Fiscal Fitness

With Harvard's budget balanced, Huidekoper focuses on the fiscal future. Photograph by Jim Harrison.

For the first time since the 1991 fiscal year, when the University began accounting for building repair and replacement costs, Harvard has recorded an unrestricted operating surplus. According to the Financial Report to the Board of Overseers of Harvard College covering the 1997 fiscal year, which ended last June 30, unrestricted revenue reached $1.534 billion, $2.7 million more than expenses.

Changes in accounting standards make it impossible to compare data shown in the 1997 report with those of prior years. But in an interview after publication of the report, of which she was a coauthor, Elizabeth C. Huidekoper, vice president for finance, highlighted four factors in Harvard's gradual move from large deficits to a modest surplus. She cited controlled growth in expenses, record giving fueled by the University Campaign, strong endowment returns, and a year of significant growth in the funding of sponsored research contracts.

Looking first at expenses, the report notes that compensation (salaries, wages, and benefits)--which accounts for just over half Harvard's total expenses--grew 2.6 percent in fiscal 1997, well below the prior year's increase. The cost of benefits actually decreased, following changes in health and other plans in 1995. Spending on supplies and equipment rose nearly 11 percent, to $170.3 million, driven by purchases of computers and software, and the cost of occupying and using buildings rose 17 percent, to $152.2 million, largely as a result of a decision to report certain expenses on a current, rather than deferred, basis.

Graph by Steven Anderson

Turning to income, total giving to Harvard reached a record $427.6 million, including $98.6 million of gifts for current use, 21 percent more than in the prior year. As capital gifts and, especially, robust financial markets pushed the endowment to $11.2 billion at the end of the fiscal year (see "$11,000,000,000," November-December 1997, page 66), investment income distributed rose more than 8 percent, to $332.3 million--just over 21 percent of Harvard's operating revenue for the year.

Sponsored research funds totaled $362.1 million, reflecting growth of nearly 7 percent--sharply higher than the 1 percent increase in fiscal year 1996. And revenue from continuing and executive education programs--a growth business for Harvard--rose 17 percent, totaling more than $100 million for the first time.

Reviewing the combined result of these trends, Huidekoper cited one member of Harvard's governing Corporation as saying, "I'd like to freeze the financial results. This could be as good as it gets."

Over the past decade, as the Financial Report illustrates, Harvard's 10 schools have effected a discernible shift in their fiscal architecture. In the aggregate, the accompanying chart shows that student tuition and fees--although still increasing, albeit more slowly in recent years--and federally sponsored research have come to account for less than half of revenue. Endowment income has grown from one-sixth of operating funds to more than one-fifth of the total. The trend is not uniform; the School of Dental Medicine, for example, is much more dependent on student revenue. But in some schools--notably Law and Design--the proportional role of endowment income has risen sharply, and that of revenues received from students has declined in turn.

In the interview, Huidekoper expanded on the report and discussed several issues on Harvard's financial agenda. Overall, she foresees a future "not hugely different" from the present. That means the share of University operating revenues from endowment will increase, and the share from tuition will decrease, "somewhat" further. That, she says, "is really what we want to have happen." This shift is the inexorable result of budgeted endowment distributions increasing 7 percent in fiscal year 1998 and 8 percent in 1999, while tuition and fee growth ranges from 3 to 5 percent across the schools.

Challenges also vary by school. Huidekoper cites "huge financial-aid concerns" across the University, Divinity School buildings in need of repair, the Graduate School of Education bursting at the seams, and, in the Faculty of Arts and Sciences (FAS), demands to invest in information technology and in science, engineering, and library facilities.

One source for meeting those needs is alluded to, but not detailed, in the Financial Report. The section on the endowment refers to "the deployment of endowment appreciation for specific purposes approved by the Corporation." This process, known as "decapitalization," permits schools to avail themselves not only of endowment income, but also of some of the capital appreciation in endowment principal since gifts were made.

As Huidekoper explains, "the schools' needs arise unequally, and the flow of funds is glacial" as pledges eventually turn into gifts and finally endowment income. Faced with the decision to pay for academic priorities--new computers, new buildings, or increased financial aid--Harvard might, on a school's behalf, borrow money externally. Alternatively, consistent with the law governing the use of such funds, the Corporation might authorize use of endowment appreciation.

For example, a $1-million gift may have grown in value to $3 million. That sum generates a larger stream of investment income, but the appreciation--the extra $2 million held in the endowment--also represents capital that might be tapped. In fiscal year 1997, Huidekoper says, the amounts involved totaled $10 million, led by the Medical School, which has resorted to decapitalization since early in the 1990s to pay for financial aid, laboratory renovations, and recruitment of new faculty members.

The report also devotes a page to administrative highlights of the fiscal year. Leading the list: the University "limited the growth of the central administration [budget] to two percent." That part of Harvard's expenses, known internally as the "core" administration--the offices of president, provost, and the five vice presidents--totals about $83 million yearly. The "core" encompasses functions such as managing the University payroll and benefit plans, running the general counsel's office and Harvard police, and administering government-sponsored research.

As Harvard's schools adjust to lower long-term growth in tuition and sponsored research funds, such administrative costs are under scrutiny; the FAS resources committee issued a report on "core" expenses last autumn. Continuing the effort to constrain such expenses, a three-year plan for the "core" functions released in December by University provost Harvey V. Fineberg sets a "target" of annual average growth in the "core" budget of 3 percent through fiscal year 2000.

Finally, although the report does not address the Medical Area Total Energy Plant, Huidekoper notes that the final chapter in its long history of cost overruns might turn out surprisingly well. Harvard has agreed to sell MATEP to Commonwealth Energy System ("Sold Off," November-December 1997, page 66) for $147 million, according to a February announcement. Disclosure of the University's proceeds, net of sales costs, may have to await the 1998 or even the 1999 fiscal reports. But, Huidekoper says, when Harvard began accounting for facilities depreciation in 1991, MATEP's value was written down to a sum far below its $350- million cost. Accordingly, the University could conceivably record a gain on the sale. Stay tuned.

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