Harvard Announces Salary, Hiring Freezes and Other Spending Cuts
Photograph courtesy of Harvard Public Affairs and Communications
Photograph courtesy of Harvard Public Affairs and Communications
Breaking News: In a message headlined “Economic Impact of COVID-19,” President Lawrence S. Bacow—joined by Provost Alan M. Garber and Executive Vice President Katie Lapp—just notified the community that “we need to take some actions immediately to align our spending with the decline in our revenue.” These include:
- an immediate salary freeze for all exempt (non-union) employees and a hiring freeze, University-wide;
- cancellation or deferral of discretionary spending; and
- review of all capital projects “to determine which ones should be deferred.”
The three senior University leaders are reducing their salaries by 25 percent, and “Other senior leadership of the University—including all School deans, vice presidents, and vice provosts—are responding by either reducing their salaries or contributing to a new fund that we are establishing in partnership with the Harvard University Employees Credit Union. Details of the fund, which will provide financial support to employees facing economic hardship because of the coronavirus, will be announced in the coming weeks.”
Looking toward the next fiscal year, they addressed concerns about “further cost reductions that might be needed in the coming months, including layoffs or furloughs,” and wrote that they are working “to gain a more complete picture of the financial conditions of the University” and to “determine what other steps are necessary to respond to the financial impact of the pandemic on our operations.” They will communicate further when more information is available.
The full text of their message appears at the end of this report, which was prepared as comprehensive background to pending Faculty of Arts and Sciences and University financial decisions.
Since publication of an initial report on the possible effects of the coronavirus pandemic and the resulting sharp recession on Harvard’s fisc (“The Financial Fallout,” March 26), additional information has become available about:
- the real and potential impacts on the Faculty of Arts and Sciences (FAS);
- the University’s initial responses;
- a peer institution’s belt-tightening measures; and
- the heightened peril facing public universities as state budgets are decimated—as happened as well during the Great Recession.
Facing the Facts in FAS
In a Good Friday message to faculty and staff colleagues, titled “Guiding Principles for Uncertain Times,” FAS dean Claudine Gay noted, “The transition to a de-densified campus is now officially behind us, but the range of institutional impacts of this pandemic is just beginning to come into view. In our long history, Harvard has never faced a challenge as all-encompassing as this one.” No part of the faculty’s academic work has been “immune to disruption,” with new information arising daily “about our constraints and possibilities,” hampering planning for the future. “And yet,” she continued briskly, “we must adapt.”
To do so while exercising “a profound responsibility not only to the Harvard of today, but also to the Harvard we want to be in the months and years to come,” Gay underscored the importance of proceeding as a community “united in common purpose by our mission of advancing knowledge.” Within the evolving circumstances, she outlined “a shared understanding of the realities we face and of the principles guiding us in our decisions”—among the values of “profound empathy for our students; attention to consistency and fairness; an impulse to connect and consult; and recognition that collective problems require collective action.”
•The collective problem: a financial impact that “was immediate, is growing, and will be significant.” To date, Gay said, FAS had incurred more than $30 million in additional expenses and lost revenue. (This figure is understood to include only the direct costs of helping students store belongings and travel home once the decision was made to end education in residence with spring recess; direct assistance to students whose term aid-related employment had to be curtailed; and refunds of room and board fees—service workers continue to be paid.) FAS is a $1.6 billion enterprise, but it operates on tight enough margins that the $30-million increment is large enough, Gay explained, to result in “the inability to fully cover our [fiscal year 2020] budget.
She forecast the inevitability of “sacrifices,” given prospective “continuing pressure on revenue sources, even as new needs may present themselves…including greater financial aid for students whose families have been affected by the global economic slowdown.”
•Principles for the decisions to come. To guide the inevitable, Gay offered these principles:
Put health and safety health first, guided by medical and public-health expertise.
Protect the academic enterprise. In doing so, “We must ensure that the academic progress of our students is maintained, even if what that means must evolve. We must remain a research active community to the extent possible, and be read to scale up research…as soon as conditions allow.
