University Loosens Purse Strings

Pulled up by a humming economy-and Wall Street success during the last five years-Harvard's endowment has soared. But the University's top decision-makers have played it cautious, fearing a market drop.

But over the past ten years the payout-the percentage of endowment money withdrawn and used in the budget every year-has not kept pace with the market, as top administrators hoarded Harvard's money for a rainy day.

Now, in one fell swoop, Harvard has increased the payout by 20 percent, a quantum leap away from an average increase of about 10 percent per year. The fiscal conservatism of the last decade seems to have been thrown out the window.

"It's out of character," says Provost Harvey V. Fineberg '67. "This is a rather bold move for Harvard."

But despite the attention given to the move,Harvard is really doing nothing more than gettingback on track.

Last year, Harvard spent 3.3 percent of itsendowment income, a figure Jeremy R. Knowles, deanof the Faculty of Arts and Sciences, calls "jollylow."

"Four-and-a-half percent we view as aconservative rate," says Naomi G. Richman, seniorvice president for Moody's Investors Services, anexpert in college investment strategies. "We wouldview 3.3 percent as an extremely low payout."

University administrators defended the lowrate, nothing that while they may have been usinga smaller portion of the endowment, the actualdollar amount of the payout grew at about 10percent each year.

And though this move will add about $95 millionto the University's budget, in reality it will dolittle more than make Harvard conservative again,rather than miserly.

A Careful Balance

Thomas O'Brien, Harvard's former vice presidentfor finance and architect of its current savingsystem, calls the new payout estimate "verymodest," adding that most schools now target for a5 percent payout.

O' Brien invented the formula for coming upwith the payout rate, which is based on findingthe perfect mix between spending today's moneyversus tomorrow's.

According to O'Brien and current Harvardofficials, the 4.5 to 5 percent rate, Harvard'straditional average, allows for the right mix.

O'Brien's today/tomorrow philosophy is oneother Harvard officials seem to strongly support.

"There must be an equilibrium between today'sstudents and tomorrow's students and today'sfaculty and tomorrow's faculty," says D. RonDaniel, Harvard's treasurer and a previousopponent of the change.

"We are below what we think is a fairdistribution of today's wealth with tomorrow'swealth," said Elizabeth C. "Beppie" Huidekoper,vice president for finance. "It's time to giveback to our own."

But what dictated the timing of this return totraditional policy seems to have been aconvergence of extraordinary financial strengthand the expectations of donors who gave toHarvard's Capital Campaign.

Last spring, according to Huidekoper, PresidentNeil L. Rudenstine and the rest of the Corporationbegan discussing the possibility of a concretechange. They met with the deans of Harvard's tenschools, who embraced the chance to receive morefunding for their schools, according to Huidekoperand Fineberg.

The change was made, according to Knowles, fortwo reasons: to improve the quality of students'education and to improve the opportunity forfaculty research.

Fineberg adds one more reason, the University'snearly-finished $2.1 billion Capital Campaign.

"A lot of people have contributed a lot ofmoney," Fineberg says. "And I think it will bevery helpful to be able to point and see how thatmoney is having an effect today."

Harvard's money managers say they are confidentthey can see this welltimed payout through amarket downturn, like the one earlier this year inwhich Harvard lost $1.3 billion.

Fineberg calls the $1.3 billion dollar drop inthe endowment "a blip," and Huidekoper says evenan actual decline in endowment value would notpush the payout percent too high.

Jack R. Meyer, president of the HarvardManagement Company, Harvard's full time financialstewards, says the change will in no way changethe University's investment strategy.

Leader of the Pack?

Though some were quick to speculate thatHarvard's move would spawn a wave of imitation inthe Ivy League, that seems not to be the case.

In fact, Harvard is not even leading the Ivypack as it makes this move. Cornell Universitybeat Daniel and company to the punch over a yearago, having raised their payout nearly 13 percentin 1997 and a whopping 35 percent this year.

But Harvard's $95 million leap onto thebandwagon might inspire imitators in highereducation, according to some.

"If it's in the papers that Harvard hasincreased the payout, there will be that much morepressure at other schools," says James, S. Clark,Cornell's chief investment officer. However, othersimilarly-endowed schools have announced no suchplans.

Yale has maintained a healthy 5 percent payoutrate since 1995 and has no intention of changingit, according to Tom Conroy, Yale's actingdirector of public affairs.

