Facing Scrutiny, Harvard To Up Spending

In the face of governmental allegations that the nation’s wealthiest universities are hoarding money, Harvard responded this year by digging deeper into its endowment while also committing—at least in private conversations—to increase its spending in future years.

The University also prioritized a new financial aid initiative catering to upper-middle class families that had been in the works prior to this year, pushing forward the program’s release in response to governmental pressure, according to one University official.

The moves to increase spending came after Harvard failed to spend five percent of its endowment in nine of the last ten years, missing a threshold that tax-exempt institutions outside of higher education are legally required to meet and that University officials say is their target.

The low spending rates became a particular point of focus in January after the Senate Finance Committee, led by its ranking member, Iowa Republican Charles E. Grassley, sent questionnaires to the nation’s 136 wealthiest universities asking for information on endowment growth and spending, as well as tuition and financial aid.

Such governmental efforts have met with resistance from University officials who question whether policymakers fully understand the complexities of managing a large endowment.

This pressure from lawmakers seems to have hit a nerve: already, one alumna has penned a scathing critique of Harvard’s spending practices in The New York Times, writing that “Harvard is sitting on top of a gargantuan pile of cash” and that “for some reason, no one seems to be talking about a new financial model for running the university.”

This external pressure, both from politicians and the alumni who will be called upon to finance the next capital campaign, seems to have found its mark within the University’s leadership, prompting an institution whose financial practices have been largely static to make the first overtures at increasing spending in some time.

‘A SHOTGUN BEHIND THE DOOR’

One of the most visible effects of the increased scrutiny appears to have been an accelerated timetable for the University’s unveiling of a new financial aid initiative promising more support for middle-income families.

While both Faculty of Arts and Sciences Dean Michael D. Smith and University President Drew G. Faust have said that planning for the program pre-dated any governmental pressure, Smith conceded that scrutiny from national lawmakers may have pushed up the release of the initiative.

“Did it have an effect on when we pushed harder to do it, to come out with it?” Smith said. “Probably. We certainly said this is now a priority for us.”

That reaction hasn’t been unique to Harvard: when Yale announced plans in early January to increase endowment spending by nearly 40 percent, with an emphasis on financial aid, Yale President Richard C. Levin was even more direct about calling policymakers the catalyst.

“The folks in Washington are saying you’re hoarding money,” Levin told The New York Times when he made the announcement. “And we felt uneasy about it ourselves.”

Grassley has not been modest about claiming that his efforts have had an influence in shaping Harvard’s decision, saying that the mere threat of governmental regulation had compelled a “self-correcting” reaction from the top brass in both New Haven and Cambridge.

“I would quote to you the president of Yale, ‘If you want to know why we’re doing this, it’s because Senator Grassley has introduced the prospect of legislation,’ and I haven’t even introduced legislation yet,” Grassley said in an April interview with The Crimson. “It’s like a shotgun behind the door.”

Pressure from alumni has also been a factor in spurring measures to up the spend rate.

J. Bradford DeLong ’82, an economist at the University of California, Berkeley, said that the number of top high school students has increased “between five and tenfold over the past half century,” and that, in response, the California system has “scaled itself up roughly from 4,000 to 40,000 undergraduates a year.”

“Harvard has received roughly $15 billion or so in gifts to carry out its mission as a charitable philanthropy and yet has only managed to scale up from roughly 1,200 to 1,600 undergraduates a year,” DeLong said, meaning that the California system had only about four times as many undergraduates as Harvard in 1960 compared to twenty-five times as many today. “As an alumnus, I think that pretty much speaks for itself.”

As it prepares for a major capital campaign, the University is increasing spending to demonstrate to alumni donors that it is willing to use the money that already in its coffers.

“Our goal is to use maximize the use of our endowment—we don’t want to ask donors for money where we can access endowment wealth,” said Deena Giancotti, FAS’

associate dean for finance. “We should be using the endowment when we can.”

UPPING THE RATE

The University’s reliable failure to meet its stated aim of spending five percent of its endowment has drawn attention not just from outside critics but from Mass. Hall as well. According to former University president Lawrence H. Summers, persistently frugal spending habits became a particular point of concern for him.

“My view was the University was insufficiently utilizing its endowment, that it needed to increase significantly the payout ratio so as to be an academic institution rather than a financial institution,” said former University president Lawrence H. Summers.