Leverage our breadth and diversity—in “disciplines, perspectives, questions, and approaches of our academic community,” even when conditions arise that make “simplicity, efficiency, and collaboration” necessary as “our best chance for sustaining the overall health and vitality of our school.”
Preserve access and affordability, to attract and enroll students.
She concluded somberly, observing that “FAS cannot be all things to all people, pursue goals that are beyond our capacity and outside our mission, or unduly privilege the current generation at the expense of the next. We will almost certainly find…that there will be opportunities we cannot pursue, activities we may have to stop, and ambitions that will go unrealized.”
Having set the tone in this initial message, Gay said, “I will write to you again to provide specific guidance and information on the steps we will need to take in light of the financial impacts of the pandemic.”
•FAS’s financial constraints. As reported last fall, FAS’s financial team projected a modified GAAP (Generally Accepted Accounting Principles) deficit for the current fiscal year, 2020, after two years of surpluses. The rather stark narrative explained (emphasis added):
The University has issued planning guidance which incorporates very constrained endowment results for an extended number of years, and further is leading an exercise to plan recession scenarios and potential responses. Having experienced over a decade of revenue constraints, and achieving low expense growth despite making significant needed investments, the FAS now has more limited options and much smaller flexible reserves than at the outset of the 2008 recession. The ability of the FAS to maintain its breadth of excellence and affordability for students and families will continue to face headwinds.
Distributions from the endowment—the source of 49 percent of FAS’s operating revenues in fiscal 2019—always loom large. The per-unit distribution rose by 2.5 percent that year (and it had been scheduled to increase a similar amount in both fiscal years 2020 and 2021). Along with incremental funds from new gifts (i.e., more units owned by the faculty), from The Harvard Campaign and other philanthropy, and other endowed funds, total endowment distributions booked in fiscal 2019 rose 4.6 percent (an increase of $34 million), to $764 million.
The budget-writers might have hoped for a similar trajectory to bring the distribution to, perhaps, $840 million or more in fiscal 2021, beginning this coming July 1. But the University’s chief financial officer, Thomas J. Hollister, had already begun sending signals that the hoped-for 2.5 percent per-unit increase is not guaranteed even for the year beginning 11 weeks hence—so that “planning guidance which incorporates very constrained endowment results for an extended number of years” may now be optimistic.
Looking beyond the per-unit increases budgeted from fiscal 2019 through (projected) fiscal 2021, deans and financial officers have been cautioned that the endowment distribution could be held flat, or worse, absent stronger investment returns than those Harvard Management has achieved during the past few years. Prudence suggests that budgets now be built on the assumption that the endowment has declined in value.
It is too early, and the markets are far too volatile, to know what the assets will be worth at the end of fiscal 2020. As a hypothetical exercise, assume that the endowment records a negative 10 percent investment return during the year; that new gifts added to the corpus are negligible; and that distributions across the University during the current year total $2 billion. That would reduce the value from $40.9 billion last year to about $35 billion at the end of this fiscal year. The Corporation uses a formula to set endowment distributions that smooths out high and low investment returns in any given year, so deans can plan in some orderly way. Inevitably, however, so severe a decline in the endowment’s market value, if realized, would lead, at best, to a leveling out of funds distributed to the faculties. Ignoring gifts received, for an academic unit like FAS, level-funding of the distribution for fiscal 2021 (again, this is hypothetical only) would reduce operating funds by $20 million or so, and likely more than twice that in the following year: more than a percent the first year, and escalating thereafter—at a time when other expenses are rising, and other revenues may be declining.
What of those other revenues? Net tuition and fees increased 5.4 percent in fiscal 2019, to $327 million—probably driven in part by the outsized growth of the Extension School. Executive, continuing, and professional extension education have been a robust source of growth across the University in recent years; all are potentially vulnerable as client organizations are pinched (a particular concern for Harvard Business School’s enormous programs, of course), and as individual learners have to look at their straitened household budgets. So whatever growth from that source of unrestricted funds might have been expected might have to be reevaluated. On April 13, for example, Harvard College dean Rakesh Khurana and Harvard Summer School dean Sandra Naddaff announced that the summer school, and all related programs, would be conducted remotely, rather than in residence. (The net fiscal effect of such changes—on enrollments and costs—remains to be determined, of course.)
