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How Harvard’s Professional Schools Will Cope with the Economic Crisis

4.15.20


In the wake of initial financial guidance and principles for drafting new budgets disseminated by President Lawrence S. Bacow and the central administration on April 13, Harvard’s faculties are learning from their deans what the pandemic-related constraints on their operations may mean. Community letters from the business, law, and medicine deans begin to outline their respective financial challenges and the priorities they intend to pursue in adjusting spending—and adapting to huge uncertainties about such fundamental matters as when residential education can resume, what will need to be done to protect health in a teaching and research context, and who may choose to come to campus. These first messages, along with Faculty of Arts and Sciences’ dean Claudine Gay’s statement of principles disseminated April 10, underscore:

  • the vulnerability of certain seemingly secure operations and sources of revenue, like executive education, to unprecedented circumstances (the near cessation of travel worldwide), layered atop known, predictable risks (recessions’ economic effects on institutions’ budgets and household finances);
  • varying priorities, from assuring access and affordability (financial aid and support for students) to protecting the employment of community members (faculty and staff); and
  • the large known costs of the initial adjustment to dispersed, socially distanced teaching and research, plus the looming unknown costs if those conditions persist, or force significant changes in the way campus classes, dining, and residences are conducted and organized.

The University Context

To recapitulate the most important points about finances in the message from Bacow, Alan M. Garber (provost), and Katie Lapp (executive vice president):

  • “Our major sources of revenue—tuition, the endowment, executive and continuing education, philanthropy, and research support—are threatened, and we expect to see increased demand for financial aid….”
  • The University has “expended substantial unbudgeted resources” to support students moving off campus, and workers who have seen their jobs displaced.
  • Pending comprehensive budget planning, Harvard has immediately frozen salaries for nonunion employees and imposed a hiring freeze; canceled or deferred discretionary spending; and begun reviewing all capital projects “to determine which ones should be deferred.”

In setting priorities for the inevitable further adjustments, they emphasized:

  • protecting the health and safety of students, faculty, and staff members;
  • maintaining “the excellence of Harvard’s educational and research mission”; and
  • guaranteeing the availability of “the financial resources necessary so our students can attend Harvard regardless of their own financial circumstances.…We also have responsibilities to our faculty and staff, but we will need to engage in shared sacrifice as we work through very real financial challenges.”

In a way, the news is simultaneously reassuring and unsettling. Having learned the hardest lessons of the financial crisis and Great Recession a dozen years ago, Harvard and most of its schools are in a better near-term financial position than they were then. But the educational impacts—dispersed students, remote teaching, constraints on travel by international students, and severe, safety-related limits on normal research activity—are of a whole different order (and possibly, duration), posing longer-term challenges to budgets and to the core mission of the University.

Harvard Business School: From Surplus to Deficit

With Nitin Nohria agreeing to defer his plan to step down as dean this June 30, and Angela Crispi continuing as long-term executive dean for administration, Harvard Business School (HBS) has experienced senior leadership in place as it confronts a severe change in financial circumstances. In a note to the community following Bacow’s message, they wrote to their colleagues highlighting sharp pressure across all operations:

  • Executive Education programs have been halted.
  • Harvard Business Publishing case sales have fallen across schools and universities, ad revenues have dropped, subscriptions have decreased, and corporate buying has slowed.
  • Alumni giving is down, and pledge fulfillments are uncertain.
  • The endowment distribution, while stable for this year, could decline next year, depending on endowment returns.

The cumulative effect is $115-million decrease in expected revenues during the current fiscal year, ending June 30—translating a forecasted $43-million operating surplus into a projected $22-million deficit. (The school had budgeted for a very modest increase in revenues overall, driven principally by a higher endowment distribution—in part reflecting its ability to build substantial reserves from prior years’ operations and to invest those funds in its endowment.)

For context, in fiscal year 2019, HBS had revenues of $925 million, with principal contributors including:

  • $262 million of publishing revenue (the sale of millions of teaching cases to institutions around the world; advertising in and subscriptions to Harvard Business Review; books and reprints; and so on);
  • $222 million from executive-education tuition (about half the University total, and a consistently growing business of late);
  • $162 million from the endowment (plus $68 million in current-use gifts); and 
  • $140 million in M.B.A. tuition and fees.

Thus, although the school is perhaps best known for its M.B.A. program (which of course is the foundation for the faculty and its research), it is far from the most important source of operating funds. 

