FAS Approaches End of Deficit

Facing a 30 percent drop in the University’s endowment, cookies at Faculty Meetings had became a luxury.

Faculty of Arts and Sciences administrators removed the cookies—as a symbolic gesture that garnered heavy media attention—from the meeting as one part of sweeping cuts to the school’s expenses that included laying off 77 FAS employees and trimming departmental budgets.

For FAS, the largest school in the University, the endowment’s collapse caused a $220 million deficit—of an operating budget of $1.2 billion.

In Dec. 2008, FAS Dean Michael D. Smith announced to a packed Faculty meeting salary freezes for faculty and staff and asked department administrators to trim 10 to 15 percent of their budgets.

But recently, the financial outlook is improving.

In Sept., the Harvard Management Company, which oversees the University endowment’s investments, announced an 11 percent investment return. This increase not only beat the HMC’s target of 8.25 percent but also allowed for an increase in the FAS distribution—the amount of money allocated to the school from the endowment—for the 2012 fiscal year.

But compared to peer institutions like Yale and Princeton, FAS has reduced its deficit, which today stands around $35 million, more efficiently than other universities, many of which are still examining additional areas for cost reduction.

“I think the FAS administration has done an astonishingly careful job in making cuts and I think they’ve done an astonishingly amazing job in reducing the deficit from $220 million to $35 million,” English Department Chair W. James Simpson said. “In that way, we might have been able to perform better than some of our competitors.”

HEALING HARVARD

Three months after Lehman Brothers collapsed into bankruptcy, sparking the 2008 financial crisis, University President Drew G. Faust sought to combat one of the most precarious financial situations in Harvard’s history by imploring deans to cut costs.

“To ensure that we are in the best position to respond to this new set of financial realities, we are working with each School to focus on a range of capital and operating budget-reduction,” Faust wrote in a letter to the deans.

Her statement came on the heels of a 22 percent decrease in the endowment’s nominal value from July 1 through Oct 31, with losses in nearly every single of its asset classes.

As the endowment dropped, so did the distributions to the University’s individual schools: In the fiscal year ending in June 2010, FAS would see its distribution drop 8 percent. It would drop another 12 percent the next year.

During those two years, departments across FAS struggled to meet Smith’s target of 10 to 15 percent reductions. Some departments eliminated staff positions, while others saw staff depart with an early retirement buyout option.

The History and History of Science departments adopted a centralized, off-site staff support system to cut costs.

Some departments, like English, were able to turn to reserve funds.

“I had thought that the cuts were going to be more dramatic than they ended up being,” Simpson said.

After announcing an 11 percent increase in the endowment value—following a restructuring of its investments to maintain diversified asset classes but drift from illiquid holdings—the Harvard Corporation approved a payout rate for the 2012 fiscal year that would lead to a rise of 4 percent in the nominal value of the distribution FAS would receive from the endowment.

That increase has freed administrators from the penny pinching that marked the previous two years and allowed them to turn back toward a focus on academic programming.

“We’re finally at the point that we can worry about things other than not buying paper clips,” History of Art and Architecture Department Administrator Deanna Dalrymple said in an interview early this month. “We can now worry about putting more focus on the academic ambition within the department—bring back symposia, host panels, think again about the academics.”

And FAS department staff members are hopeful about that transition.

“I’m in an optimistic mood,” History Department Administrator Janet H. Hatch said. “Yes, we still have some ways to go with the remaining deficit, but we’ve also learned how to operate at the same level more cheaply—and it’s easier to maintain it.”

YALE YEARNINGS

But as FAS approaches a balanced budget, Yale President Richard C. Levin and Provost Peter Salovey announced in January that Yale would pursue another round of budget cuts, to be approved this May.

In an email to faculty and staff, they said that for fiscal year 2012 they expected a 5 percent decrease in non-academic budgets, while academic programs would maintain their slimmed down budgets.

Although Yale’s endowment increased at 8.9 percent last fiscal year—less than the investment return seen at Harvard—the university still faces a more daunting deficit of $68 million.

Rather than immediately making cuts in the wake of the financial crisis, Yale has relied on its reserves in order to bridge shortfalls in the budget. As a result, it has been slower to make necessary long-term cuts, according to The Yale Daily News.

Staff consolidation still lags behind projected timetables and will continue next year, the YDN reported.

At Harvard, FAS refrained from spending the majority of its large reserves—which stood at $138 million in 2008—in the first two years after the crisis. In May 2010, Smith said the school would draw on the reserves more heavily as it tackles the remaining $35 million deficit by the self-imposed 2012 deadline.

PRIVATE EQUITY PRINCETON

Valued at $350 million, Yale’s deficit was more than twice that of Princeton, which was pressed to meet a $170 million shortfall.

Though Princeton was able to reduce its deficit to $82 million by the end of the 2010 fiscal year, it, unlike Harvard, had to freeze salaries for a second year.

Princeton has also received criticism for its investment strategy as overly reliant on questionable investment vehicles. In the wake of the crisis, The Daily Princetonian reported that the university was expanding its illiquid private equity holdings, a practice questioned by Princeton alumni as overly risky. Harvard has since moved away from many of those investments.

Harvard faculty members and administrators said that this transition in strategy is only one of many ways in which University leaders have moved quickly to address the University’s financial needs in a way that has not necessarily been seen at peer institutions.

“And I only have admiration that, going forward, the leaders in FAS administration will be able to solve this situation in the best interests of the school,” Simpson said.

—Staff writer Sirui Li contributed to the reporting of this story.

—Staff writer Gautam S. Kumar can be reached at gkumar@college.harvard.edu