Research sponsored by foundations, corporations, and other non-federal sources increased by a robust 21 percent in fiscal 2019 (to $65 million from $53 million the prior year). Much of that kind of funding depends on the underlying institutions’ financial strength and the value of their investments—and is therefore also sensitive to the adverse economy. Current-use giving, about $99 million in fiscal 2019, remains vital as a source of flexible funding—but it declined significantly from the prior year as The Harvard Campaign wrapped up. And, of course, donors’ ability to be supportive may have been compromised in the recent economic downturn, even as needs for emergency and humanitarian relief have escalated sharply. And other income was bolstered by an unusual, and probably nonrecurring, $15-million gain in royalty income during fiscal 2019.
Turning to expenses, a couple of items merit notice. During the Great Recession, FAS’s consolidated financial-aid costs(undergraduate, graduate, and continuing-education) indeed rose: from $192.1 million in fiscal 2009 to $203.8 million in fiscal 2010 and then to $212.6 million, $226.1 million, and $230.4. million in the ensuing three years—when a period of moderating growth set in for a few years in the middle of the decade. But:
- The College has deliberately admitted a more socioeconomically diverse class of late, with more first-generation students and those from lower-income households—thus committing itself to more financial aid. Among those admitted to the class of 2024, 19.4 percent are first-generation college students (up from 16.4 percent last spring), and 19 percent who quality for federal Pell grants (a common proxy for lower-income students)—up from 17 percent the year before.
- Gay only recently announced an enhancement to summer financial aid—eliminating the summer work requirement, so that all students can pursue public-service activities. The cost was estimated at $2 million.
- In addition to these structural changes in the student body and the aid program, the need for aid is, as Gay noted, economically sensitive to decreases in family income.
- Finally, despite the half-billion dollars or more raised to endow aid during the capital campaign, FAS remains well less than fully endowed for such funds. As an estimate, perhaps two-thirds or so of undergraduate aid is supported by endowment resources. Thus, even as the anticipated endowment distributions may be constrained, rising need for aid funds will put more pressure on FAS’s unrestricted funds: tuition income from degree programs and those extension students (potentially vulnerable), unrestricted current-use gifts (ditto), and so on.
The commitment to financial aid is rock-solid. Gay’s April 10 message was unambivalent: “We stand by our leading commitment to financial aid, and that commitment will not waver.” If aid requirements rise, and importance sources of revenue to fund aid come under pressure, other funds will, too.
Lost in the recent overwhelming news is the continuing negotiation between the Graduate Students’ Union and the University over a contract. Long after the pre-Christmas strike, work toward a settlement continues. The number of students involved is significant, as may be any incremental costs for FAS if stipends or benefits are augmented, or work rules liberalized. Complicating matters, it is unknown what effect current travel bans and the suspension of visa issuance will have on enrollment of international students, who make up a significant portion of the Graduate School of Arts and Sciences’ degree candidates.
Finally, the recent announcement that a substantial portion of the engineering and applied sciences (SEAS) faculty will have to delay its planned move to the new science complex in Allston may yield unknown costs and savings. Construction costs may rise when crews return to the site. SEAS may incur extra expenses in redoing the complicated logistics of relocating several dozen faculty members’ laboratories. On the other hand, it will be operating the large, expensive new quarters for half an academic year, rather than most of fiscal 2021—but it will also be ramping up to do so while continuing to occupy all of its Cambridge facilities for longer than planned.
Overall, FAS had already anticipated pressure on most of its significant sources of funds in fiscal 2020 and thereafter, and had budgeted for some increased expenses. Now, it faces potentially greater revenue constraints, and unknown, but likely not lower, operating expenses (depending on whether teaching remains remote in the coming fall term, or, as all hope, returns to campus). The damage to University and FAS finances is, to date, far less severe than the losses incurred in the 2008-2009 crisis. But as Dean Gay noted, the academic challenges the faculty faces are far wider and potentially more complex today.
