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Harvard administrators have readjusted budget planning assumptions for the next two years to keep spending in line with expectations for a slow economic recovery.
The payout from the endowment will decline by 8 percent in dollar value for the next fiscal year and is projected to fall by at least another 8 percent from 2010 to 2011—meaning that the payout in two years will have shrunk by over 15 percent from this year, the University’s Chief Financial Officer Daniel S. Shore said yesterday.
The new budget guidance marks a departure from University instructions issued in the fall, which directed Harvard administrators to plan for scenarios ranging from a flat payout to a 2 percent decline in dollar value.
Harvard officials were forced to reevaluate planning assumptions due to continued market volatility and economic uncertainty, Shore said. Since December, the Dow Jones Industrial Average has plummeted by over 1000 points, dipping to 10-year lows this month.
The University’s decision to issue more conservative budget guidance reflects progressively more pessimistic expectations for the pace of an economic rebound.
“Ultimately, we’re going to have to adapt to a new economic reality,” Shore said. “The question is, how do you start to get back to a more sustainable place?”
Since the endowment fell 22 percent in four months last year from its peak value of $36.9 billion, University President Drew G. Faust has repeatedly stated that the University estimates a 30 percent decline in endowment value by June 30.
The Corporation—Harvard’s highest governing body—adjusts the payout rate each year according to endowment returns, ensuring that the amount of money available for budgeting does not experience wild fluctuations from year to year.
The University generally targets a 5 to 5.5 percent endowment payout rate, but the payout rate has not exceeded that level since 2004, due to above-average endowment growth in a booming economy.
In the current financial climate, maintaining even flat spending from the endowment would require taking out an unusually large chunk of the endowment, calculated to be over 6 percent, the highest rate in over 20 years.
Due to economic uncertainty, the Corporation had elected not to determine an endowment payout rate last fall, leaving administrators at the various schools to draft budget proposals under several endowment payout scenarios.
Preliminary budgets were due this month, and Harvard deans were notified today of the 8 percent payout decline, Shore said.
Because the schools had already budgeted for multiple scenarios, Shore said that the announcement would only require a “re-examination of ideas that already have been raised.”
University officials plan to submit final budget proposals to the Corporation for fiscal year 2010 at the end of May.
—Staff writer Athena Y. Jiang can be reached at firstname.lastname@example.org.
—Staff writer June Q. Wu can be reached at email@example.com.
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