Harvard's annual financial report, released in early December, describes the fiscal year ended June 30, 1996, as "one in which the deficit shrank further, endowment returns were extraordinary, the capital campaign reported another successful year, and progress was made in moderating the growth of expenses." So wrote Elizabeth ("Beppie") C. Huidekoper, vice president for finance, and D. Ronald Daniel, treasurer.

Interpreting the report poses more than ordinary difficulty for the fiscally challenged. The adoption of two new accounting standards--applicable to contributions and nonprofit organizations--renders most of the 1996 data not comparable to figures from prior years. Nonetheless, certain facts stand out.

First, the University's operating deficit totaled $2.3 million on revenues of $1.519 billion. Among major sources of income, support for sponsored research grew only 1 percent, to $340 million, one-fifth the 1995 rate of growth. The report highlights President Neil L. Rudenstine's recent warning that "the prospect of serious research funding cuts remains genuine and troubling." On the expense side, employee compensation (salaries, wages, and benefits) increased 4.6 percent, to $753 million; the bill for employee benefits, which declined in 1995, rose 2 percent in 1996--still far below the rapid growth from 1985 to 1995.

Second, it becomes increasingly clear that Harvard's strategy for funding future academic programs depends on its endowment. Endowment income distributed for operations rose more than 8 percent, to $332 million, and now constitutes nearly 22 percent of Harvard's revenue. Moreover, under the new financial reporting principles, which take into account sums pledged but not yet received, the endowment now totals $9.1 billion, up from a restated $7.4 billion at the end of fiscal 1995. (The 1996 and 1995 figures of $8.6 billion and $7.0 billion reported in "Well Endowed," November-December 1996, page 60, did not reflect the new reporting standards.) The 1996 distribution rate was 3.8 percent of the endowment's year-end market value--one of the lowest levels of the past quarter century, and almost a full percentage point below the average distribution rate over that period.

All this indicates that endowment growth, fueled by strong investment returns and funds received from the University Campaign, now provides some cushion against slower growth in tuitions, more constrained research funding, and the other fiscal realities of higher education at the end of the century.