The retirement incentives, limits on staffing, and consolidations (in the libraries and information technology, for example) that FAS effected in the wake of the Great Recession have already been implemented, suggesting that the margin for easy savings has narrowed. Its debt, driven by the costs of the continuing House Renewal program, rose to $1.3 billion at the end of fiscal 2019 from $875 million three years earlier—and has already been restructured with the University, to ease near-term servicing costs.
Accordingly, that “specific guidance and information on the steps we will need to take” forthcoming from University Hall looms large.
The University’s Borrowing
When he discussed Harvard’s finances in late March, vice president Thomas Hollister was at pains to contrast the University’s liquidity now with the bind it confronted a dozen years ago:
- slightly more than $1 billion of cash and short-term investments on hand as of June 30, 2019, subsequently augmented; and
- a short-term credit facility of up to $1.5 billion, and an undrawn balance of $2.0 billion in taxable commercial paper—neither drawn down.
Subsequently, in light of unprecedented market conditions, including record-low interest rates, the University has taken advantage of its AAA credit rating to issue:
- $573 million of tax-exempt revenue bonds; and
- $500 million of taxable bonds.
The net effect appears to be a level of indebtedness not substantially different from the $5.2 billion reported at the end of fiscal 2019, with the entire debt portfolio converted to fixed rates (about 11 percent was variable-rate). That outcome reflects the use of the tax-exempt financing to refund up to $250 million of variable-rate obligations and additional outstanding commercial paper. According to an S&P Global RatingsDirect analysis, the taxable issue will be used to finance up to $500 million in capital projects (of which there are plenty in progress, from the Allston science complex to continuing House Renewal, now focused on Adams House) or “to add to institutional liquidity.”
In March, Hollister seemed to indicate that in light of past refinancings and debt reduction, further such transactions were not a significant priority. The more recent news is consistent with Harvard’s long-term financial-management and capital-spending programs (which have run at an annual rate of $1 billion in recent years), and with the opportunities arising from its stellar credit and the financial markets (where interest rates have fallen in response to the Federal Reserve Board’s massive, continuing intervention to shore up the faltering economy).
Princeton differs significantly from Harvard—particularly because it does not operate large professional schools in business, law, medicine, and so on. As a result, it is somewhat similar to FAS, with a liberal-arts college with a large graduate school in related disciplines, and a considerably larger engineering focus among those disciplines. Its operating revenues are somewhat larger ($2.1 billion), and it is also significantly dependent on endowment distributions, which contributed 64 percent of operating revenues in fiscal 2019. (It plans to go public with a large capital campaign this fall.)
So it may be instructive in Cambridge to pay attention to the message the Tigers’ provost, Debbie Prentice, disseminated on April 8. In anticipation of “difficult reductions and tradeoffs,” she cited the institution’s overall strength as a factor that “does buy us time to evaluate the evolving situation and make major decisions in a more thoughtful, measured way.” In that context, she outlined “a few critical moves that we must make now,” including:
- suspending faculty and staff salary increases, including spring merit awards;
- managing staffing—i.e., effectively freezing hiring, in order “to protect the positions of those currently working at Princeton”;
- reducing temporary and contracted employment after the end of this semester; and
- cutting “all non-essential spending.”
It would not be surprising in the least to see similar action taken within FAS, or across Harvard—nor to learn that the appetite for new capital construction projects will be reined in. Indeed, the announcement this afternoon (see top of this report, and the full message, below) is consistent with these steps.
Elsewhere in Higher Education
However uncomfortable things might become within the elite, endowed research universities, the threat to other parts of higher education is much more pressing, and in some cases may become existential. High-cost, private institutions that do not have significant endowments are essentially dependent on tuition, room, and board fees—and many are at risk if their projected enrollments fail to materialize this fall. And the public institutions that educate most American college students have barely recovered from the draconian post-Great Recession state budget reductions that forced tuition levels upward and student loan indebtedness to balloon. Most such institutions don’t have the resources to invest in cutting-edge online learning, and they risk being undercut—in quality and price—by Southern New Hampshire University (which recently made an agreement with Pennsylvania’s community-college system), Western Governors University, and other powerhouses.
