The Financial Fallout

Barely a decade after the 2008 crisis and Great Recession, new challenges loom. An early assessment of the University’s strengths this time

Photograph of Thomas J. Hollister, vice president for finance

Thomas J. Hollister, Harvard’s chief financial officer
Photograph by Stephanie Mitchell/Harvard Public Affairs and Communications

In the fall of 2008, as banks and markets collapsed, Harvard discovered enormous problems in its own financial structure and operations. By year’s end, under duress, the University had to borrow $2.5 billion at high interest rates to maintain liquidity (annual interest expense doubled, to nearly $300 million, from fiscal year 2008 to fiscal 2011—a lingering, onerous tax on operations). And atop the $11-billion-dollar loss in the endowment’s value, Harvard sustained $3 billion in additional losses from having invested its funds needed for shorter-term purposes alongside the illiquid (and now depreciated) endowment, and from swap agreements that were put in place to hedge its borrowing. (They misfired disastrously when rates declined in the wake of the Great Recession.)

In the wake of the tragic coronavirus pandemic, what should one make of the astonishingly rapid reversal of economic and financial fortunes in early 2020? From a record economic expansion extending back to the recovery from the abyss a decade ago, and low unemployment—with employers desperate to fill millions of openings—the nation has pivoted to plummeting securities prices and the threat of self-reinforcing, wholesale joblessness on a generational scale.

In a word, for Harvard, this is not déjà vu all over again. Harvard is a learning institution, and an early reading of its financial circumstances today suggests important differences from those in the first decade of the millennium, which set the stage for the acute vulnerabilities exposed during 2008 and 2009:

  • The University enters this downturn with far greater liquid reserves.
  • Its growth in expenditures has been much more restrained during the past several years than during the effervescent period in the middle of the previous decade.
  • And although the revaluation of investment assets has been historically swift, it has not, so far, been as damaging as the cumulative market collapse leading up to and following the earlier financial crisis and recession.

An essential caveat: Current economic and financial-market circumstances remain extremely volatile, and circumstances could easily change significantly at any time in the weeks ahead. Accordingly, this account is a snapshot in time, and subject to revision, as:

  • the economic outlook could darken, and the recovery from the pandemic and the resulting economic damage may become prolonged; or
  • the unprecedented, multi-trillion-dollar stimulus and recovery measures now being enacted in Washington (and around the world) may offset the crises more swiftly and effectively than can be forecast.

Preparing for a Downturn

Last September, Harvard’s Office of Financial Strategy and Planning distributed a set of guidelines, “Financial Resilience at Harvard: A Recession Playbook,” to the schools and other University units “for use as a downside planning toolkit” (a summary is accessible here). Some of these precautionary steps stemmed from President Lawrence S. Bacow’s experience steering Tufts through the Great Recession (described herein). He of course also became a member of the Harvard Corporation in 2011, and saw from the inside this institution’s slow recovery from the Great Recession. Those debt-service costs showed up in the budgets the President and Fellows vetted and approved each year; and he could see first-hand the challenges of rebuilding the decimated endowment—which provides more than one-third of Harvard’s annual operating revenue. (Tufts, which is less endowment-dependent, derived just 8 percent of its revenues from that source when the crisis erupted in 2008, and so was less threatened by the crash, and better able to rebound quickly, than was Harvard. That difference in financial structure persists, and Bacow is well aware of the implications.)

An economist himself, Bacow at Tufts indulged in the profession’s brand of humor, writing, during the financial crisis, “Economists are fond of giving forecasts without time horizons. I can guarantee you that this market will turn, but I cannot tell you when,” thereby conveying a sense of assurance and normalcy from the institution’s leadership. He drew another lesson from his previous presidency, telling this magazine last summer that at Tufts, “every year was unto itself, often shaped by circumstances that could not be foreseen at the start of the year”—beginning, for him, at the outset of his presidency, with the tragedy of 9/11, and followed later in the decade by the Great Recession. A leader can plan, he said, but not predict.

Inverting the joke—economists could predict that America’s red-hot economy would certainly suffer a future recession, but with the timing and cause uncertain—and preparing for the unpredictable, he wrote in his preface to Harvard’s fiscal year 2019 annual financial report, published last October:

While our financial resources remain strong, we, along with all of our colleagues in higher education, must be conscious of the challenges in our current climate. The prospect of a long-running period of economic expansion coming to an end is very real. 

