Recession Hits University's Budgets

Even the University with the country’s largest endowment has to tighten its belt sometimes.

Harvard schools this year faced a recession that began in March 2001 and have begun scrambling to cut costs as they finalize budgets for the upcoming 2003 fiscal year.

The extent of the problem has varied widely by school, and solutions have ranged from leaving positions open or delaying new projects to outright staff and program cuts.

All across Harvard, however, tuitions will rise more sharply than in recent years to replace lost income.

The University-wide endowment payout will rise by 2 percent in the coming fiscal year, less than one tenth of this year’s increase. Similarly low increases in payouts are expected in the years to come.

In his annual letter to the Faculty of Arts and Sciences in February, outgoing Dean Jeremy R. Knowles noted that despite recent budgetary successes, “looking further ahead, the financial outlook is less robust.”

While the Kennedy School of Government announced major staff and faculty cuts in an effort to trim an expanding deficit, the majority of schools say they have remained financially in the black.

“I think the University will weather this period quite well as long as we’re careful stewards,” University Provost Steven E. Hyman said last week, noting that state schools sometimes have to cut entire programs in times of recession.

Yet less money coming in inevitably means that Harvard may be reconsidering expensive plans as long as the recession continues—“holding off on major commitments and making trade-offs,” as University Vice President for Finance Elizabeth C. “Beppie” Huidekoper put it in February.

The Money Coming In

The low growth in endowment payouts combined with a more challenging fundraising environment have reduced school’s income and necessitate cost-cutting measures.

At the Medical School, fundraising had been down “substantially” at mid-year, said Associate Dean for Finance Cynthia L. Walker.

The Kennedy School, which has not yet seen decreased financial contributions, has had to put more resources into fundraising and has asked its development office to focus on soliciting unrestricted donations.

At the Business School, overall participation in annual giving has declined, although a few large gifts have made up for most of the loss. Chief Financial Officer Donella M. Rapier said that it had been “surprising we haven’t seen more of an impact,” although she noted that, like the Kennedy School, the Business School has focused more on fundraising.

The Law School is unusual in that donations have actually picked up slightly over the current year, but the increase comes at a time when the school has been gearing up for a large-scale capital campaign.

Despite the fundraising success, the Law School relies to a large degree on the endowment payout that will increase by only 2 percent.

“Since [the endowment] funds approximately one third of our budget, that’s a major issue,” said Executive Dean and Chief Financial Officer Paul W. Upson.

During the 1990s, payouts from the University’s endowment sometimes increased by more than 20 percent from year to year, although a more typical increase in payout centered around 7 percent.

As a result of the low increase in payout, the Law School’s fiscal year 2003 budget will increase at less than a quarter of this year’s growth rate.

The Kennedy and Business Schools have also taken hits on their executive education programs, which have seen decreased enrollment and profits following the recession.

At the Business School, where the endowment covers only 16 percent of the budget, the revenue loss in executive education—some programs had to be cancelled—has been a major concern, Rapier said, although enrollment has recently been picking up.

And the school has seen steady enrollment in its MBA program, as applications to graduate programs throughout the University have risen in a less promising job market.

Director of Fiscal and Administrative Services Robert Gewecke said that “admissions responses to next year were an all-time record” at the Graduate School of Education (GSE).

And not only did students entering next fall have to face more competition than usual to be admitted, but they will also face steeper than normal termbill increases.

The College’s tuition will rise by 4.9 percent next year, the largest percentage increase in eight years.

Upson called the Law School’s tuition increase of 7.2 percent “way more” than the rises of recent years.

But perhaps the biggest change comes at the Kennedy School, where the tuition jump of almost 7 percent comes after years of rises hovering around 4 percent, one of the lowest throughout the 12 schools.

Trimming the Pork

Even the tuition hike will not make up for reduced growth in endowment payouts at the Kennedy School, which was hit particularly hard by the recession.

It announced last week that it will reduce 30 administrative staff positions—half through attrition and half through layoffs—and adjunct faculty by 17.

Years of expansion through deficit-spending had led to dramatic expansions in faculty—positions increased by almost 40 percent in the last five years—and the creation of a number of new centers. But deficit-spending could no longer be maintained by the endowment in this year’s fiscal climate.

Kennedy School Dean Joseph S. Nye announced in April that the school’s deficit for the current 2002 fiscal year would come to $5.6 million, almost double previous projections.

In addition to the last week’s 47 cuts, the school eliminated five staff positions earlier this year. In an effort to save costs for physical space, it has closed its Washington office and terminated leases at buildings in Cambridge as well. And more consolidations are planned.

Yet before the most recent layoff announcements, the school had predicted a deficit of $2.5 million in 2003.

Unanticipated expenses this year, such as overtime payments and increased labor costs, combined with the lower growth in endowment payouts to make the earlier measures insufficient.