In a succinct summary, Kevin Carey, an astute observer of higher education who directs the education-policy program at New America, recently wrote in the Chronicle of Higher Education:
Tuition-dependent, non-elite private colleges with shrinking endowments and growing discount rates were already in trouble before the crisis. If they’re not included in some kind of huge government bailout, many will go under.
State universities will benefit from a combination of public trust and lower tuition that is attractive to debt-averse students. But those in red states that mostly serve undergraduates and aren’t in a position to go fully online are going to get squeezed by declines in tuition revenue and state support. Public universities hardly ever go bankrupt, but they can be permanently diminished.
The pandemic will probably benefit institutions with the right combination of financial cushion and ability to get bigger online. Smaller, mostly elite institutions that specialize in personal undergraduate instruction will benefit from the sudden contrast with ad hoc internet teaching. Everyone else is facing a dangerous road.
Harvard has it hands full, locally. But it also is a leading light for all of higher education, at a time when the entire sector’s finances are at risk and operating assumptions are under challenge. It will be a test for the University to be mindful of the wider stakes, as well as those in its immediate neighborhood.
The text of the message from President Bacow, Provost Garber, and Executive Vice President Lapp follows.
Dear Members of the Harvard Community,
Let us start with our thanks for your flexibility, your patience, and your goodwill.
The coronavirus has touched every aspect of our lives. Most of us are now working from home, separated from friends and colleagues. Parents are struggling to look after—and, in some cases, educate—their children as they fulfill their professional responsibilities. Some of us are caring for particularly vulnerable individuals or coping with separation from loved ones. Family gatherings, community celebrations, and religious services have either been canceled, postponed, or conducted online. Faculty and students have had to master the art of remote teaching and learning in record time, often under trying circumstances. Scholars have had to reorient their work given that many no longer have access to the resources necessary to do their research. Staff have had to respond quickly to myriad changes necessitated by moving students off campus, shifting to remote teaching, and planning for even more change in the future. The traditional rites of spring on campus have been delayed or canceled.
Through disorienting, even dizzying, change, we have been heartened by the way that you have responded with grit and determination, as well as a deep concern for others. Researchers and clinicians at Harvard are working day and night to discover new ways to diagnose and treat people with COVID-19 and to search for an eventual vaccine. Students, faculty, and staff are finding creative ways to stay connected and to help others less fortunate. And we are partnering with officials in Cambridge and Boston to support frontline health care workers and to help those in greatest need in our communities. Time and again, you have displayed resilience and deep commitment to one another. Even amid uncertainty, we are confident that Harvard is in a strong position to weather this crisis.
But to say that we will weather the crisis is not the same as saying we will be unaffected by it. We must recognize the economic impact the pandemic is having on the nation, the region, and the University. Since the financial crisis of 2008, Harvard has taken many steps to improve our ability to withstand financial shocks. We have strengthened our balance sheet, built reserves, and trimmed risk in our investment portfolios, and each School has developed plans to respond to a downturn in the economy. We are certainly better positioned to respond to current circumstances thanks to the hard work of our deans, their staffs, and our finance team.
Yet Harvard, like other universities around the world, will not be spared the economic consequences of the pandemic. 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 as the economic fallout from the pandemic hits family budgets. We have expended substantial unbudgeted resources to assist students moving off campus, and we have extended support to our workers who have seen their jobs displaced. We also have tried to be good neighbors in responding to requests for assistance from the Commonwealth as well as Cambridge and Boston. Although we entered this crisis in a position of relative financial strength, our resources are already stretched. If we are to preserve our core mission of teaching and scholarship, we face difficult, even painful, decisions in the days ahead.