In their accompanying message, vice president for finance Thomas J. Hollister, Harvard’s CFO, and University treasurer Paul J. Finnegan cautioned similarly that “the current economic expansion, already the longest in United States history, cannot go on forever. Rainy day reserves will be needed.” To that end, they continued:

The University has taken several steps in recent years to prepare for the end of the current economic expansion, including reducing debt levels, increasing cash holdings, and strengthening reserves. Schools and units annually prepare rolling-five year financial plans, and are including “downside” scenarios as part of this year’s exercise. The University has learned from history and is preparing for the future….

Now, that future is very much here.


Having learned from Harvard’s searing experience ins 2008, financial administrators have during the past decade built up the level of liquid reserves, consistent with their view of the University’s regular operating needs. As of June 30, 2019, the annual financial report detailed cash and short-term investments on hand, held separately within the General Operating Account (think of it as the checking-account balance), of slightly more than $1 billion. In addition, the University then maintained (but had not drawn upon) a short-term credit facility of up to $1.5 billion, and an undrawn balance of $2.0 billion in taxable commercial paper. (The latter is subject to market conditions, of course, but Harvard maintains its AAA credit rating, and the Federal Reserve Board’s early actions during the current crisis have aimed at providing unquestioned support for the commercial-paper market, a foundational source of operating funds for corporations and institutions throughout the economy, so this facility should be completely intact.)

In a conversation on March 23, Hollister said that beginning a year or so ago, in face of the potential showdown that he, Bacow, and Finnegan had signaled, “We made an additional shift of University resources” into highly liquid securities. Thus, the fiscal 2019 financial report understates Harvard’s liquidity position ahead of this year’s downturn.

Expenses and Revenues

The flows of funds within Harvard have changed radically in the past two weeks, as students have been sent home, campus residences and dining halls have closed, instruction has been moved to online platforms, nonessential research has been paused, and more.

Hollister cited two large, immediate effects.

First, he said, “We’ve been writing checks back to people,” to refund room and board fees for the duration of the spring semester. Obviously, some expenses have been reduced, too (the dining halls are not buying supplies), but Harvard has guaranteed dining and janitorial staff members 30 days of continued pay if they are unable to work normally—bringing them close to the end of the term, and a University official said that meant 30 days “at least,” with discussions about the future to follow as events unfold. Skeleton operations have been maintained, for students unable to return home, who remain in Harvard housing and receive take-out meals, consistent with health precautions.

Second, the revenues received from in-residence executive and continuing education are at risk. This is a large business: in fiscal 2019, Harvard garnered a half-billion dollars from executive and continuing education: 9 percent of University revenues—the most consistently growing source of revenues in recent years—and on track, until the pandemic, to exceed total revenues from degree programs (net of financial aid) this year. With the collapse of travel worldwide, spring enrollment has been affected, and summer studies are in limbo. Hollister indicated that these activities are year-round, rather than strongly seasonal.

That suggests that the exposure to lost revenues could quickly amount to tens of millions of dollars, if not much more. Some of these activities are conducted online, but business budgets for such courses may be imperiled, and individual learners may cut back, too. Harvard Business School generates nearly half of Harvard’s executive and professional education business ($222 million in fiscal 2019), and the Faculty of Arts and Sciences’ Division of Continuing Education (the Extension School) perhaps a quarter—the profits from which support FAS activities. But virtually every school has some continuing-education portfolio, and virtually all were investing in further growth from this sector—a forecast now best postponed.

Beyond these “obvious, immediate impact” items, Hollister pointed to intermediate and longer-term concerns. One is financial aid: as family incomes are impaired, students’ needs for support may be expected to rise, for the duration of any recession. Within the College, for instance, The Harvard Campaign yielded about a half-billion dollars of endowment support for undergraduate scholarships—but FAS still relies on its unrestricted funds (tuition revenue, those distributions from the extension school, etc.) to pay for a significant share of its aid program: currently, probably somewhere between 30 and 40 percent. Any increase in need, and decrease in unrestricted giving or endowment distributions (both discussed below), would result in immediate pressure on the consolidated FAS budget and the dean’s ability to invest in new academic programs or other priorities 

Another likely pressure point is philanthropy. One lasting effect of The Harvard Campaign was to boost the amount of current-use giving, from about a quarter-billion dollars annually in the years preceding the fundraising drive, to nearly twice that since. In fiscal 2019, such largess totaled $472 million: 8 percent of Harvard revenues. (For the heavily endowment-dependent FAS, in the past two fiscal years, the comparable sum has been $99 million and $116 million, or 6.4 percent and 7.8 percent, respectively—nothing to sneeze at, and much of the total in the highly valuable form of flexible-use funds.) Donors worried about their retirement savings, or seeing investment assets depreciate, may necessarily have to restrain giving. Some of the same constraints of course apply to donors of large, capital gifts.

