The Endowment Engine Funds distributed from the endowment have become an increasingly important source of revenue for Harvard, rising from a low of 17 percent of University income in fiscal year 1987 to 23 percent in fiscal year 1998. By the year ending June 30, 2000, endowment distributions will likely account for more than a quarter of Harvard's revenue.

The Payoff

Harvard's academic programs are about to reap the benefits of recent robust growth in the endowment. In November, the Corporation approved a plan to distribute $95 million more in endowment income to the schools for the fiscal year beginning July 1. This sum will be in addition to the customary annual increase in the distribution of endowment earnings.

Coming after a decade in which the income distributed has grown at a 10 percent annual rate, the special appropriation means that Harvard will be able to use more than a half-billion dollars from endowment to support operations in the next fiscal year. That sum is expected to be a sustainable base, with further growth in endowment distributions anticipated in subsequent budgets. Explaining the plan, President Neil L. Rudenstine said, "We are in a position where the present ought to benefit more from the gains of the past few years than a deferral to an uncertain future."

Why can Harvard now accelerate spending on the deans' academic priorities? Fueled by strong investment returns and the $2.1-billion University Campaign, the endowment grew to $13 billion at mid 1998, providing an ample cushion even if the financial markets decline for a protracted period. In fact, the Corporation approved the additional spending after last summer's abrupt drop in the market value of endowment assets (see "Unlucky Number?" November-December 1998). Elizabeth C. Huidekoper, vice president for finance, says that even under adverse conditions, Harvard can maintain the new level of endowment distributions and still, over time, adhere to its target of spending 4.5 percent to 5 percent of the market value of the endowment each year. Since 1971, the spending rate has varied between 3.3 percent and 5.8 percent, recently averaging 4.25 percent--below the goal. She says, "You can't panic if it goes above 5 percent or below 4 percent in any one year" as market values fluctuate.

Moreover, Harvard's large operating deficits earlier in the decade are now history. The University recorded a $2.7-million surplus in its unrestricted operating budget for fiscal year 1997--and a $24-million surplus last year. Huidekoper attributes the improvement to further growth in endowment-income distributions (up 19 percent), in executive and continuing-education programs (13 percent), and in gifts for current use (9 percent), combined with moderate salary increases (4 percent) and another year of level employee-benefits costs. Hence the routine 1999 and 2000 annual increases in endowment distributions--6 percent to 7 percent each year--plus the $95-million extra distribution "are dealing with programs," she says, not with deficits.

How will the schools sort out their priorities? The Faculty of Arts and Sciences (FAS) is the largest beneficiary, receiving $40.5 million of the $95 million. By terms of the gifts to the endowment, one-fifth of that money passes directly to affiliated units, such as the libraries and museums. According to Ann E. Berman, associate dean for finance, about $23 million can be applied to unfunded priorities. Of that sum, 40 percent will help pay for the recent increase in undergraduate financial aid (see "Autumn Windfall," November-December 1998), and 25 percent for enhanced graduate-student aid (see "Loneliness of the Long-Distance Scholar"). The balance of the $23 million will be used for research support and facilities; for faculty compensation; and to fund debt service on planned large capital projects, such as the Widener library renovation and the Knafel Center (see "Knafel Reconceived"). Other schools have comparable priorities, with particular emphasis on financial aid, information technology, and faculty recruitment and research support.

Not accounted for in the FAS spending plans is a $6.5 million reallocation to academic initiatives being managed by the president. Combined with proportional sums from the other schools, these funds will support University-wide programs such as faculty training in pedagogical use of information technology, and the digital library initiative (see "Digital Union of Images Will Break Boundaries," May-June 1998).

In all, says Huidekoper, Harvard's aca-demic planning process, begun by Rudenstine before the University Campaign, established the schools' needs. Since then, "The demands are only increasing" beyond the goals set for the Campaign--especially for financial aid, investment in information technology, and the scope of projects such as the Widener renovation. "Now, with the Campaign's success, and with endowment gains over the past five years averaging 20 percent," she says, "we can do even more than we expected."

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