Better Uses of Harvard's Wealth

As the soon-to-be interim president of Harvard, Derek C. Bok leads an institution far wealthier than it was 15 years ago, when his previous term ended. In those intervening years, this growth in the endowment has been accompanied by constant increases in tuition, student debt (especially in professional schools), and an unwelcome shift in the values expressed in the name of the University. As America has drifted into the sway of the money culture, so has Harvard.

For several years, we (along with a number of others from the Class of 1969) have raised this issue with University President Lawrence H. Summers. Following the announcement of his resignation, the Wall Street Journal reported that Harvard’s recently-departed fund managers asserted that Summers listened too much to us. In fact, he did not listen enough.

The growth in the endowment has clearly benefited those who managed it. Since 1991, Bok’s final year as University president, their pay has risen 10 times faster than the endowment itself. Following his retirement, fund managers began receiving million-dollar bonuses. By 2000, those blossomed into eight-digit bonuses—two years ago topping $35 million paid to a single manager. Two months ago, Harvard announced $57 million in bonuses for six fund managers, five of whom no longer worked at Harvard.

There are those who say that Harvard can’t get manage its endowment on the cheap—that, put simply, this is “the market price” for outstanding returns. To the contrary, this pay level has not been established by competition on the free marketplace but is merely an irresponsibly generous figure set by a group of people whose names have not been revealed (but should be). Even if the endowment were to be managed externally, the sheer size of Harvard’s endowment would give it extraordinary leverage to negotiate favorable fees.

We are not the only ones to reject this “market” argument. So does Yale’s chief investment officer, David Swenson, a Yale alumnus who earns roughly $1.1 million per year and manages an endowment fund that has outperformed Harvard’s in recent years. Recently, Swenson said, “the structure of Harvard Management is inherently unstable.” He also warned­ that, “You can’t pay managers astronomical amounts of money because it tears at the fabric of [a university].”

There are issues beyond mere economics at work. From those who manage Harvard’s vast real estate holdings to those who teach law or business, to the president of the University, Harvard does not pay, nor expects to pay, top-of-the-market salaries. Except fund managers, no Harvard employee receives cuts of the endowment’s growth.

Directly or indirectly, this $72 million in bonuses to five employees crowds out funds that would otherwise be available to boost pay at the low end of Harvard’s wage scale—or to restrain tuition increases and debt burdens imposed on students and their families. As the endowment has grown, one would think the economic burdens on students and their families would be alleviated. Not so. Every year since Bok’s retirement, tuition has risen by the rate of inflation only once. Every other year, it rose by substantially more than inflation—more than half the time, by at least twice inflation. Professional school tuitions have risen even faster.

In the 40 years since we entered college, adjusting for inflation, tuition has tripled. When we were freshmen, in 1965, annual tuition was $1,760, the equivalent of $10,912 in today’s dollars. In 2005-06, it’s $32,097, three times greater.

These tuition costs, and the debts required to meet them, can have lifelong impacts. They force many recent graduates to work for top dollar, making it far more difficult for them than it was for us to enter public service, teaching, the arts, or wherever else their ideals and education might lead them. Through the last decade, for just a fraction of what Harvard spent on fund manager bonuses, it could have frozen tuition at all its schools. For just a fraction of the recent (inflation-adjusted) growth in the endowment, Harvard could have forgiven the college and graduate school debts of all its recent graduates who chose to enter public service and other modestly-paying professions.

Not long ago, amid much fanfare, Summers announced that Harvard would no longer require low-income parents to contribute to college costs. What did not get reported was that low-income students must still borrow sums nearly as large as before. The Harvard Financial Aid Initiative costs the University less than $2 million per year, or six weeks’ pay for one fund manager.

For the sake of current and future generations of students, this ever-rising spiral of tuition and debt must be broken. Very soon, Harvard is scheduled to announce its tuition for 2006-07. Last year, the endowment rose by roughly $2.5 billion. Given this, will Harvard once again add to the financial burdens on students and their families? If any tuition increase is in fact announced, we urge Bok to intervene, as interim president, to postpone it, pending an inquiry into whether part of the University’s recent growth in wealth could be used to offset the need for more tuition.

We further ask Bok to return Harvard to an era of full transparency and accountability in the management of the endowment. We encourage him to convene a public forum, open to all members of the University community—students, faculty, employees, and alumni—to discuss how Harvard can manage the greatness of its wealth in a manner that justifies the greatness of its reputation.

Stanley H. Eleff, David E. Kaiser, and William A. Strauss, on behalf of nine members of the Class of 1969.