Stretching the meaning of philanthropy, “non-federal sponsors” of Harvard research—foundations and corporations—provided more than $300 million of funding in fiscal 2019; to the extent that their support depends on their own underlying endowment assets or operating cash flows, that revenue may come under pressure as well. And such non-federal research support has been growing much more rapidly than the federal kind. Facing an economic crisis caused by a pandemic, one might hope federal funding for biomedical research would be maintained or increased; but with multi-trillion-dollar deficits looming, it would be foolish to count on those appropriations.

In this broad sense, Hollister summarized, “All of our revenues are correlated” with the larger economy, over time.

On the positive side, Harvard may be better prepared, culturally, for any belt-tightening to come. Consolidated expenses rose from $2.3 billion in fiscal year 2002 to $2.6 billion in fiscal 2004, and from there—propelled by strong endowment investment returns—rapidly upward: to $3.0 billion in fiscal 2006, $3.2 billion in 2007, $3.5 billion in 2008, and even to $3.8 billion in 2009, bracketing the financial crisis and onset of recession, as the spigot proved hard to turn off. In all, spending increased 65 percent in seven years. From fiscal 2013 through last year, expenses rose from $4.2 billion to $5.5 billion: 31 percent. That is not nothing, to be sure, but it reflects much more restrained expectations—for instance, essentially no growth in the faculty ranks University-wide, throughout this decade—a far better environment in which to confront emerging constraints on resources.

Notably, since fiscal 2014, Harvard has ended each fiscal year with a surplus—in the aggregate totaling about three-quarters of a billion dollars. However achieved—banking some fruits of The Harvard Campaign, managing funds cautiously with an anxious look back at the end of the prior decade—deans and their schools have deferred some possible spending and accumulated some reserves that may come in especially handy now.

The Endowment

The most important of the constraints, of course, comes back to the endowment. At the end of fiscal 2019, its value was $40.9 billion. Funds distributed from the endowment that year to pay for Harvard’s academic operations totaled $1.9 billion: 35 percent of total revenues, by far the largest source. 

How might the endowment have fared in the current market environment? There is no way to tell precisely, so the following is an illustrative, back-of-the envelope exercise.

As of June 30, 2019, the endowment’s assets were distributed among public equity (stocks, 26 percent); private equity (20 percent); hedge funds (33 percent); and other classes (real estate, 8 percent; natural resources, 4 percent; bonds, 6 percent; other real assets, 2 percent; and cash and other, 2 percent—rounding raises the total above 100 percent). That distribution may well have been very different by late this winter, and until Harvard Management Company (HMC) reports its results next fall, no outside observer can tell how a very diverse set of investments lumped under the rubric of hedge funds may have performed. But for the purposes of this exercise, assume the corpus and its distribution were as reported last June, and that in recent weeks the endowment experienced the following changes in value:

  • Public equities, down 30 percent
  • Hedge funds, down 10 percent
  • Private equity, down 10 to 15 percent
  • Natural resources, down 50 percent

Many hedge funds are structured to buffer declining markets. Harvard’s natural-resources portfolio is being reduced in size, but has been subject to repeated decreases in valuation and outright write-offs, and the current environment might prompt more of the same. The value of private-equity investments, typically in business enterprises, will surely be reduced, but such valuations may well lag public-securities pricing. Given the size of the other asset classes, no estimate is applied to them—the bond holdings could very well have appreciated, perhaps significantly, but they are probably too small to offset losses elsewhere in the portfolio to any significant degree.

A very crude calculation using these estimates of investment losses yields a decline in endowment value of $5.5 billion to $6 billion: perhaps 15 percent. Gifts received during the year, from fulfillment of Harvard Campaign pledges or new philanthropy, would increase the endowment value somewhat—but distributions during the current year of $2.0 billion or so would reduce it. Overall, it is possible to imagine, at present, a resulting endowment value of $33 billion to $35 billion: a decline of 15 percent to 20 percent. (For perspective, the value of the endowment decreased $11 billion in fiscal 2009—nearly 30 percent.)

