Harvard News

Harvard released its annual financial statements last week. You can download the whole report here or just read Harvard Magazine's summary here. (Try to find a story about it on the Gazette site. I couldn't, though I came up with a nice story about my colleague Michael Mitzenmacher's work on Yelp data privacy problems, another about the Digital Public Library of America, and a third about Mark Zuckerberg coming to town, so I can't complain!) The Crimson has a straightforward account. The headlines cite the $130 million deficit, which is not good but also not terrible on a $4 billon budget. Quoting the financial VP, the Crimson reports,

Shore cited a number of projects aimed at increasing the University’s operating efficiency as part of the cost-cutting effort. Among these are the consolidation of the University’s IT systems, the overhaul of the University library system, and efforts aimed at “better leveraging purchasing power with vendors.”

I am sure that the I/T consolidation was a good idea, whether or not it saves money; I am very impressed with the new leadership. So much the better if the new organization gives better service at lower costs. The "leveraging purchasing power" has been standard cant ever since Larry Summers complained about every professor buying his own bricks, or something like that. Maybe it adds up, but I rather think there would be more money to be saved if every professor did not have his or her own Center to begin with. I am worried, frankly, about saving money on the library system. It certainly was not obvious to me that having 70 libraries (a number that is commonly quoted as an indicator of the absurdity of Harvard's library system) is such a terrible thing for the world's greatest university. And it certainly is disappointing that Archives is now open to researchers only 25 hours per week. My freshman seminar students love using archival materials, but most of the hours they can access them are in conflict with class times or athletic practices.

The report cites some other things we are doing to restore our financial stability, and to avoid similar problems in the future. More of the infamous debt swaps are being retired. We are converting some debt from floating to fixed rates. And so on.

But it is worth contemplating Note 12 to remind ourselves how we got into this mess in the first place. We have borrowed $6.3 billion and have to pay it back at rates averaging 4.6%. We have floated $3.1 billion in fixed rate bonds at an average of 5%, and almost all of them have more than 20 years to go. Where is all that money? Look around you. The Northwest Building. The Center for Government and International Studies. The Fogg Museum. The pit in Allston, meant to be the foundation for a building that has not been built. Etc., etc. We borrowed so much that we can't borrow any more without risking our bond rating, though if we could do it, we could borrow today at much lower rates. We are paying $300 million per year in debt service.

And so the financial model is changing. We are pressing alumni to give "current use" gifts. They have responded remarkably well -- $277 million in current use gifts were given in the last fiscal year. But this is very unlike the old Harvard, which used to raise money for its buildings before it built them. Now a quarter-billion dollars in annual giving, solicited in preference to endowing professorships and scholarships, isn't enough to cover the interest payments on our debts. We are increasingly reliant on income from sponsored research, at a time when the Congressional "super-committee" may well decide to slash federal grants (a terrible idea for the economy in the long run, regardless of its impact on universities).

A little more than wo years ago, Fred Abernathy and I laid it out in the Boston Globe. Sorry about the paywall: here are the central paragraphs:

The story goes back to 2001. With much fanfare about President Lawrence Summers's bold vision, Harvard started a building campaign, mostly to grow the size of its science facilities by more than a third. Average yearly expenditures for facilities jumped from under $150 million in 1995-2000 to $495 million from 2001-2005, to $644 million in 2009. The Faculty of Arts and Sciences - about half the university - grew from about 600 professors before 2001 to 700 in 2006 and was projected to reach 750 by 2010. With this growth spurt already underway in 2004, Summers told the faculty not to think small. Its ambitions were limited only by its imagination, he said - Harvard could always come up with more money from its "deeply loyal friends." 

All that growth has now come to a crashing halt. The half-finished science lab in Allston has been mothballed; the faculty, only recently expanded, will now have to shrink. 

Are these the consequences of a market downturn no one could have predicted? Not in Harvard's case. By January 2006, the faculty itself was warning that Harvard's plans depended on extremely optimistic financial projections. 

Hoxby addressed the Faculty of Arts and Sciences on behalf of a committee charged with scrutinizing the administration's plans. The Arts and Sciences budget - roughly $1 billion - was in balance, but with all the growth that was underway, she said, by 2010 it would be in deficit by at least $108 million. 

The biggest item was interest payments - the buildings were mostly debt-financed, in a sharp departure from Harvard's past practice of raising the money first. Add to that the salaries of the new faculty and the costs of operating those huge new science laboratories. Where would the money come from? The Faculty of Arts and Sciences had saved up $73 million, but that account would quickly be depleted as it was used to balance the budget. Selling endowment assets wouldn't work either, because almost all those funds had to be used as donors had stipulated, not for building undreamed-of buildings. So there were only two possibilities: a lot more money from donors, and very high investment returns. 

Was it wise to borrow so much? The Arts and Sciences dean explained that it was like a homeowner assuming a mortgage. Going into debt was OK, because incomes rise. And President Summers termed the whole borrowing-to-build plan an "extraordinary investment."

This year's report is the sound of the other shoe dropping.

The closing paragraph of our opinion piece suggests some governance reforms:

The Harvard Corporation is a dangerous anachronism. It failed its most basic fiduciary and moral responsibilities. Some of its members should resign. But the Corporation's problems are also structural. It is too small, too closed, and too secretive to be intensely self-critical, as any responsible board must be. Until the board can be restructured, the fellows should voluntarily share their power with the overseers. And Harvard should reveal the risks of its business plans, as would be required if it were a publicly held corporation. 

 This was nothing more than what a lot of people were saying in private but nobody else was saying in public. In the intervening years, the Corporation wisely decided to expand itself; I give Drew Faust a lot of credit for engineering that. I am quite happy about the new people who have been appointed (if less happy about one who remains). And I was quite happy to see the Gazette, even if it was mute on the financials, report that the Corporation has created a rational committee structure and included on the key committees some individuals who are neither Fellows nor Overseers. I don't expect Harvard to go overboard on transparency any time soon, but the more eyes that look at the books and at major building decisions, the more likely it is that someone will speak up when they see a powerful president or Corporation member pushing something that puts the university at risk. I am not holding my breath waiting for the risk reports Fred and I suggested, but I hope the echo chamber that was Harvard governance when we got into this mess under Summers is a thing of the past.