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In his annual dean’s report, released to colleagues for the year’s second Faculty of Arts and Sciences (FAS) meeting on October 27, Michael D. Smith necessarily found himself covering “a time that straddles two radically different worlds—the one before the beginning of the global financial crisis, and the one that came after it.” The period under review, from early 2008 through the fiscal year ending on June 30, 2009, brought about a “seismic change” in FAS’s finances, Smith wrote, but not its goals: renewing the undergraduate experience; supporting “existing and emerging intellectual communities”; and strengthening teaching and learning. Aspirations to “reshape our physical environment” to support academic aims, he acknowledged, will obviously be slowed given financial realities—the dimensions of which he spelled out in a briefing on September 15 (see “FAS’s Progress—and Prognosis,” November-December 2009, page 58). Smith used the report to initiate much more detailed, and revealing, disclosure of the faculty’s finances, discussed below; as is customary, he first reviewed FAS’s accomplishments and goals, including these highlights (read the full text here):

• Administration and Academics. Smith highlighted thorough changes in FAS’s management—aimed at enhancing information and better tying academic plans to budgets—and emphasized the importance of those changes in helping the faculty respond to the sharp losses in the endowment (see “$11 Billion Less,” November-December 2009, page 50) and the resulting reduction in FAS’s operating funds. He also pointed to the launch of the undergraduate General Education curriculum, and noted other points of interest.

In the College, students concentrating in the social sciences in academic year 2008-2009 numbered 2,596; the sciences attracted 1,072 concentrators and engineering and applied sciences 354, both increasing (for a sciences total of 1,426); and—continuing a general downward trend —the humanities and arts drew 882.

Physical and financial planning for renewal of the undergraduate Houses—expected to be a billion-dollar-plus project extending more than a decade, and perhaps beginning in 2012—has now been centralized under the direction of the University’s Allston Development Group and vice president for finance.

Graduate School of Arts and Sciences (GSAS) new enrollments declined, as planned: 665 master’s and doctoral candidates were expected to enter this fall, 15 percent fewer than in the prior year. Stipends were increased modestly, maintaining prior years’ gains in support for graduate students.

The School of Engineering and Applied Sciences, which has had rapid growth in faculty, as planned, is now constrained by limited physical facilities—a problem worsened by slowed plans for lab development in Allston and the resulting need to locate part of a new bioengineering program in Cambridge instead. (For more on SEAS, see “Critical Mass, and World-Class,” November-December 2009, page 62.)

In both the arts and humanities and the social sciences, Smith highlighted efforts to make pedagogy more active, with art-making present in 25 courses, and “activity-based learning” tying classwork to extracurricular work in anthropology, government, history of science, and sociology.

The Harvard College Library was described starkly as suffering from the “increase in publishing output” and the pressures on purchasing materials given the “diminished strength of the dollar”—even before recent belt-tightening. Now, the major goal for the system “will be to rebuild HCL with a dramatically smaller base of resources, and it will likely emerge a vastly different organization than it has been.” Doing so will require “bold, innovative, and creative initiatives, rather than modest, incremental changes.”

• Finances. One visible fruit of Smith’s efforts to improve management is an expanded discussion of FAS’s income and expenses, and those of its “core” operations (the faculty, the College, and GSAS), which account for 72 percent of revenues and 74 percent of expenses. The dean outlined broad financial trends at his September 15 briefing, but the details in the annual report reward a close reading.

As a result of cost cuts (savings on utilities, less spending to install new faculty members in offices as hiring slowed) and revenue gains (stronger than anticipated unrestricted gift income and overhead-cost recoveries from sponsored research), a forecast $30-million deficit in the core operations’ unrestricted budget for fiscal year 2009 became a $6-million surplus.

Atop these gains, nonrecurring items enabled the faculty to boost its reserves by $58.6 million, a valuable cushion for the coming leaner years. First, FAS received two unrestricted gifts totaling $32 million. Second, Smith disclosed that as part of a fiscal year 2008 “strategic” payout of endowment capital, FAS was able to spend $20 million in fiscal year 2009 to defray the increased costs of the middle-income undergraduate financial-aid initiative unveiled in December 2007 (see “Boosting College Financial Aid”). This year and in the future, it will have to cover those extra costs from its regular, unrestricted operating budget. Undergraduate financial-aid costs increased from $106.8 million in fiscal year 2008 to $137.2 million last year; they are expected to rise some $10 million more this year, presumably expanding the draw on unrestricted funds still further.

A footnote partially discloses other uses of that special, $95.3-million “decapitalization” from fiscal year 2008—most of which apparently was applied to the 2008 and 2009 budgets: part funded capital projects (the principal use of a similar, $100-million decapitalization in fiscal year 2007, according to Smith’s May 2008 annual report) and one-time expenses. But part was applied “to fund the FAS core unrestricted deficit” (neither the amounts nor the fiscal year, or years, affected is specified). In effect, endowment capital helped to cushion both the sharp increase in financial-aid spending, now a continuing operating cost, and FAS’s unrestricted operating deficit. In the much more straitened circumstances now prevailing, such capital-assisted deficit funding is clearly no longer an option.

FAS’s construction-related debt rose to $994.5 million at the end of fiscal year 2009, from $938 million a year earlier. Debt service totaled $86.4 million, up 28 percent from the prior year. Total capital spending was $167.6 million in fiscal year 2009, down from $224.1 million the prior year, when major laboratory construction was in full swing; a principal funding source was debt proceeds of $95.3 million and $168.1 million, respectively, in the two years. It is possible that some of the 2008 decapitalization came into play, too (but this detail was not explicitly reported), as “support from the University” for capital spending was $18.7 million in fiscal year 2009, up more than fourfold from the prior year. In the future, given constraints on University debt issuance and on FAS’s ability to service its existing construction-related debt (in light of other expenses and constrained revenues), it is difficult to imagine sustaining comparable levels of capital investment.

Faculty and staff loans—principally mortgages and zero-interest education loans (the latter for children’s higher-education expenses)—totaled $89.2 million at the end of fiscal year 2009, up modestly from the prior year.

Two final items illuminate the relationship between FAS—and by proxy, other Harvard schools and academic units—and the central administration, in Massachusetts Hall. In fiscal year 2009, FAS reported an endowment decapitalization of $81.8 million for “central administrative overhead”—its share of the half-percent assessment for the “strategic infrastructure fund” (SIF) used to defray Allston-related development expenses (a total of $176 million University-wide for the fiscal year).

A separate footnote spells out FAS’s “University Assessment,” a levy of 2.6 percent on the faculty’s total operating expenses to pay for services provided by the central administration (legal, accounting, and information-technology services, for instance). That assessment, at the same rate for all schools, is calculated on each unit’s expenses of two years earlier; for fiscal year 2009, FAS paid $28.9 million.

From a Mass Hall perspective, these formulas yield leaner years to come: the SIF distribution will fall sharply, reflecting the much-reduced value of the endowment; and the University Assessment may come under pressure to the extent that schools’ expenses flatten or decline in future fiscal years as their operating distributions from the endowment are reduced.