During fiscal 2020, ending this June 30, deans have been enjoying an increased distribution from the endowment. The Corporation determined that during the transition to President Bacow’s leadership and the repositioning of HMC’s strategies and personnel under N.P. Narvekar, it would use a three-year “collar” to guide financial planning. It has provided for 2.5 percent annual increases in the distribution from each unit of the endowment owned by each school. That provision, augmented by new units resulting from the campaign, has effectively yielded 4 percent-plus gains in endowment distributions received, across the University, for fiscal 2019 and (anticipated) 2020. (HBS’s fiscal 2019 report, for example, forecast “high single-digit growth in the endowment distribution for fiscal 2020. A portion of this growth relates to the increase in the University’s distribution rate. The balance reflects growth in the size of the endowment as a result of endowment gifts and the School’s fiscal 2019 investment in its endowment reserve.”)

Budgets for fiscal 2021, starting this coming July 1, have been built on the expectation that something similar was in store. Thereafter, deans and financial officers have been cautioned that the endowment distribution could be held flat, or worse, absent stronger investment returns from HMC than have been achieved during the past few years.

In current circumstances, with a sharp recession in prospect, that guidance may be subject to revision. In a recent interview with The Harvard Gazette, CFO Hollister said (emphasis added):

[T]he University is positioned to withstand an interruption in normal operations, an economic downturn, and other stress scenarios. These efforts put us in a good position and give us the ability to focus on aligning our resources behind our academic mission, but they will not eliminate adversity or difficulty in the event of a recession. Given what is happening, we expect to see a decline in revenues due to, for example, increased financial-aid needs, a slowdown in philanthropy, and a lower distribution from the endowment, and we will need to adjust our spending accordingly.

So far, 2020 is not 2008—not even close. But it is no longer 2019, either, so it has perhaps become time to read the tea leaves. If the endowment indeed declines significantly in value, the distribution will be adjusted—perhaps sooner rather than later, and in any event, no longer delivering the annual increments in funding to which schools have become accustomed.

To put that in perspective, FAS derived half its revenues from endowment distributions in fiscal 2019. As noted, it could be particularly exposed to needs for more financial aid. Apart from term appointments associated with sponsored research and investments in the extension school, FAS has not increased staffing levels for several years. And it has had to restructure its (considerable) debt to be able to shoulder the huge costs of House renewal–resulting in locked-in higher debt-service costs several years hence. If the trajectory of endowment distributions turns downward, that will be felt in University Hall—and beyond.

The distribution (the mechanics are explained here) typically amounts to about 5 percent of the value of the endowment at the beginning of the fiscal year, but “smoothed” through a formula that reflects investment performance in prior years to dampen the effects of extraordinary gains or losses in any one year’s budget. Thus, a double-digit percentage decline in the endowment’s value does not automatically translate into an equivalent reduction in the funds distributed to the faculties in the next fiscal year. But over time, endowment returns that fall short of the University’s presumed goal (roughly 8 percent, to maintain future purchasing power while accounting for the 5 percent distribution plus 3 percent inflation in operating costs) do translate into lessened cash distributions. For fiscal years 2017 through 2019, HMC’s returns were 8.1 percent, 10.0 percent, and 6.5 percent—suggesting flattish distributions in future years. If the returns for 2020 turn out to be negative, the deans indeed have their work cut out for them. For FAS, which received $764 million in fiscal 2019, even slight changes in the distribution obviously present major financial, operating, and academic challenges. One way of thinking about it is to imagine that the endowment value held even, but the distribution rate declined by 0.5 percentage points; that change would reduce FAS’s income by about $75 million, or 5 percent of revenues. 

For fans of black humor, it is perhaps worth mentioning that the federal excise tax on endowments, legislated in late 2017 and recorded in the University’s finances for the first time in fiscal 2019, is for now, if not moot, at least much lower down on Harvard financial planners’ list of worries.

Going on Offense

Financial planning is not a one-way exercise. Last fall’s recession playbook naturally focuses on “areas to be deprioritized” in adverse circumstances, as it noted. But financial planning is also about identifying “areas for investment and growth. Creating capacity—dry powder—in advance of a downturn can enable the organization to make investments or ‘play offense’ during times of constraint. The ability to hire faculty or invest in emerging fields of study can better position Harvard for future success.” In that vein, President Bacow, a former marathoner and confessed sports fan, likes to say that races are won on the uphill: pressing one’s advantage when competitors are winded.

In the conversation this week, Hollister suggested that the sudden reversal of economic and market conditions had not obliterated that aspiration. Deans, who control most of the surpluses realized of late, may want to make “key faculty hires” if the opportunity arises, he said, or to provide “key research support” where needed.

