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Harvard Projects $750-Million Revenue Shortfall in Next Academic Year

5.5.20


Harvard forecasts a net shortfall of $415 million in anticipated revenue for the fiscal year ending this June 30, reflecting the effects of the coronavirus pandemic, and a further $750-million shortfall compared to budgeted expectations for the year beginning July 1. Katie Lapp, executive vice president, disclosed the projections to the community in an email to faculty and staff members released this morning. For perspective, the University’s operating revenues were $5.5 billion in the fiscal year ended June 30, 2019, and have been growing at about 5 pecent in recent years—propelled by distributions from the endowment and torrid growth in executive and continuing education (see below).

She also announced that the decision to guarantee pay and benefits to directly employed staff and contract workers—including those who provide dining, custodial, and security services that were disrupted by the closing of campus—has been extended from May 28 to June 28.

Today’s message updates guidance provided in an April 13 note from President Lawrence S. Bacow, Provost Alan Garber, and Lapp. It precedes the scheduled Faculty of Arts and Sciences faculty meeting this afternoon (being conducted remotely, by Zoom), at which Bacow and FAS dean Claudine Gay might be expected to offer further perspective on the challenges facing Harvard.

In totaling the fiscal effects this year, Lapp cited the costs of “refunding room and board for the last half of the semester and providing moving, travel, and other financial assistance to students who were required to depart campus. It also includes the necessary step of cancelling in-person Continuing and Executive Education courses and programs, and the loss of funding from federal and non-federal sources due to the closure of labs.”

Looking ahead to next year, some of those effects—like the halt in in-person continuing and executive education (see details about the effect on Harvard Business School here)—may well compound, and it appears likely that the distribution from the endowment (the University’s largest source of operating revenue) will be reduced as well. In materials prepared for the FAS meeting, Extension School interim dean Henry Leitner noted that about 70 percent of its 2019-2020 offerings were online (although some had campus components), and forecast that “It is likely that we will offer only online…courses in the fall, with the hope that we will be able to offer some campus courses in January and spring.” Vice president and chief financial officer Thomas Hollister suggested in late March that the endowment distribution for fiscal 2021 was under review. A message from Provost Garber released yesterday addresses the processes Harvard will follow to begin reopening laboratories, libraries, and other facilities critical to resuming research.

Not surprisingly, Lapp telegraphed measures to reduce spending—including the possibility of furloughs and layoffs:

These significant losses will require difficult cost saving measures to ensure that the University can continue to advance its core mission of teaching and research. Last month, we announced several initial steps that are already being implemented. These include salary freezes for all faculty and exempt staff, a University-wide hiring freeze, deferring or cancelling all discretionary spending, a review of all capital projects to determine which ones can be deferred, and voluntary salary reductions for senior leadership. As we stated last month, given the magnitude of the financial losses the University has sustained and the projected loss of revenues, it is clear that additional cost saving measures will be needed in the coming months including the possibility of furloughs and layoffs of some members of our workforce.

Yale recently announced a 5 percent reduction in its budgets for 2020-2021, and forecast, in its president’s words, “A few years from now, we could have $300-400 million per year less to spend than we had anticipated,” given the reduced value of its endowment. And Princeton, which derives 60 percent of its operating revenues from its endowment (Harvard averages 35 percent), yesterday disclosed that the current elevated rate of distributions (reflecting the reduced endowment value) “is not sustainable.” Though the schools’ situations differ, all face painful economic constraints.

 The full text of Lapp’s message follows.

Dear Members of the Harvard Community,

As we continue to manage the impacts of this public health crisis, I write once again to thank you for your commitment and work over these last several weeks. Your collective action, guided by the goal to ensure the safety and wellbeing of each member of our community, is both unprecedented and remarkable. Your demonstrated adaptability to our changing environment, coupled with a steadfast focus on ensuring our students are able to complete their academic work, is nothing short of inspiring.

This crisis has disrupted every aspect of the University’s operations, as well as the lives and work of every member of our community. And, we are uncertain as to what the next several weeks and months will bring. As Provost Garber wrote last week, the University will be open for the upcoming Fall semester; however, due to the COVID-19 situation, we cannot be certain that it will be safe to resume normal activities on campus at that time.

Given this unpredictability, we previously announced a financial commitment that we would guarantee pay and benefits through May 28th to our directly employed staff and contract workers, including those who provide dining, custodial, and security services, who are able to work, but experienced the disruption of idle work since the decision to reduce the population living on campus. Today, I want to share that we have decided to extend that guarantee of pay and benefits to those workers covered under this May 28th policy for an additional month, until June 28th.

As we look forward to the late summer and fall, I am compelled to underscore that the University is facing significant financial challenges which will require difficult decisions in the coming months. In our April 13th letter to the community, President Bacow, Provost Garber, and I stated that our institution has not been spared the economic consequences of this pandemic. We now estimate the University’s revenue for this fiscal year to be $415 million less due to the COVID-19 crisis. This figure includes, among other things, refunding room and board for the last half of the semester and providing moving, travel, and other financial assistance to students who were required to depart campus. It also includes the necessary step of cancelling in-person Continuing and Executive Education courses and programs, and the loss of funding from federal and non-federal sources due to the closure of labs. Additionally, for fiscal year 2021, which begins July 1, we are now projecting a revenue shortfall of $750 million compared to the original budget plans for the year.

These significant losses will require difficult cost saving measures to ensure that the University can continue to advance its core mission of teaching and research. Last month, we announced several initial steps that are already being implemented. These include salary freezes for all faculty and exempt staff, a University-wide hiring freeze, deferring or cancelling all discretionary spending, a review of all capital projects to determine which ones can be deferred, and voluntary salary reductions for senior leadership. As we stated last month, given the magnitude of the financial losses the University has sustained and the projected loss of revenues, it is clear that additional cost saving measures will be needed in the coming months including the possibility of furloughs and layoffs of some members of our workforce.

Decisions regarding furloughs, layoffs, and other cost saving measures are not ones we would make lightly, and we recognize will only add to the uncertainty and difficulty this public health crisis is causing for every member of our community. While no decision has been made at this time, we will make every effort to limit the extent of any workforce actions. However, faced with the significant disruptions to normal activities, we have a responsibility to act to preserve our core mission of teaching and scholarship. We are trying to understand the extent to which some of our revenue loss is temporary versus permanent. While we have some capacity to absorb temporary losses, we must take the necessary steps in some areas to adjust to what is likely to be a new normal. We will continue to communicate with you as our future comes into sharper focus.

We recognize that Harvard is its people. We are grateful for the countless ways each of you contributes to the important work of this institution. In all we do, we will be guided by our goal to protect the wellbeing and security of our workforce as we manage through these unprecedented times.

Sincerely,

Katie Lapp
Executive Vice President, Harvard University

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