While the extent and nature of the economic impact are not yet fully known, planning for a range of scenarios is under way. There is no doubt that we will need to do more than simply tighten our belts. We write now to share a framework for how the University will approach the financial decisions that lie ahead, and some initial steps we are taking.
First, we will continue to prioritize the health and safety of our students, faculty, and staff in every decision we make. Many of you are concerned about plans for the fall. We are analyzing multiple scenarios, but, in the end, we will be guided by public health considerations—just as we were in deciding on March 10 to send students home and then to implement plans for remote work.
Second, we will do everything we can to maintain the excellence of Harvard’s educational and research mission. As an institution, we exist to educate students and create new knowledge that makes a difference in the world. Nothing is more important than preserving this mission, and every decision we make must be in service to this mission.
Third, Harvard is its people—our students, faculty, and staff. In many cases, we have guaranteed that the University will provide the financial resources necessary so our students can attend Harvard regardless of their own financial circumstances. We must honor these commitments. 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.
While many decisions and choices will come into sharper focus in the future, it is already clear that we need to take some actions immediately to align our spending with the decline in our revenue.
- We are announcing an immediate salary freeze for all exempt employees and a hiring freeze, both of which are University-wide.
- Similarly, discretionary spending will be either canceled or deferred.
- The provost and the executive vice president, in consultation with the deans and the vice presidents, will ensure appropriate processes are in place for considering exceptions to the salary and hiring freezes, and limits on discretionary spending.
- We also will be reviewing all capital projects to determine which ones should be deferred.
Going forward, we must be creative in envisioning new ways to deliver on our mission. We must look for more cost-efficient ways to deliver our essential services. This may entail Schools or administrative units working together to avoid duplication of effort. We will need everyone’s best thinking on how we can thrive in an environment where resources are likely to be constrained for some time to come. We will be setting up a website to solicit your ideas, and we welcome your best thinking.
All of us at Harvard will, in some way, be affected by the economic impact of the pandemic, and we will each have to respond to new economic realities in the coming weeks and months. Accordingly, each of us has agreed to take a 25 percent reduction in our salary. Other senior leadership of the University—including all School deans, vice presidents, and vice provosts—are responding by either reducing their salaries or contributing to a new fund that we are establishing in partnership with the Harvard University Employees Credit Union. Details of the fund, which will provide financial support to employees facing economic hardship because of the coronavirus, will be announced in the coming weeks.
We suspect that many of you are concerned about further cost reductions that might be needed in the coming months, including layoffs or furloughs. We are still working to gain a more complete picture of the financial conditions of the University, and we will be scrutinizing the FY21 budget to determine what other steps are necessary to respond to the financial impact of the pandemic on our operations. We will communicate with you when more information is available.
Some of you may be wondering why we can’t just dip into the endowment to support us through these difficult times. We do intend to distribute as much from the endowment as we responsibly can, but there are limitations to the endowment’s capacity.
Because of the recent declines in the markets, the endowment, while still large, is not as large as it was previously. As it shrinks, it has less capacity to support our existing operations, especially as other shortfalls in revenue sources loom.
The endowment is highly restricted. The vast majority of it is dedicated to specific purposes by donors. We cannot legally take a restricted fund and simply repurpose it for another use to make up for shortfalls elsewhere in our budget.
The endowment has been accumulated over our long history. We hold it in trust for the benefit of the current generation as well as future generations of students, faculty, and staff. Harvard has endured other financial challenges in the past, and each generation has made sacrifices to ensure that future generations would have the resources to thrive academically and otherwise. We have a moral responsibility to those who will come after us, and we must act decisively and selflessly to preserve all that makes the University special.
We recognize the strain and the disruption that COVID-19 has caused for every member of our community. This institution has been tested in ways none of us could have anticipated, and challenges will continue to confront us in the days ahead. But we are confident that, together as a community, we will adapt to meet these new challenges as they arise. If we respond with creativity, we can emerge stronger as an institution whose mission has never been more vital.
Let us close as we began—with our thanks for your flexibility, your patience, and your goodwill. Together, we will find our way through this crisis.
Alan M. Garber
Executive Vice President