing pressure on grant aid expenditures”—given families’ economic circumstances.

That suggests continued reliance on boosting philanthropic support, during and between capital campaigns; “meaningful growth in continuing and executive education” (including finding ways to monetize investments in online education through HarvardX, the business school’s HBX, at the Extension and medical schools, and elsewhere); and further “encouraging growth in corporate-sponsored research,” of “particular importance” given the problems in the public sector.

The annual report and business model are covered further at


While University leaders pursue such longer-range financial matters from an institutional perspective, Harvard’s fiscal future hit home in a more personal way on campus. As reported (“Frenetic Fall,” November-December 2014), faculty and nonunionized staff members learned in early September that their health-insurance coverage for 2015 would include coinsurance and deductible payments for certain medical services of as much as $4,500 per family (subject to partial reimbursement to lower-paid workers).

Photograph by Rose Lincoln/HPAC

Mary Lewis

During the October 7 FAS faculty meeting, professor of history Mary Lewis questioned the new health-benefits design and its effect on employees or family members suffering from either chronic conditions or acute medical problems. “It’s asking those most at risk to pay more,” said Lewis, who then asked how the changes could be reversed. Provost Alan Garber, to whom the University Benefits Committee (UBC) reports, responded at length to defend the changes as economically necessary. (That exchange, and the subsequent developments described below, are reported in full at At the November 4 meeting, Lewis advanced this resolution for faculty debate: “That for 2015 the President and Fellows be asked to replace the currently proposed health care benefit plan with an appropriately adjusted version of the 2014 health benefit package, maintaining the 2014 plan design.” Further arguments presented by Garber and two members of the UBC (both policy scholars from the medical school) were overwhelmed by a tide of passionate, and even angry, opposition by other professors—among them such influential speakers as Wells professor of political economy Jerry R. Green, a former provost who had opposed certain proposals to change benefits in 1994, and Enders University Professor Marc Kirschner, chair of the systems biology department at the medical school, who spoke with feeling about the financial plight of postdoctoral fellows in many Harvard laboratories, “whose take-home pay is less than about $3,000 per month.”

Photograph by Rose Lincoln/HPAC

Alan Garber

Lewis perhaps articulated the underlying faculty sentiment when she said:

Is Harvard a business that transfers costs to its employees, reducing its expenses by shifting the burden to people coping with serious illness? Or is Harvard a community where we equitably share the risks that we all face as human beings and where health care is a human right?

If Harvard were just a business, it would not offer such generous financial aid to middle class students and their families. Indeed, Harvard always has been more than a business. Let us keep it that way.

After extended debate, the faculty members present voted unanimously in support of Lewis’s motion. There was no practical way for the resolution to make a difference: the faculty and nonunionized staff do not negotiate their benefits, and the annual employee benefit-plan enrollment period began the next day.

But the calculus had apparently changed, nonetheless. Data provided by a UBC member at the faculty meeting made it possible to calculate how much Harvard has been spending on health benefits. The annual financial report, released three days later, was accompanied by comments that made it possible to calculate such spending per capita, accounting roughly for continued growth in the University’s workforce. That math revealed that spending on health benefits rose about 2.5 percent per capita in fiscal 2014: not nothing, but significantly less than aggregate figures, and those for prior periods, had indicated.

On November 13, President Faust took communication with faculty members on the benefits changes directly in hand. In a long message to FAS members, she reiterated that the 2015 plan would go into effect. But she also announced a supplementary fund to limit out-of-pocket costs (exclusive of premiums) to 3 percent of full-time-equivalent salary during the year. She directed the provost and UBC to reexamine plan designs for 2016, exploring the possibilities of relying less on coinsurance and deductibles and more on higher premiums or narrower medical-provider networks. She further charged the UBC with monitoring the consequences of the 2015 design, focusing on the cost of care and use of medical services. And she set in place greater outreach from the UBC to the community at large.

Whether those actions result in different benefits packages for 2016—or longer-term changes such as much more aggressive promotion of wellness plans or other ideas—remains to be seen. In the interim, against the backdrop of demonstrably successful fundraising for The Harvard Campaign, the president’s intervention and the commitment to more extensive communication might bridge the gap between abstract University financial reports and faculty and staff members’ immediate pocketbook concerns. See for a full report on the president’s message and further benefits-related developments.

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