The Faculty of Arts and Sciences (FAS) needs to cut its annual operating costs by $100 million to $130 million. That daunting challenge remains after FAS imposes severe measures to rein in growth in current costs, including:
- freezing compensation for faculty and nonunionized staff;
- canceling more than two-thirds of the currently authorized searches for new professorial appointments (a reduction from 50 to 15 searches);
- maintaining the current stringent restrictions on hiring new staff (all of which appointments require senior-level scrutiny); and
- discouraging any hiring of visiting faculty, non-ladder faculty appointments (those not eligible for tenure consideration), or "purchases" of faculty from other Harvard schools, to cover instructional or curriculum requirements within FAS
Dean Michael D. Smith outlined these measures, and the circumstances underlying them, in a jam-packed faculty meeting on December 9 and in a letter he and his academic deans sent to department chairs a day earlier, to prepare for the meeting. (On December 15, Smith summarized his presentation in a letter released to all faculty members and FAS staff--reinforcing his view of the situation and sharing it with those colleagues not in attendance on December 9.)
FAS's financial circumstances reflect the severe pressure resulting from the sharp decline in the value of Harvard's endowment, distributions from which currently provide 56 percent of the faculty's revenues (see these earlier reports on the declining endowment value, on FAS's interim responses to its adverse financial position, and on the November 18 faculty meeting at which Smith first discussed the issues in detail).
The financial gap. Smith said that FAS's current (fiscal year 2009) income is $1.115 billion, derived from:
- endowment distributions ($650 million);
- sponsored-research grants and contracts, current-use gifts, and other revenues ($310 million); and
- tuition and fees (which are reported net of financial aid, $195 million).
Its expenses, however, are $20 million greater, reflecting a deficit of $25 million in unrestricted funding and a surplus of $5 million in restricted accounts. (That deficit principally reflects the costs of increasing the faculty ranks by more than 20 percent since the start of the decade, building several hundred thousand square feet of new laboratory space and other facilities, and undertaking extensive renovations--all in advance of fundraising. It is covered by drawing down unrestricted fund balances and unrestricted endowment funds; FAS has been the beneficiary of two distributions of endowment capital funds, "decapitalizations," in fiscal 2007 and 2008, each totaling nearly $100 million, to help pay for building costs, augmented financial aid, and other spending.)
In fiscal 2010, starting July 1--even factoring in the wage freeze, severe hiring restrictions, and the sharp reduction in searches for new faculty appointments--Smith forecast several continuing expense pressures:
- $20 million in additional financial-aid costs, from greater need and Harvard's recently augmented middle-income-family aid programs (accounted for as a commensurate reduction in revenue);
- $10 million in new personnel costs (reflecting the "pipeline" of earlier faculty appointees expected to arrive on campus during the coming academic year, net of expected retirements among current faculty members);
- $15 million in added operation and maintenance costs for buildings (as the new facilities, principally expensive-to-operate laboratories, come on line and are occupied; this item totals $170 million in the current fiscal year, continuing the sharp increases from the recent past);
- $20 million in additional debt service (up from $90 million in the current year, and just $30 million in fiscal 2005, again reflecting the costs of the aggressive construction program--and the sum would be even greater had not the decapitalizations been authorized in fiscal 2007 and 2008);
- and $10 million or so for growth in general expenses (a $375-million category for supplies, travel, grant-related expenses, capital projects, etc., in the current year; growth has averaged up to 4 percent annually, but Smith's estimate for fiscal 2010 brings that growth rate down).
Those five factors represent $75 million of growth in fixed or untouchable expenses in fiscal 2010; combined with the existing deficit, the problem totals $100 million.
FAS had expected to cover those expenses (and probably have room to accommodate some modest pay increases and growth in the faculty ranks) with a $100-million increase in its endowment-income distribution in fiscal 2010. Now, in light of the endowment losses, Smith assumes that the distribution will be held flat at the current $650 million, creating a need to cut FAS expenses by $100 million even after all the steps being taken to restrain growth in all other costs.
Optimistic assumptions? Smith’s estimate for the budget gap, he acknowledged, is built on several assumptions, any of which could deteriorate.
