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Officials Expect No Rise in Payout from Endowment

By Laura L. Krug and Stephen M. Marks, Crimson Staff Writerss

The Harvard Corporation is expected to vote this fall to not increase endowment payout for the next fiscal year, a rare move that would decrease schools’ real endowment revenue in already lean times.

Financial officials say the University governing board warned this spring that it was inclined to keep the funds schools receive from the endowment flat for the 2005 Fiscal Year (FY05), the budget period that begins next July 1.

Such a move would come on the heels of two successive years of low payout increases: 2 percent in both FY03 and FY04.

The University governing body hasn’t been this conservative since the early 1980s. Just three years ago, the Corporation approved the highest endowment payout increase in Harvard’s modern history—37 percent for FY02.

According to Dan Shore, a member of the Office of the Vice President for Finance, the Corporation’s warning was guided by “recent market trends”—namely, declining endowment value. The University’s holdings decreased in value from a peak of $19.2 billion in 2000 to $17.5 billion as of last July, the last date for which figures have been released.

While finance officers across the University said they were not surprised by the Corporation’s warning, they said it will put further stress on already tight budgets as costs rise and revenue stays stable.

The Harvard University Art Museums indicated last month that the University’s conservative approach will force them to implement severe cuts including considerable layoffs.

Other divisions of the University that rely heavily on endowment income are hoping that layoffs and other cost-cutting measures they have already undertaken will be enough to deal with a continued scarcity of funds.

Fresh off a round of cuts and administrative belt-tightening that reduced an expected deficit to $200,000, the Graduate School of Education is readying for continued tough times, acting Administrative Dean Richard Pagett said.

“We will be working all year during the coming year on cost-containment strategy,” Pagett said. “Clearly FY05 is going to be problematic.”

Race to the Bottom

In charting a course of zero growth for next year after two successive years of meager increases, the Corporation has opted to preserve the endowment rather than bail out schools during the current recession.

After the booming economy of the 1990’s, the Corporation had loosened its pursestrings, approving real increases for the fiscal years 1998 to 2002 that when adjusted for inflation totaled 14.7, 4, 14.2, 6 and 32.8 percent, sequentially.

By contrast, the endowment payout shrank by 0.8 percent in real terms in FY03. The University will likely record real declines in payout again for the current year and next year.

According to Shore, the last time the endowment payout was held flat was 1984. Runaway inflation during the decade from 1972 to 1982 made for real decreases over that time period.

Harvard Management Company President Jack Meyer, who manages Harvard’s endowment, said the Corporation’s current conservatism is probably due to the sagging economy and its toll on the endowment.

“Market conditions over the last few years have been harsh,” he said.

“While we have not decreased spending as many schools have, the climate has not been good for spending increases.”

Meyer said the Corporation relies on a formula to guide its decision about payout. The formula gives 70 percent weight to the previous year’s spending plus the Higher Education Price Index—a measure of inflation—and 30 percent weight to the endowment’s market performance.

He notes that the Corporation is right to be cautious about spending the endowment during the economic downturn, emphasizing the importance of judicious management in preserving its value.

“The to maintain the real value of the endowment and spending over time,” Meyer said. An increase of “zero [percent] is not that out of the ordinary in real dollars.”

Shore notes that in the long term, the University aims to spend 4.5 to 5.5 percent of the endowment’s market value annually.

Meyer said that whether the current streak of low payout raises continues will depend on macroeconomic performance and the Corporation’s assessment of current University needs.

Tightening Many Belts

Harvard’s schools depend on endowment payout to differing degrees, and as a result are taking staggered losses.

Like the museums, Harvard’s libraries are highly dependent on endowment revenue.

Library spokesperson Beth Brainard said that the libraries face a number of uncertainties in this fiscal year and the next, including the potential for increased salaries following upcoming negotiations with the Harvard Union of Clerical and Technical Workers.

Even Harvard Law School (HLS), with over 1,000 tuition-paying students, derives as much as a third of its budget from the endowment.

Stagnant endowment payouts have hit students’ term bills, said HLS Assistant Dean and Chief Financial Officer Paul W. Upson.

“The impact coming from last year into this year, where the payout is going up 2 percent, meant we had to raise tuition a little more than we would have liked,” Upson said. “The only question is how fast the tuition will go up. When the endowment was going up much faster than inflation and other things, we were really able to back off on tuition increases.”

Last year’s tuition at HLS rang up at $29,500. It will cost $31,250 to attend for a year this fall—an increase of 5.9 percent.

The Corporation’s planned move will “put more pressure on what we charge for tuition,” Upson said, adding that the blow will be somewhat softened by fiscal reserves accumulated during the prosperous 1990s.

“We don’t know when this sort of slow growth will end. We do expect to start chewing into the balances,” he said.

On the opposite end of the spectrum is the Harvard School of Public Health (HSPH), where only about 10 percent of the school’s budget comes from the endowment. The balance comes from revenue sources like tuition, research grants and research contracts, according to HSPH Dean of Academic Affairs Jim H. Ware.

As long as students keep enrolling and research and educational programs continue to succeed, the bulk of the budget money will remain steady.

But the stalled endowment payouts will still be felt.

“Endowment income is important for the school’s discretionary investments and new initiatives,” Ware wrote in an e-mail, “so we look forward to a return to larger increases when conditions allow.”

Ware added that though HSPH has not needed to cut staffing or programs because of the small payout increases, it has been forced to be “very selective about new initiatives.”

Neither HSPH nor HLS finished out FY03 with deficits—in fact, both were left in the black, though not by as much as desired.

Harvard Medical School (HMS) closed with a small surplus as well and expects a repeat performance next year, according to Eric P. Buehrens, the school’s executive dean for administration. However, a confluence of factors—including the low payout numbers, investments in building and renovations and plans for future expansion—all mean money out of HMS’s budget and the “potential for significant deficits.”

“When you put it all together we’ve been seeing pretty challenging financial times ahead for quite some time,” said Buehrens. “The next 10 years are not going to be as strong financially for the Medical School as the last 10 years.”

The school has been planning with the possibility of future tough times in mind for a while. Several years ago, HMS administration handed down a series of budget cuts that reduced the annual budget by eight percent.

In addition, the administration has “ratcheted back a bit” on annual salary increases, though it has not frozen either them or hiring itself. However, hiring is coming under much closer examination, slowing the process of refilling vacant spots or creating new positions.

A new dean for resource development, Jeffrey Newton from the University of Miami, will take the helm of fundraising beginning August 18 and Buehrens said there will be a greater focus on garnering philanthropy.

Similar measures are being taken at Harvard Business School (HBS), where, according to Associate Dean for External Relations and Chief Financial Officer Donella M. Rapier, positions that became empty have been held empty for quite some time.

“We’ve just been really, really careful on all of our infrastructure and administrative costs,” Rapier said. “We’ve budgeted those to be at exactly the same levels as they were last year even though they have to absorb inflation. We’ve figured out ways to save money in other places so we can hold it completely flat from year to year.”

She added that HBS is still spending money to grow its faculty, despite a crunch that has meant empty positions going unfilled and layoffs at the HBS publishing company.

“We’ve been keeping administrative costs as tight as we can so we can keep investing in strategic initiatives,” Rapier said.

—Staff writer Laura L. Krug can be reached at

—Staff writer Stephen M. Marks can be reached at

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