Just after placing $434 million of tax-exempt bonds to pay for capital projects, Harvard is returning to the market to borrow $750 million of taxable debt, fueling speculation about its uses for the funds. That speculation is understandable, in light of the Trump administration’s intent to slash federal funding for the indirect costs of research (which might cost Harvard $100 million annually); its March 31 announcement of a “review” of $256 million of current research contracts and $8.7 billion of long-term funding commitments to Harvard and affiliated hospitals (part of its nationwide campaign against universities’ “failure to protect students on campus from anti-Semitic discrimination—all while promoting divisive ideologies over free inquiry”); and the follow-up list of “lasting, structural reforms” encompassing University disciplinary procedures, admissions and hiring, governance, diversity policies, and more.
Is the new debt offering a sign that Harvard is preparing to square off against the federal demands, which would guarantee a financial squeeze, at least in the short term, while the government’s procedures and demands are litigated? That is in the realm of possibility, but the unfolding federal challenge to Harvard and many other higher education institutions certainly promises many twists and turns yet to come. It seems useful, therefore, to put this new Harvard borrowing into context, come what may.
Updated: The federal government’s demands, sweepingly expanded April 11, were rejected outright by President Alan M. Garber and the University’s legal counsel on April 14; see “Harvard Resists Government Demands.”
•The offering. The preliminary offering memorandum, dated April 6, makes the usual bland disclosure: that proceeds will be used “for general corporate purposes.” A separate University statement merely adds, “As part of ongoing contingency planning for a range of financial circumstances, Harvard is evaluating resources needed to advance its academic and research priorities.”
The offering memorandum also contains “additional considerations,” which carry greater significance in the current context: “Harvard’s standing in the higher education sector and its revenues, expenses and net assets may be impacted by…actions at the federal level that may have the direct or indirect effect of reducing federal support for the University’s research costs including facilities and administrative overhead, reducing the University’s fundraising or other revenue sources, increasing taxes or other costs borne by the University, or otherwise adversely effecting [its tax-exempt status].” The government’s attempt to change indirect-cost reimbursement and its March 31 and April 3 letters to Harvard prompt the further disclosure that, although the outcome cannot be quantified now, such measures “may, directly or indirectly, have a material adverse effect on the current and future financial profile and operating performance of the University.”
• Current constraints. As the courts weigh the proposed reduction in reimbursement for indirect research costs, and Harvard determines how to respond to the federal demands directed at this institution, the University’s financial picture has already darkened, for several reasons.
As has been widely reported, many research grants are being suspended across academia as the Trump administration objects to an array of projects it associates with diversity, equity, and inclusion policies and programs, COVID-19 research, or health disparities—all of which it seeks to end. The Crimson has toted up at least $110 million in National Institutes of Health (NIH) research contracts to Harvard and affiliates halted since February; projects already well underway and staffed are affected. Moreover, the NIH—by far the largest source of federal research support for Harvard and the affiliated hospitals—has dramatically slowed the routine process of identifying and funding future research projects. Science reports that the National Science Foundation (NSF), another major source of funds, is also slowing the pace of new commitments and, according to the Chronicle of Higher Education, is reportedly in line for as much as a two-thirds reduction in its annual grant funding, from $9 billion to $3 billion. Similar reductions in research funding from the National Oceanographic and Atmospheric Administration (NOAA) and the National Aeronautics and Space Administration (NASA) are also reportedly under consideration. And following the NIH, the U.S. Department of Energy has announced its intent to reduce funding for the indirect costs of research, too. The effects—squeezing current projects, dramatically reducing future ones—pose problems for funding research teams and the expensive infrastructure they use. That portends both immediate needs for substitute funding and a longer-term, wholesale rethinking of the government-academy research paradigm that has been in place since World War II.
It is presumably in response to such delays in funding and the prospective termination of current projects and those anticipated in the near future that the University announced austerity measures, including a hiring freeze and constraints on graduate admissions, in early March. That announcement came three weeks before the Trump administration targeted Harvard as part of its antisemitism task force’s review or termination of multiple institutions’ research awards.
The Boston Globe suggests the impact of the federal administration’s prospective sanctions directed against Harvard in this report about a leading research program on tuberculosis.
• Sources of funding in times of need. There are precedents in recent Harvard history for borrowings such as the pending $750-million new issue. During the financial crisis in 2008, when University finances came under extraordinary strain (with endowment and other losses of about $14 billion), Harvard borrowed $2.5 billion, most of that to shore up its liquidity and balance sheet. In 2020, when the pandemic temporarily ended residential teaching and choked off executive and continuing education operations, threatening major losses, the University quickly placed $500 million of taxable bonds to “fund institutional liquidity.”
The two circumstances differed, but in each case, the immediate solution was borrowing. Today, when among other needs it may wish to support threatened research efforts—including sometimes large, highly specialized laboratory teams—the University may want to have extra funding on hand. Although the financial markets have been extraordinarily volatile this month, following President Trump’s unexpectedly steep and broad tariff proposals, at times interest rates have been relatively favorable for borrowers, and Harvard may be hoping to take advantage of such opportunities. Nor is it alone in doing so (Princeton is seeking to borrow more than $300 million, for example).
For institutions with large endowments significantly invested in illiquid securities (private equities, for example)—Harvard, Princeton, Yale, and peers very much among them—taxable debt sold today would cost less than forgoing typical returns on endowment holdings. That is even more the case if illiquid holdings could be sold only at a loss. So, the first solution is tapping the debt markets.
• Assessing future risks. Beyond the immediate challenges, and the possible dissolution of the public-private research partnership, Harvard and endowed peers face a truly major threat to their funding model: a sharply higher excise tax on endowment earnings.
As reported, the current levy, enacted in 2017, assesses a 1.4 percent tax rate on such net investment earnings. Among the proposals being bruited about are tax rates of 10 to 35 percent. Phillip Levine, professor of economics at Wellesley College, has prepared a daunting analysis assessing the effects of reduced NIH funding, reduced NSF funding, and an endowment tax rate of 14 percent (as proposed by the U.S. House of Representatives Ways and Means Committee). His findings, summarized in “These 77 Colleges Have the Most to Lose from Trump’s Cuts,” appeared April 10 in the Chronicle of Higher Education.
The “triple whammy” institutions he identified have a medical school and/or hospital affiliates (NIH funding); an engineering school (NSF funding); and large endowments. Leading the parade in potential, absolute losses: Harvard, with estimated exposure of $667 million, more than 10 percent of fiscal year 2024 revenues. Although other institutions have higher per-student exposure, or the risk of losing a larger percentage of their overall budgets, the projected effects at Harvard and at its major research-intensive peers are large across the board.
It is easy to imagine the impact on sponsored research, but the effects could extend much further, as institutions like this one scramble to redirect available resources to urgent priorities. During the past five fiscal years, for example, the Faculty of Arts and Sciences has typically invested around $30 million annually of its own funds to equip facilities for laboratories and facilities for curiosity-based research and teaching—apart from utilitarian, federally sponsored programs. And about half of its large undergraduate financial aid budget comes from unrestricted funds—the money available to invest in new fields of discovery, faculty growth, and other core needs of an academic institution.
In this context, there are plenty of “general corporate purposes” for which Harvard might seek additional liquid funds on hand. If the economy falls into a recession and inflation reignites, its ability to raise funds and control costs may be further impaired. So, it must prepare not only for a rainy day but potentially for lots of them, over an extended period. It’s wise to get the cash in the till to prepare, as “Fair Harvard” has it, for the severe changes and storms ahead.