The former president’s solution was what came to be known as a “strategic payout” by which schools within the University were allowed to come to the president and the Harvard Corporation with proposals to increase expenditures to pay for their priority initiatives.

More recently, governmental pressure has led top University officials to encourage deans to make further use of the strategic payouts in an attempt to increase long-term spending, according to Faust.

“One of the things we’ve asked them to do is to up the spending rate and try to identify priorities,” Faust said. “So what we’ve been talking about is really the use of the strategic payout.”

In what appears to be a further—and more immediate—response to concerns over low levels of endowment spending, Faust has encouraged deans to come forward this year with plans for “strategic decapitalizations,” or proposals for one-time infusions of endowment money geared toward short-term initiatives.

“With the strategic decap this year we’ve said, ‘Okay, we have these returns, we’d really like to use our resources,’” Faust said. “We are a university not a bank.”

In more ways than one. Unlike a bank, the University cannot simply withdraw money from the endowment to pay for initiatives not in line with donor’s wishes. And Harvard’s benefactors have earmarked little wealth to pay for certain things, like information technology, where there are significant and growing expenses.

While the endowment, at $34.9 billion as of last summer, is the largest of any university in the world, it comprises more than 11,000 separate funds, with 83 percent of the total value restricted by donors’ wishes.

“We have endowments, for instance in the Graduate School, that might be designated specifically to provide financial aid for a graduate student who is a single parent from Connecticut,” Giancotti said. “We may only get a student who meets this criteria once every 10 years, and so the endowment just keeps growing and growing. But we can’t use it.”

In order to give itself more latitude in spending, FAS—which accounts for just under half of the total University’s total endowment—launched an initiative this spring to sift through and examine the terms of its most restrictive funds. Those that remain inflexible after further scrutiny, Giancotti said, will be sent to the University’s lawyers and, as a last resort, potentially brought before a probate court in order to broaden the terms under which Harvard can access the money.

BESET FROM ALL SIDES

Governmental concerns over endowment spending came to a head this spring, starting with the Finance Committee’s decision to send a questionnaire requesting financial information from universities whose endowments top $500 million.

Grassley and his Democratic counterpart, Max S. Baucus of Montana, expressed concern that soaring tuition costs have made it difficult for lower and middle-income families to pay for college education, and that endowments have grown faster than spending on financial aid.

“We want to make sure the money is used for the purpose given,” Grassley said in the Crimson interview. “[Universities] are not a store-house for money, and they have become one to some extent.”

Harvard officials, who received the 11-point inquiry on Jan. 24, returned a 23-page response in late February that included detailed data about endowment growth, management, and spending, as well as financial aid and tuition.

In a short cover letter addressed to the senators, Faust stressed Harvard’s commitment to expanding access to those from poorer backgrounds, while suggesting that a blanket policy—like Grassley’s talk of mandating a five percent payout rate—might be ill-advised.

Endowment spending, Faust wrote, had to be examined “through a careful balancing of the needs of the current generation of students against the preservation of sufficient resources for generations to come.”

But Grassley did not appear convinced that Harvard has been making a full commitment to adequate spending.

“I think they’re asking us to consider, saying don’t lock us in too much, considering the ups and downs of the economy,” Grassley said. “But recently when you have 20 percent growth just as return on your investment, I think we can expect more.”

Grassley’s investigation made ripples for legislators outside of Washington. Three months after Grassley sent his questionnaires, a Massachusetts state representative—building on the senator’s contention that universities are hoarding wealth—introduced an amendment to the state budget that would impose a 2.5 percent annual tax on every dollar of endowment in excess of $1 billion. The amendment did not pass, but has been submitted to the Department of Revenue for further study.

The amendment caused an immediate backlash in the University community, with economics professor N. Gregory Mankiw, a former chief economic advisor in the Bush administration, calling the legislation “one of the most pernicious ideas I have heard of late.” Smith followed suit, condemning what he said was the arbitrary effect of the tax.

“I guess the most key item here for me is that this is our future, this is the future of the country, that universities are the way we keep our society moving forward and helping out the world,” Smith said. “And to start taxing them randomly is very dangerous—very, very dangerous.”

—Staff writers Clifford M. Marks and Nathan C. Strauss contributed to the reporting of this article.
—Staff writer Christian B. Flow can be reached at cflow@fas.harvard.edu.
—Staff writer Kevin Zhou can be reached at kzhou@fas.harvard.edu.