Emory University has also stayed above 4percent, which it considers the outer bounds ofconservatism, and also sees no reason to increaseits payout.

Harvard's changes may put it back on track withits peers, but the size of the University'sendowment-the largest in higher education-willactually give a higher dollar output than itspeers.-David A. Fahrenthold contributed to the reportingof this story.

But despite the attention given to the move,Harvard is really doing nothing more than gettingback on track.

Last year, Harvard spent 3.3 percent of itsendowment income, a figure Jeremy R. Knowles, deanof the Faculty of Arts and Sciences, calls "jollylow."

"Four-and-a-half percent we view as aconservative rate," says Naomi G. Richman, seniorvice president for Moody's Investors Services, anexpert in college investment strategies. "We wouldview 3.3 percent as an extremely low payout."

University administrators defended the lowrate, nothing that while they may have been usinga smaller portion of the endowment, the actualdollar amount of the payout grew at about 10percent each year.

And though this move will add about $95 millionto the University's budget, in reality it will dolittle more than make Harvard conservative again,rather than miserly.

A Careful Balance

Thomas O'Brien, Harvard's former vice presidentfor finance and architect of its current savingsystem, calls the new payout estimate "verymodest," adding that most schools now target for a5 percent payout.

O' Brien invented the formula for coming upwith the payout rate, which is based on findingthe perfect mix between spending today's moneyversus tomorrow's.

According to O'Brien and current Harvardofficials, the 4.5 to 5 percent rate, Harvard'straditional average, allows for the right mix.

O'Brien's today/tomorrow philosophy is oneother Harvard officials seem to strongly support.

"There must be an equilibrium between today'sstudents and tomorrow's students and today'sfaculty and tomorrow's faculty," says D. RonDaniel, Harvard's treasurer and a previousopponent of the change.

"We are below what we think is a fairdistribution of today's wealth with tomorrow'swealth," said Elizabeth C. "Beppie" Huidekoper,vice president for finance. "It's time to giveback to our own."

But what dictated the timing of this return totraditional policy seems to have been aconvergence of extraordinary financial strengthand the expectations of donors who gave toHarvard's Capital Campaign.

Last spring, according to Huidekoper, PresidentNeil L. Rudenstine and the rest of the Corporationbegan discussing the possibility of a concretechange. They met with the deans of Harvard's tenschools, who embraced the chance to receive morefunding for their schools, according to Huidekoperand Fineberg.

The change was made, according to Knowles, fortwo reasons: to improve the quality of students'education and to improve the opportunity forfaculty research.

Fineberg adds one more reason, the University'snearly-finished $2.1 billion Capital Campaign.

"A lot of people have contributed a lot ofmoney," Fineberg says. "And I think it will bevery helpful to be able to point and see how thatmoney is having an effect today."

Harvard's money managers say they are confidentthey can see this welltimed payout through amarket downturn, like the one earlier this year inwhich Harvard lost $1.3 billion.

Fineberg calls the $1.3 billion dollar drop inthe endowment "a blip," and Huidekoper says evenan actual decline in endowment value would notpush the payout percent too high.

Jack R. Meyer, president of the HarvardManagement Company, Harvard's full time financialstewards, says the change will in no way changethe University's investment strategy.

Leader of the Pack?

Though some were quick to speculate thatHarvard's move would spawn a wave of imitation inthe Ivy League, that seems not to be the case.

In fact, Harvard is not even leading the Ivypack as it makes this move. Cornell Universitybeat Daniel and company to the punch over a yearago, having raised their payout nearly 13 percentin 1997 and a whopping 35 percent this year.

But Harvard's $95 million leap onto thebandwagon might inspire imitators in highereducation, according to some.

"If it's in the papers that Harvard hasincreased the payout, there will be that much morepressure at other schools," says James, S. Clark,Cornell's chief investment officer. However, othersimilarly-endowed schools have announced no suchplans.

Yale has maintained a healthy 5 percent payoutrate since 1995 and has no intention of changingit, according to Tom Conroy, Yale's actingdirector of public affairs.

Emory University has also stayed above 4percent, which it considers the outer bounds ofconservatism, and also sees no reason to increaseits payout.

Harvard's changes may put it back on track withits peers, but the size of the University'sendowment-the largest in higher education-willactually give a higher dollar output than itspeers.-David A. Fahrenthold contributed to the reportingof this story.