Given the University’s continued heavy capital program (nearly a billion dollars of construction annually in recent years), a recession might provide some relief. Boston’s heretofore white-hot construction market might cool, Hollister speculated, meaning that inflated construction costs “will be very different in a year or two.”

Turning to financial and investment matters, he noted, in response to a query, that the University had refinanced much of its outstanding debt in recent years, taking advantage of lower interest rates. Although rates are still lower now, given the restructuring already effected, he left the impression that this would not be a high priority for deploying Harvard funds, compared to other uses.

One of those uses might be within the HMC portfolio. Narvekar has been trying to substantially increase the commitment to private equity—but doing so takes time, as fund managers receive and deploy funds. In the current environment, as the value of existing private-equity investments declines and other sources of funding become more constrained, it is possible that funds HMC freed up in previous years and stashed in hedge-fund investments may be deployed sooner, or in greater volume, in pursuit of the investment strategy. Much depends on market conditions, of course, but the current very low interest rates may make it more profitable to undertake private-equity investments (many of which depend on leveraged financial structures) than in the recent past: an accident of good timing, if HMC were able to take advantage of it.

More generally, Hollister said, “I’m very pleased to report, in our financial affairs, Harvard is operating today in a very effective manner.” He did so while speaking from his home, as he and the financial staff are working remotely. Even five years ago, he said, the Internet resources, software tools, and connectivity simply did not exist to enable routine processing of receivables and payables to proceed as is happening, apparently seamlessly, under current conditions. The technology has “enabled a new way of doing work, which is being tested under stress,” successfully.

The recession playbook has helped schools and other Harvard units prepare for altered circumstances, even though the current situation could not have been foreseen precisely, he said: “Yes, we like to think it’s ready and able to help” as academic financial officers scrutinize discretionary expenses and model budget scenarios.

Hollister also said it was helpful that Harvard has “an economist as president” who is “experienced in turbulent waters” from his Tufts tenure. He noted that Alan Garber, the provost, is also an economist, and that executive vice president Katie Lapp had prior management experience in such crises as the 9/11 attack and a New York City transit strike. Those intangibles have come into play as the University has made “extraordinary changes very fast,” dispersing students and staff from campus, ramping up remote teaching during spring recess, and reducing laboratory and research activities to protect community members’ health. Those are “stunning achievements,” he said—a counter to views of academia as staid and slow-moving. (The work continues, even in the wake of Bacow’s announcement, a day after this conversation about financial matters, that he and his wife have tested positive for the coronavirus and are in isolation for the next two weeks.)

There are “a lot of learnings out of this” for future Harvard operations, Hollister concluded—not least financial lessons for the continuing support of the teaching and research mission, on campus or remotely, in the months and years to come.

Allston: An Allegory

One way to distinguish the current circumstances from those in 2008 might be found in Allston.

The University announced last December that it had appointed a developer for the commercial “enterprise research campus” in Allston, across Western Avenue from HBS. Obviously, an economy turned upside down might change the timing of and prospects for such development. Large Internet and technology companies are thriving during the social distancing imposed by the pandemic, but are not the target tenants. Entrepreneurial biotechnology enterprises might well fit the bill, and be able to find financing and proceed, given the nature of the coronavirus crisis—but the odds are longer, and the calendar appears vulnerable to some extension.

But compare this to the end of the last decade, when the University simply could not afford to finance continued construction on the Allston science complex. Work had to be suspended once the enormously expensive subsurface structure was put in place—with perhaps $1 billion of planned investment halted. This magazine’s painful headline on its news report of December 10, 2009, was “Allston Development on Ice.”

Today, the stakes are considerably lower. The same site now houses a nearly completed (albeit redesigned and less expensive), cutting-edge research and teaching facility. True, Boston has imposed a halt on construction, to protect workers from exposure to coronavirus—so the meticulously scheduled move this spring and summer of half the School of Engineering and Applied Sciences faculty to the new “science and engineering center” may have to be reworked. The fall-semester festivities planned for its official opening are in flux (like everything else on the Harvard calendar). But in context, these are inconveniences, particularly compared to the human and economic trauma affecting people around the globe.

For Harvard, measured in purely financial terms, the current circumstances are challenging, but not existential. The University has put itself in a better position to adapt—and thereby pursue critical research on coronavirus, and sustain its teaching mission. That is how, and when, financial management and planning prove their worth.

Read more articles by: John S. Rosenberg

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