First, in light of a projected 30 percent decline in the endowment's value, and further reductions associated with this year's distributions, the Corporation may not authorize a level distribution in fiscal 2010. If the FAS endowment declines from about $16 billion (at the beginning of this fiscal year) to about $11 billion, as the planning scenario envisions, a $650-million distribution is a 5.9 percent rate--sharply higher than the University's historic 5 percent rule of thumb. (The University-wide distribution for operations in fiscal year 2008 totaled just 3.5 percent; augmented by assessments and decapitalizations, it came to 4.8 percent; see here for detail.) Given an expected half-percent capital assessment, that would make the effective distribution rate 6.4 percent. If, instead, the Corporation were to cut FAS's operating distribution by 5 percent from the current level, the budget gap for fiscal 2010 would worsen by $30 million or so, to $130 million.
Second, Smith's revenue estimate for fiscal 2010 is based on the assumption that the $310 million of income from sponsored-research funding and, crucially, gifts for current use, will remain level with the current year.
Closing the gap. As Smith went on to point out, closing the gap is not simply a matter of finding $100 million to $130 million in savings from a projected $1.22 billion of expenses anticipated in fiscal 2010. Of that sum, the debt service ($110 million) and sponsored research ($120 million) are certainly fixed, so the expense base subject to reduction is $990 million--implying a need to reduce costs by 10 percent to 13 percent. Accordingly, he has directed the faculty, for planning purposes, to examine scenarios in which 10 to 15 percent of expenses are removed.
Smith was quick to concede that that level of cost reduction could not be fully accomplished in the fiscal year beginning just more than six months hence. Therefore, the challenge he posed to the faculty was to figure out how to achieve the savings over a couple of years at least--a scenario involving further challenges.
First, it assumes that by fiscal 2011, financial-aid costs will not need to grow further, so revenues will not be reduced further from that source.
Second, it must assume that sponsored-research funding and gift revenues hold up.
Third, it implies an extended period of hiring and compensation restraint.
And fourth, it implies that to the extent FAS falls short of its ultimate expense-reduction goals next year, it will be draining its reserve funds. As of July 1, 2008, Smith said, unrestricted reserves totaled $138 million. Of that sum, $122 million was held in the endowment, and so may be assumed to have depreciated by the 30 percent planning target for endowment losses, or some $35 million. That suggests that FAS has about $100 million of unrestricted reserves--equal to, or less than, the assumed budget gap for next year. Because it hopes to fund its most urgent academic priorities (perhaps in fields such as bioengineering or other emerging fields) at least to some degree, it has to preserve those reserves to the maximum amount feasible, even as it whittles down its deficit in coming years. Any growth would have to come from revenue growth, from a stronger endowment and stronger economy, resumed capital giving, and so on.
Smith outlined some of the suggestions he had received to trim spending: reining in Commencement costs, doing away with printed course catalogs, curtailing food services, investing in energy-saving equipment, limiting travel and visiting scholars, eliminating consultants. No one item amounted to more than $5 million in annual savings, he noted. All of them will be necessary, and a lot more as well, to achieve the magnitude of saving required.
Other measures. During the ensuing question-and-answer period, Smith reiterated that the current budget planning is not meant to be a 10 to 15 percent across-the-board cut--instead, guided by faculty priorities, some areas will be reduced less, and others more. He said that neither staff hiring nor faculty searches were absolutely frozen, but that the bar to both had been set very high. President Drew Faust told the faculty that the half-percent capital assessment of endowments annually to defray Allston development costs (the so-called "strategic infrastructure fund," totaling $168 million in fiscal 2008) would not be discontinued or scaled back, even as Allston's costs and pace are reconsidered, but that the funds may be applied to other uses.
In conversation after the meeting, Smith elaborated on a few significant points.
First, FAS is looking at incentives, buyouts, or other measures that would make it more attractive for current faculty (and perhaps others) to retire.
Second, the Graduate School of Arts and Sciences is examining whether to admit smaller cohorts of students; doing so would make it possible to slightly increase stipends for those now enrolled, consistent with his aim of taking care of people already at Harvard, to the extent possible, within the severe financial constraints.
Third, FAS is mulling a proposal to establish a sort of post-doctoral position for graduate students about to receive their Ph.D.s, who face a dismal job market; if feasible, that might help support them, while also covering FAS teaching, research, and other needs at lower cost than recruiting and relocating such help from elsewhere (see comment above on visiting lecturers and other non-ladder faculty appointments).
Given the magnitude and likely duration of FAS's budget pressures (absent a sustained, strong recovery in endowment values), and the limited effect of the cost-cutting suggestions advanced so far, the faculty faces searching examination of all aspects of its academic programs in shaping the budget due this spring--and potentially in the years to come.