Executive Dean J. Bonnie Newman said she hoped the new plan will allow the school to balance its budget by the 2004 fiscal year.

And some Kennedy School faculty said cuts may actually strengthen the school’s remaining programs.

Ramsey Professor of Political Economy Richard J. Zeckhauser ’62, who characterized the school’s recent growth as “very precipitous,” said in April that the cutbacks might allow the school to focus on its core mission rather than attempting to research too many subjects.

‘A Hard Frost’

Although the Kennedy School has been unique this year in the size of its budget deficit, administrators across the University have been taking cost-cutting measures.

The Business School has not cut staff but has held positions vacant instead of hiring replacements immediately.

“It’s not a freeze,” Rapier said. “It’s a hard frost.”

Although Rapier expects the school will break even at the end of the 2002 fiscal year—a small deficit is “unlikely, but possible”—she said this is the result of a concerted effort by the school, which normally runs a small surplus each year.

“The whole community has just been amazing at saving costs,” she said.

Nevertheless, some technology projects have been delayed, and the school has not replaced some failing or outdated equipment.

Similarly, the Law School will not face a deficit this year and has not had to cut staff or programs—it has just been less likely to sign off on new initiatives.

“We knew right from the beginning of the process that there wouldn’t really be room to add a lot,” Upson said. “There were not a large amount of requests.”

Unlike both the Business School and the Medical School, the Law School is not leaving open positions unfilled, and Upson said he doubts administrators will need to do so in the future.

The school is proceeding with plans to hire 15 new professors over the next decade.

In addition to leaving staff positions unfilled, Walker said the Medical School has cut administrative budgets twice as it prepares to finalize its budget for the 2003 fiscal year.

At GSE, however, years of balanced budgets, as well a steady influx of annual giving donations that was in line with expectations, have made major cost-cutting measures unnecessary.

“We’re still able to do all the things we want to do,” Gewecke said. “We’re not looking at any cutbacks or layoffs.”

Rising Wages

Wage increases for janitors, security guards and custodial workers added to the budget difficulties brought on by the recession.

Contract negotiations following the report of the Harvard Committee on Employee and Contracting Policies (HCECP) have not yet finished, and schools have had to budget for retroactive wage increases that will impact the current year’s budget before knowing the exact costs of the new compensation.

Entry-level hourly wages for guards rose from $8.75 to $11.15, retroactive to July 2001, while janitors agreed to a contract that would give them at least $11.35 an hour, retroactive to May 2001. Each contract also provides for successive raises, in contrast to the past in which some employees went for years without wage increases.

Previously, over three quarters of both contracted and in-house custodial workers earned less than $10 an hour.

Some employees will receive thousands of dollars in back pay, and a parity policy drafted in March requires that Harvard contractors provide total compensation—including both wages and benefits—that is comparable to what Harvard gives its in-house workers.

Administrators said while the added labor costs were slightly greater than anticipated, they were not a surprise.

Upson said he expected HCECP implementation costs for the Law School to top half a million dollars, while Gewecke said that for GSE—which has far fewer employees than the Law School—costs would come to roughly $50,000.

“It has had an effect, but not one we haven’t been able to absorb,” Rapier said of the Business School.

But because the University has not yet concluded ongoing negotiations with its dining workers, administrators are still unable to determine the total costs of the wage increases.

The Law, Business and Kennedy Schools were cited specifically in the HCECP report for outsourcing a large number of low-paid dining workers, meaning that the outcome of the currently ongoing talks may have a particularly large effect on their budgets.

All three schools’ dining facilities already operate at a loss, and subsidies will have to climb as wages increase.

Looking Toward The Center

Increased budget involvement from the central administration this year came not only through the University-wide wage rules and parity policy.

Although yearly budget reviews are standard for each of Harvard’s schools, this year saw an unusual amount of participation from central administration officials—Hyman as well as three of the University’s five vice presidents oversaw the process.

This year’s reviews were wide in scope, covering current budget prospects and also fundraising and academic plans.

Hyman said in April that he intended the reviews to ensure that individual budgets were on “firm footing” and to determine how to “best face the results of an uninspired stock market.”

During the capital campaign led by former President Neil L. Rudenstine, administrators from the central administration had similar meetings with the individual schools but focused on the goals of the campaign rather than on each school’s finances.

Although Harvard’s schools have traditionally operated more independently of the center than at many other universities, University President Lawrence H. Summers had made encouraging coordination between schools a priority.

“I think it’s very important that the central administration function so that all people who need the information and can contribute it are in the room,” Hyman said. “It creates a spirit of cooperation.”

—Catherine E. Shoichet contributed to the reporting of this story.

—Staff writer Elisabeth S. Theodore can be reached at theodore@fas.harvard.edu.