Endowment Peaks as Harvard Readies for Capital Campaign

As Harvard wraps up fiscal year 2005 at the end of this month, many of the same financial hurdles it has faced in recent years—such as compensation and federal funding levels for research—still figure prominently into the University’s concerns.

Even so, the year has been a “solid, stable” one for the University’s finances, Vice President for Finance Ann E. Berman told The Crimson in a March interview.

And in an e-mail late last month, Berman wrote that she wasn’t aware of any significant problems for fiscal year 2005.

In 2004, the University’s revenues and expenses both rose about 5 percent to $2.6 billion, producing an operating surplus of $37 million.

But this year, the University is still concerned about federal sponsorship levels for research, and Berman said the funding for many agencies is increasing slower than the rate of inflation.

The Faculty of Arts and Sciences (FAS) too is grappling with its own financial concerns, tightening its own belt even as it pursues costly priorities, such as expanding the faculty and instituting curricular changes.

While Harvard’s federal funding increased in fiscal 2004, most funding cycles run over several years—meaning that the negative effects of slow funding growth will not be visible until current grants are replaced with new ones.

“We suspect that we just haven’t seen the impact of that yet,” she said. “We continue to be very worried.”

Space and occupancy costs are “probably up,” Berman said in March, attributing the increase to a “tough winter” that drove up energy expenses. Other costs increase with square footage as Harvard’s physical plant grows.

Compensation costs have also been on Harvard’s radar, but while salary and wage costs have increased—exceeding $1 billion in 2004 for the first time—Berman said that benefits are the University’s chief concern.

“Harvard is no different from any other business in the United States; health costs are going up,” Berman said in March. “And none of us have great solutions to the problem.”

Construction expenditures will factor into Harvard’s finances for fiscal year 2005 as well. Construction and planning for two new science buildings for FAS and planning for major construction work at Harvard Law School will also figure into Harvard’s capital costs.

FOCUSING ON THE COLLEGE

In Dean of the Faculty William C. Kirby’s annual letter in February, he wrote that as FAS concentrates on investing in financial aid, curricular changes, salaries, and expanding its ranks, it will also try to rein in spending with careful monitoring of general expenses, maintaining its years-long “soft freeze” on staff hiring and conserving energy.

A portion of the University’s income is supplied by student tuition. At the College, annual tuition and fees will increase 4.5 percent next year, exceeding $40,000 for the first time in its history. The overall cost of $41,567 will be offset by a 5.8 percent rise in total scholarship dollars.

But the single greatest income source for all the schools is Harvard’s endowment. The University’s mammoth endowment broke records in fiscal year 2004, yielding a return of 21.1 percent, to reach $22.6 billion.

The payout to schools from the endowment is set far in advance. In December 2004, the Corporation voted to increase the endowment payout for next year—fiscal 2006—by just 4 percent.

But the Corporation also authorized the payment of an additional 4 percent in endowment payout for programs that have been touted as top priorities of Harvard administrators.

All of Harvard’s schools plan to devote the extra increase to financial aid and the hiring of new faculty, Berman wrote in her e-mail late last month. Many schools will also spend the funds on “other aspects of support for the student experience,” Berman wrote.

In March, Berman called the response to the extra 4 percent “very positive.”

“I think all the deans are very focused on a set of priorities and this is encouraging them to figure out how to start making some progress on those priorities,” she said.

SHUFFLE AT THE TOP

But the extraordinary endowment returns come at a time when Harvard Management Company, which invests the endowment, is seeking to fill a very large pair of shoes. The management company’s president, Jack R. Meyer, is scheduled to leave at the end of June after 14 years at the helm. He will start his own investment firm with four other Harvard colleagues.

In January, Harvard announced that a search committee will try to find a new chief for the management company. And in March, the University said it had hired an executive search firm, the New York-based PrinceGoldsmith LLC, to aid in the search process.

Meyer is not alone in his decision to depart. Vice President of Trusts David W. Scudder ’57, who helped Harvard get clearance from the Internal Revenue Service (IRS) to allow donors to invest their charitable trusts in the Harvard endowment, will leave July 1 to start an investment management firm in Boston. And in July 2004, foreign equity manager Jeffrey B. Larson left Harvard along with 14 members of his team to start a hedge fund, Sowood Capital Management.

The University’s investments this year were also targeted by students and faculty who pressured Harvard to divest from the oil company PetroChina because of its ties to the government in Sudan. The Corporation voted to sell its shares last month.

RAKING IT IN

For the second consecutive year, Harvard led higher education in fundraising, pulling in $540.3 million from donors in fiscal year 2004.

The University has also set its sights on a colossal capital campaign that will likely be the largest ever announced in higher education.

The campaign is currently in the “quiet phase,” a time when the University plans the direction of the campaign and seeks donations from top donors, hoping to raise 20 to 30 percent of the total. For most universities, the process takes about two years, but Harvard may spend more time in the quiet phase, Vice President for Alumni Affairs and Development Donella Rapier said last month.

Harvard will publicly launch the campaign in the next two or three years, but has yet to announce the total dollar figure the campaign will seek to raise.

But the University has set its “high level” objectives, Rapier said. The campaign will focus on the curricular review, efforts to strengthen the College, graduate schools whose missions support public service, and cross-university initiatives like a new focus on the sciences. The campaign will also center on funding for the arts, culture, and humanities, she said.

The University’s planned expansion into Allston will be partly financed through fundraising, but development there will outlast the likely five-year public phase of the capital campaign. Harvard may launch fundraising drives specifically for Allston or extend the campaign itself, Rapier said.

In addition, debt will play a large role in financing the costly Allston development. Harvard will also derive income from fees it charges for services like parking, Berman said in March.

Another source of income will be the endowment itself. In 2001, Harvard’s central administration instituted an annual one-half of 1 percent tax on the endowment to help fund the expansion; the 25-year tax is expected to yield at least $3 billion. But Berman said that decapitalizing the endowment—removing capital from the University’s long-term holdings—is not currently being discussed as a funding source for Allston development.

Though the cost of expansion will be in the billions, Harvard is still not prepared to put a more concrete dollar figure on Allston.

Berman said that an estimate will not be ready until a variety of expansion possibilities are presented to the University by Cooper, Robertson & Partners, a firm retained by Harvard to develop planning frameworks for Allston development.

“Aside from the fact that we know it will be billions, we don’t have anything more specific,” Berman said.

—Staff writer Nicholas M. Ciarelli can be reached at ciarelli@fas.harvard.edu.