The pressure on publishing and executive education is therefore highly significant for HBS’s financial position. Executive education is anchored by the Esteves, McCollum, McArthur, and Tata residences, and the Chao Center, on the eastern end of the Allston campus: a formidable complex of facilities of recent vintage or recently renovated, and now idled by the pandemic-related elimination of global travel. This is something far beyond a recession-induced reduction in businesses’ budgeting for executive and professional development. Instead, it is an external full-stop in the program’s operations, which may be followed by a conventional, if sharp, recession.

In response, Nohria and Crispi said:

We are now doing the detailed work to understand potential expense changes as well. We will see some savings as a result of the many activities that have been postponed or canceled, including travel, events, and catering. Moreover, we can expect to see savings in areas like utilities consumption, given how few people are on campus. But we've also had to make investments and unplanned payments this spring, in areas like technology and residence hall refunds. So we are awaiting department-level Q3 reforecasts this week to assess the true magnitude of our shortfall. We will explore every opportunity to realize breakeven, though we are late enough in the year that this course correction may not be possible. Generally, expenses do not fall as quickly as revenues in a downturn.

In the near term, the school has significant reserves: beyond the $165 million it invested in its endowment reserves during fiscal years 2018 and 2019 (according to the annual report), at year-end 2019 it maintained $129 million in unrestricted reserves on hand (outside the endowment). Despite that enviable position, “Absent indications that the campus will re-open and all our normal activities will resume quickly—indications that do not exist today—we must anticipate a very different operating budget for HBS in FY21 and begin taking steps now.”

As they prepare for what the next year may bring, Nohria and Crispi outlined these principles, driven by maintaining the community:

  • To protect, for as long as possible, employment and benefits for those who work at the School;
  • To invest, strategically, in programs and activities—whether where the need is great (e.g., in supporting career and professional development for our graduating students and recent alumni), or to create long-term advantage (e.g., in building the faculty and in strengthening our portfolio of HBS Online courses); and
  • To sustain our School, and our core activities of teaching and research, for the long term.

Given the value of addressing problems quickly, they have begun to “control personnel costs” (reduced overtime, leaving vacant positions unfilled, curtailing searches, limiting use of consultants and contingent labor); freeze compensation for faculty and exempt staff members; and take “a careful look at planned capital projects, cutting the budget for the coming year by more than 75 percent.” HBS is past its major building projects, like Chao, Tata, and the Klarman convening center, but it has been renovating offices and building new online education studios. Finally, faculty members have been asked to find savings in their research activities, and all expenses are being scrutinized for postponement, reduction, or elimination.

That is the outlook from the Harvard school that has approached the current crisis with, seemingly, the most enviable mix of diversified, external sources of revenue; the best operating margins and balance sheet; the most up-to-date facilities; and the strongest roster of philanthropic supporters relative to its size. Looking ahead, it also faces challenges in the M.B.A. program, if visas and international travel continue to be curtailed: 37 percent of the class of 2021 is from outside the United States.

Harvard Law School: Prioritizing Access and Affordability

HBS is, naturally, businesslike in its communications about such matters. Across the Charles, Harvard Law School (HLS) dean John Manning wrote a more tone-setting letter to his community, following the Bacow email.

After acknowledging the “extraordinary resilience, courage, and spirit” of community members in dispersing from campus, shifting to remote learning, and coping with the accompanying disruptions, he turned to the institutional implications: 

Until this year, the financial crisis of 2008-2009 was the largest financial challenge Harvard had faced in modern history. This global pandemic, which has caused unprecedented disruption and displacement, is expected to be even worse. As Harvard’s leaders have made clear, every revenue source we depend on – including the endowment and tuition, as well as philanthropy, executive and continuing education, and research support – will be under enormous pressure for the foreseeable future. There have also been, and we expect there will continue to be, significant new costs as we take necessary steps to support our students, staff, and faculty in this challenging new environment. To all of these known challenges, we must add the deep uncertainty wrought by a global health and economic crisis whose contours change by the day.

With “very difficult spending choices” looming “in the coming months, and possibly years,” Manning emphasized the paramount importance of community members’ health and safety, and then prioritized:

  • Access and Affordability—As was the case with the 2008-2009 financial downturn, we will continue to make financial aid a top priority as we strive to promote broad accessibility of legal education.
  • Academic Mission—We will continue to foster excellence and innovation in teaching, learning, and research.
  • Our Workforce—We will strive to limit impacts on our workforce, who make it possible for us each and every day to fulfill our mission.  

The emphasis on access and affordability may reflect both the school’s agenda, given the expense of legal education, and the dean’s personal experience—as a first-generation college student and the first member of his family to attend law school. 

