The University’s severely challenging academic year—marked by a community divided over the Middle East war, an abrupt change of presidents, a pro-Palestinian encampment that spawned protests at Commencement—ended formally June 30. That also concluded fiscal year 2024. Although annual financial results and endowment returns will not be reported until early autumn (typically, toward the end of October), now is a good time to consider the immediate effects the campus convulsions may have had on the financial results and the resource implications for the future—fundamental to Harvard’s academic mission.
As noted in the fiscal 2023 results reported last October 19, Harvard had then achieved a full decade of operating surpluses: gratifying as evidence of sound financial management and strength—bolstered by the $9.6-billion capital campaign and largely favorable economic and market conditions—and a source of reserves for future needs and academic investments. Black was clearly the new Crimson. But the fiscal 2023 results also contained a few warning signs, as the growth in operating revenues diminished while the increase in expenses accelerated.
Elevating Expenses?
Personnel costs—salaries and wages, and employee benefits—account for about half of Harvard’s $6 billion in operating expenses each year. During fiscal 2023, salaries and wages rose nearly 10 percent, and benefits costs about 8 percent. The University attributed the growth roughly equally to merit pay increases and negotiated contracts for unionized employees, and growth in the size of the workforce (reflecting catch-up hiring post-pandemic, plus new positions to support sponsored-research awards, information technology, and rising enrollments in continuing and professional education).
At a minimum, those new employees are likely to have driven up salary and wage expenses in fiscal 2024. And evidence is emerging around the country that healthcare spending, the largest component of employee benefits expenses, has accelerated as use of medical services has risen and hospitals have had to pay their own large staffs more. In that sense, employee benefits expenses may be lagging general inflation, which has clearly moderated. It would not be surprising if Harvard reports continued significant growth in personnel costs during fiscal 2024, given its own inflation-driven and competitive compensation adjustments during the year. And if hiring continued at a torrid pace, these expenses may come in at a surprisingly high, and perhaps unsustainable, rate. That merits watching.
With pandemic expenses (social-distancing, office and building modifications, testing, personal protective equipment) now in the past, financial administrators may have expected relief from one-time costs—but no such luck. Congressional hearings and requests for information, federal investigations of antisemitism or other kinds of discrimination, lobbying, defending against lawsuits, security personnel hired to cope with campus protests, and no doubt midnight oil for the administrators charged with worrying about all of these during the academic year certainly amounted to many millions of dollars of unbudgeted expenses. No separate disclosure of those costs is likely (they probably weren’t material to a $6-billion-plus enterprise); but general operating expenses were certainly elevated as a result.
Philanthropy and the Endowment
Among the most closely analyzed figures in the fiscal 2024 financial report will be the level of current use giving. That philanthropic support has become an enormous source of revenue: about a half-billion dollars in fiscal 2023—8 percent of operating funds for the year. Current use gifts are a real-time picture of alumni sentiment, and unrestricted gifts are a good proxy for confidence in the University and its leaders (as well as being the most valuable source of funds for deans’ investment in academic priorities). This year, expect interpretation of the reported results to be polarized, like nearly everything else on campus: critics of Harvard’s leadership and its response to the Hamas attack of October 7 and ensuing upheavals will be looking for evidence that support decreased; those who remain unshaken in their view of the institution’s longer-term value and importance, or who are favorably inclined by the actions taken since January 2 by President Alan M. Garber, will presumably hope to see a continued flow of philanthropic dollars.
Whatever data are reported will require some interpretation. Each year’s tally of current use gifts recorded reflects both sums given within the 12 months and the fulfillment during the year of prior pledges to make such gifts in the future. In the “pledges receivable” footnote to the fiscal 2023 annual report, the gifts for current use line showed $953 million banked—up smartly from the $666 million of pledges pending as of June 30, 2022. So careful readers will want to compare the flow of current use gifts received (i.e., paid) in fiscal 2024 to the $486 million in fiscal 2023 and the balance of such pledges outstanding at the end of each year to get a sense of philanthropic support realized in the past period and in prospect. Those figures taken together will provide the clearest guide to the year that was.
One would expect new large gifts for endowment to be relatively minimal: it takes a long time to cultivate the relationships that produce such gifts; Claudine Gay’s presidency had barely begun before it ended; and the transition to the Garber administration came during a period when, no matter what relationships he had cultivated as provost for a dozen years, planning for long-term, major capital commitments was hardly the highest priority. (Moreover, he was serving in an interim capacity until he was appointed president August 2, a further complicating factor.) Among the few endowment gifts announced during the year were $20 million to support arts and humanities in the Faculty of Arts and Sciences, and $15 million to support environmental programs at the Law School (see News in Brief, September-October, page 20): welcome and valuable support, but not the kind of transformative nine-figure gifts that stand out in the financial statements.
