Faculty Budget: Good and Very, Very Bad

This week, followers of the University's financial state heard lots of good news--and some that was very, very bad. The bad was so bad, in fact, that one administrator said the University is facing one of the most formidable financial crises in recent memory.

The bad news is that the University had amassed a $52.2 million deficit from its employee benefits spending. In only four year, the University as wiped out its reserves for employee benefits and plunged into debt, which is now owed to the Corporation.

A special task force chaired by Provost Jerry R. Green was formed months ago the conduct a comprehensive review of Harvard's benefits package. But if they had seen the data on the $52 million deficit, they didn't mention it to the Faculty Council, who first saw the figures on Wednesday.

Only a day earlier, professors' financial fears were allayed by Den of the Faculty Jeremy R. Knowles at the faculty's monthly meeting.

Knowles discussed highlights from his annual budget letter, distributed to all faculty members on February 9. He stressed "cautious optimism," declaring that the finances of the University were moving swiftly towards stability.

Knowles went so far a say that "the downward trajectory of the annual deficit...shows that we are driving towards a balanced budget within a year or two."

Juxtaposed against the revelations of the next day before the Faculty Council, Knowles' assertions appear startlingly incomplete, if not inaccurate.

The finances of the FAS may be improving, but benefits as crucial as social security, pensions, health care and dental care may be in jeopardy for faculty and staff members throughout the University.

And any solution from Green's task force could be months off.

"It's too soon to tell what kinds of solutions the task force may come up with," said Director of Benefits Administration Joan Bruce.

Bruce also said, however, that administrators had been working to formulate a plan to take steps towards introducing managed health care for faculty and staff as a method of cost containment.

"Our costs are not driven by the numbers of people who participate, but more by the design of the plans they participate in," Bruce said.

This projection contradicts a suggestion made by Secretary to the Faculty Council John B. Fox Jr. '59. Fox said this week that the costs of benefits--particularly for health care--are rising in part because of increased enrollment in University health care programs.

Fox also attributed rising costs to increasingly generous benefit programs and rising social security costs, as well as a national force beyond Harvard's control: the rapidly escalating costs of health care itself.

There's no reprieve in sight. Even if the University could completely eliminate the $52 million deficit it has already amassed, within five or six years another shortfall of the same scale would accumulate, Fox said.

When figures on the shortfall were distributed to the Faculty Council Wednesday, the reactions of members ranged from concern to amazement.

"$52 million is a huge amount of money," said Kahn Associate Professor of the History of Science Anne Harrington. "It was amazing to see the payroll benefits broken down like that."

"I was alarmed to see the amount of money we put into things that are invisible to most of us," Harrington added.

Professor of Chinese History Peter K. Bol said his reaction to the data was one of "profound concern."

While the University lost $66.4 million on employee benefits over the last four years, a reserve of $14.2 million from 1989 limited the actual shortfall to $52.2 million, according to a table produced by Director of Finance and Accounting Judith B. Warren.

In Warren's presentation to the Faculty Council, she said the University normally recovers the costs of employee benefits by charging the schools and departments a fringe benefit rate applied to all salaries. Until recently, she said, these assessments covered the University's benefits bills.

According to a statement from Acting Vice President for Government, Community & Public Affairs Jane H. Corlette, benefits costs have increased by an average of 15 percent per year over the last five years.

Harvard has drawn from its reserves to pay some of those costs rather than burden the schools and departments with the added expense, Corlette continued.

The shortfall is especially costly because the Corporation money could be used for other purposes, such as slowing tuition increases or raising faculty salaries, Fox said.

"My understanding is that the more we spend on benefits, the less money we have to spend on educational programs and on faculty and students," said Professor of Sociology Theda Skocpol.

Faculty Council members said they will await a report from the Green task force before considering potential solutions to the deficit problem.

"My sense was that this was presented to the Faculty Council with the idea of preparing us to review solutions when they are presented," said Assistant Professor of the Classics Cynthia Damon.

Despite her willingness to wait for a report from the task force, Damon said that "the problem is in urgent need of solution."

Exactly how the University will find that solution is itself a matter of contention, however.

Some members of the Harvard community are claiming that they are being excluded from a process whose outcome could directly affect their lives.

"This looks like a process that a small group of top-level, highly-paid administrators are trying to control very tightly," said Bill Jaeger, director of the 3,600-member Harvard Union of Clerical and Technical Workers.

Jaeger said he was concerned that the process of finding a solution to the financial crisis is not as inclusive as it ought to be, despite the task force's establishment of various advisor groups.

These groups are supposed to provide vehicles for faculty and union members to offer input to the task force. But Jaeger said these groups are more useful in theory than in practice.

"These are supposed to be advisory groups--but no one even knows who's on them," he said.

"I understand that the burden of increasing costs on the University community is very real," Jaeger said. "But these are not fringe benefits."

"Members of the Harvard community depend heavily on these benefits," he added. "For many Harvard families these benefits are tools for survival."

Jaeger said he would like to see a more inclusive process evolve, and postulated that a careful review must incorporate "real, deep participation from all the important constituencies, not the secondary participation that we're being offered now."

In fact, Jaeger charged that the present construction of the task force is "so confused that it might not be able to produce anything at all."

FAS Budget

All this appears to stand in contrast with Knowles' Faculty of Arts and Sciences budget report, which depicts as promising immediate future.

It is not Knowles' broad statements but in the budget report's numerical details that a picture of the rising payroll benefits and resulting financial disaster emerges.

According to the report (see table, this page), personnel expenditures accounted for 38 percent of total FAS spending in 1993, while employee salaries constituted only 31 percent of spending.

That seven percent gap between personnel salaries and total outlays amounted to $19.3 million. Knowles addressed this situation at the conclusion of his budget letter.

"At the start of this letter I mentioned that there are some thunderclouds in sight," he wrote. "[But] unlike most thunderstorms, we can do more about our problems than merely put up our personal umbrellas and wait for the institutional rain to stop."

Knowles said he was concerned by the fact that fringe benefits are often equal to 25 percent of an employee's salary. The dean said that for each percentage point that the fringe benefit increases, the cost to the FAS is $1.4 million.

"Much work remains to be done," Knowles acknowledged, "but it is clear that the FAS could not sustain large increases in fringe benefit rates."

"All solutions will surely involve some moderation in the benefits that we presently expect," Knowles wrote, "but we must work to minimize the inevitable sacrifices and to distribute them equitably."