The letter does not go into specifics, beyond the University spending limits imposed by Bacow (“While we have no way to fully assess at this moment the extent of the budget deficit we will need to fill, we expect to receive in the coming weeks updated guidance from the University that will help us plan for the budget that begins on July 1”). But Manning does note that he has reduced his salary for the coming year (as have central administrators, deans, and comparable members of the community throughout Harvard), and expresses regret that “we will not be able this year to reward the outstanding level of performance that has been a hallmark of our workforce and especially seen this past month.”

Harvard Medical School: Coronavirus Research—and Renewed Financial Pressure

By rights, George Q. Daley, Harvard Medical School’s (HMS) dean, should be the most frustrated member of the University’s cohort of leaders. As he coordinates an all-hands, $115-million research collaboration on coronavirus involving the entire Boston biomedical-science community and colleagues in China, the pandemic itself has had the effect of offsetting the school’s hard-won return to financial strength. In a letter to the community following Bacow’s guidance, Daley and executive dean for administration Lisa M. Muto wrote:

[R]ight now we cannot tell you the extent to which this pandemic will impact our HMS finances, but we know it will be substantial. We are disappointed because we have worked diligently and made challenging decisions over the past several years to bring our budget back into balance, and we have focused on raising revenues and philanthropy to provide resources to support your extraordinary work in service of our mission. Before this pandemic, we were projecting the first budget surplus in over a decade. Now, we will inevitably see a return to deficits.

Those efforts and decisions included the $272.5-million sale of a leasehold interest in the Harvard Institutes of Medicine research building at 4 Blackfan Circle, effected in 2018, with the proceeds used to reduce outstanding debt and bolster research. The signal philanthropic event was the Blavatnik Family Foundation’s $200-million gift for research, which immediately enhanced fiscal 2019 results.

With those major gains realized, the school, they wrote, is “much stronger financially than we were during the Great Recession of 2008. Our FY21 budget process had already factored in downside planning for a potential recession, though not of this acuteness and magnitude.”

As they revisit fiscal 2020 forecasts and the fiscal 2021 budget, Daley and Muto continued, “The more each of us can do locally to curtail spending and to bolster grant and revenue portfolios, the more we can help improve the School’s bottom line and avoid more stringent mandates down the road.”

They did not explicate the principles that will guide subsequent decisions or “more stringent mandates”—and given the overwhelming urgency facing HMS scientists and clinical partners as they address the coronavirus, the succinctness of the leadership’s initial message can surely be understood.

The MIT Context

Down river, MIT is of course confronting challenges like those facing Harvard. In an April 13 letter to the Engineers, President L. Rafael Reif wrote that “Every crisis is different—and this moment is unlike any we have seen before” in terms of shuttering cities, shutting down much of the economy, separating people from one another, and imposing terrible personal suffering.

Having effected the initial response—protecting health by dispersing the community from the campus—Reif turned to the “new phase” of larger adjustments for the future. So far, he said, MIT had incurred costs nearing $50 million to help people move from campus, shift to remote teaching and work, sustain financial aid, refund room and board fees, sustain the workforce through the semester, and contribute to Cambridge’s business and nonprofit institutions. Although the school’s finances are stronger than they were during the financial crisis and Great Recession, he said, “in terms of financial impact, the present crisis may be more severe,” with wide impacts on research and foundation funding, philanthropy, and the endowment.

Accordingly, he put in place controls on hiring and discretionary spending, as of March 20. Those have now been augmented by suspension of compensation merit increases, reduced spending on capital projects, and a 20 percent reduction in salary for Reif himself and the provost (with the funds going to support employees who are suffering severe financial hardships), and the voluntary diversion of a part of other senior leaders’ compensation toward financial aid and research directed to the pandemic crisis.

As for bigger issues: “When will we all be back on campus? We do not yet have an answer.” And, “Will the fall semester be online? We do not have this answer yet, either….” As for the possibility of layoffs, “Given the terrible state of the current job market, we feel a responsibility to avoid or delay as much as possible cutting costs by cutting jobs.”

 

Clearly, huge decisions lie ahead. The answers to the hardest problems—can campuses reopen? can students, faculty, and staff be in residence?—differ in kind and scale from the challenges of a decade ago. Given the quarter-million-plus students who enroll in Greater Boston institutions of higher education, those questions hang over the entire Massachusetts economy. On the answers will depend those painfully immediate concerns about jobs and the well-being of all academic communities, wherever they may be.

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