That naturally directs attention to the endowment itself. Distributions from the endowment remain the University’s largest source of operating revenue ($2.2 billion in fiscal 2023, some 37 percent of the total), and no doubt increased by some single-digit percentage in the most recent year. So, the rate of investment return on endowment assets remains perhaps the single most crucial figure in determining Harvard’s capacity to maintain and enhance the academic mission. The modest 2.9 percent net rate of return in fiscal 2023, rebounding from losses the prior year, was helpful—although clearly well below long-term expectations (about 8 percent) and expense growth.
With the usual caveat that other institutions’ portfolios differ significantly from the University’s, given their spending needs and investment strategies, a couple of early reports suggest that Harvard’s fiscal 2024 endowment investment returns will exceed those of last year. The enormous California Public Employees’ Retirement System issued a preliminary fiscal 2024 report in mid-July, recording a 9.3 percent rate of return—notably including private equity returns of 10.9 percent through March 31 (such assets are reported with a lag). Because private equity is the largest category of Harvard Management Company’s endowment assets (39 percent at the end of fiscal 2023), that is an important indicator. Public equities appreciated even more for CalPERS (up 17.5 percent). HMC has a much lower exposure to public stocks, but the good equities market during the fiscal year may contribute to favorable hedge fund performance, too (31 percent of HMC assets at the end of fiscal 2023). Similarly, the main Massachusetts public pension fund reported a net 10.9 percent return for the trailing 12 months ended March 31.
Together, these diversified pools of pension investments—different though they may be in purpose and allocation from HMC’s managed assets—suggest that Harvard’s endowment investments may have produced a high-single-digit rate of return in fiscal 2024. If so, that would be encouraging relative to the long-term goal of supporting growth in University operations while maintaining the real, after-inflation value of the endowment.
Other Items
Given the robust U.S. economy, Harvard probably enjoyed another year of strong revenues from executive and continuing education programs at the Extension School, the Business and Medical Schools, and diverse other faculties. In fiscal 2023, they rose 12 percent, to $544 million—exceeding the pre-pandemic record. With tuition and fees (net of financial aid) for degree programs resuming a more normal trajectory as students’ pandemic-related deferred admissions and leaves of absence diminish, nondegree enrollments likely resumed their role in driving student income overall.
As anyone who visited campus in recent months knows, the pace of capital spending—investment in buildings and equipment—has ramped up enormously (see “Crimson Construction,” September-October, page 14), and almost certainly exceeded the half-billion-dollar outlay of fiscal 2023. The activity spans everything from Adams House renewal and modernization of Wadsworth House to the University conference center at the enormous, private enterprise research campus in Allston and the nearby American Repertory Theater and affiliate-housing tower, just south of Harvard Stadium. That activity will continue, with more to come, as Eliot House renewal, the biggest such updating so far, is scheduled to begin perhaps as soon as next summer.
Supporting all that construction, underway and in the pipeline, was a two-part bond offering made during the spring(partly new funds, partly to refinance existing debt more economically). The University sold $750 million of taxable bonds and $855 million of tax-exempt bonds (total proceeds of the latter offering, which had a $735 million par value). So the June 30, 2024, balance sheet will have a new look when the financial report is published.
In Context
The eruptions and disruptions of the 2023-2024 academic year undoubtedly affected operating expenses, current use giving, and the timing of endowment gifts. When issued, the fiscal 2024 financial report will provide at least some evidence about the immediate magnitude of those effects and, of greater consequence, their implications over the longer term. Harvard is, as noted, a multibillion-dollar enterprise, in annual revenues and expenses, historically backed by its significant endowment (past giving and accumulated investment returns), current philanthropy, student income, and support for sponsored research.
After a prolonged period of exceptionally strong economic and financial market conditions, it would perhaps be optimistic to expect their continuation in the near term, but the endowment investments are structured to weather market cycles. The level of endowment giving will depend in important ways on long-term philanthropists’ confidence in University management. President Garber’s appointment to a three-year term of service is a stabilizing factor, and he has already put significant effort into speaking with major supporters. But the limit on his service probably precludes much planning for a next capital campaign, which would have to be conducted by a successor administration. The transition in University development leadership at the end of this year also means further change in cultivating donor relationships. In any event, Harvard has plenty of issues to address now and in coming months before it can turn to capital gift planning.
A wild card is the political environment, even beyond criticisms of Harvard and other elite universities over campus reactions to the Middle East war. The Republican presidential and vice-presidential nominees have both harshly criticized higher education and have suggested enormous tax increases on private institutions’ endowments. Were such policies to be enacted, the University would have to look beyond recent instabilities to an entirely new, incredibly challenging economic model to sustain its core commitments to teaching, financial aid, and research.
