Harvard Ups Payout to Match Bounty

The University yesterday announced its highest increase to endowment payout in five years, acknowledging that the distribution of funds from the endowment to its schools had failed to keep pace with high returns on Harvard’s investments.

Each year, money from the endowment—the University’s war chest—is disbursed to all of Harvard’s schools. Along with tuition, sponsored research, and other sources, the payout is a component of the schools’ operating revenue each year.

The Harvard Corporation, the University’s highest governing body, voted on Nov. 7 to approve a five-percent increase in base payout for the next fiscal year, which begins July 1, 2007. While the start of fiscal 2007 is more than six months away, the University announces the increases early to allow schools to plan their budgets.

Certain projects at the schools will also be eligible for an additional six-percent increase—an “incremental payout” intended to fund strategic initiatives.

These projects must be agreed upon both by school deans and by University President Lawrence H. Summers to receive the extra endowment funding—giving Harvard’s central administration a greater hand in defining “strategic priorities” at the schools.

The practice of providing certain projects with further increases was first implemented in the current fiscal year, 2006. This year’s incremental payout is being used, in large part, to fund additional faculty and increases to financial aid, wrote Vice President for Finance Ann E. Berman in an e-mail last night.

After its introduction last year, the incremental payout appears to be here to say. According to the Corporation’s preliminary guidance on payouts for the next few years, released yesterday, the University will offer incremental payouts at least through 2010.

The guidance for the Corporation calls for annual increases to base payout of four percent in fiscal years 2008, 2009, and 2010. Schools will see incremental payout increases in those years of four percent, three percent, and two percent, respectively.

The combined increase will bring a total rise of 11 percent for some projects—a modest increase over the four percent base and four percent incremental increases that took effect this year.

A letter distributed to administrative and financial deans at Harvard’s schools, provided by Berman, said that the recent years’ increases to endowment payout had not kept pace with the University’s soaring investment returns. Investment returns were up 19.2 percent last fiscal year, growing the endowment to a mammoth $25.9 billion. Harvard earned a 21 percent return the previous year.

“Due to two years of higher-than-expected endowment returns, the current endowment spending rate has declined below our desired target spending,” the letter states.

While payout from the endowment rose 37 percent in fiscal year