FAS Report Calls Center's Funds Into Question

The central administration's management of Harvard's financial assets is seriously flawed, according to a report released to the full Faculty today by the Faculty of Arts and Sciences (FAS) Committee on Resources.

The committee's central concern is with the General Operating Account (GOA), a University bank of sorts where Harvard requires its nine schools deposit all their non-endowment assets--a total of $1.676 billion in fiscal '96.

All transactions between the University, its units and outside organizations are handled through the account. The central administration, in turn, invests the funds not needed for immediate use by the schools and uses the profits to cover about 47 percent of its budget, by far its largest income source.

The report takes issue with the administration's profiting from the schools' funds--or, at least, not returning part of those profits to the schools.

"We don't get any interest on it, and there's something sort of vague about the whole thing," said William Paul, Mallinckrodt professor of applied physics and a member of the Faculty Council. "That upsets me because there may be millions of dollars involved."

The Faculty Council discussed the report at a previous meeting, and a discussion of the report is on the agenda for next week's meeting of the full Faculty.

The committee also questions the prudence with which the center is investing the GOA--as well as the very advisability of the center relying so heavily on the investments for its income. It has now requested an annual report on the fund's performance.

"One obvious concern is that a serious downturn in investment markets would have a detrimental effect on the current account of the University and would require alternative financial sources, very possibly from the Faculties," the report says.

The report notes that the central administration has undertaken its own review of the GOA, led by Vice President for Finance Elizabeth C. "Beppie" Huidekoper.

The GOA was created in the 1970s, and at the time, the administration did not invest the money but got most of its funding through fees assessed on the Faculties based on their sizes. Harvard began investing the account in the 1980s.

The report also called for the central administration to report its finances with more lucidity and to be more accountable to the Faculties--particularly the FAS--when making major financial decisions.

Former Provost Albert Carnesale prepared a letter to the Faculties this summer, which summarized the center's finances, though some Faculty members said they had hoped for a more substantive analysis, something akin to Dean of FAS Jeremy R. Knowles' annual budget letter.

The center is currently implementing Project ADAPT, a $50 million initiative to coordinate financial record-keeping University-wide, a move that should improve its ability to report on its finances.

"The committee's greatest concern...is that the University does not have formal governance structures to ensure consultation for major decisions by the Center, or by other Faculties, that will have an impact on all parts of the University," the report says. "No structures have been put in place to protect us from another MATEP."

The University constructed the Medical Area Total Energy Plant (MATEP) in the 1970s to provide steam, chilled water and electricity to the Longwood Medical Area and the affiliated hospitals.

Original projections placed the plant's cost at $50 million, but final construction costs ballooned to nearly $350 million.

"The bigger general question is that there's no great accountability about what's going on in the center and the Faculty would like to have more accountability," Paul said.

Much of the report's significance and conclusions stem from the way power and money flow at Harvard--a policy those in administration circles dub, "every tub on its own bottom." This approach gives each unit, school or organization within Harvard final financial responsibility for itself.

Because the central administration has few income sources of its own, the fees it assesses each of the faculties to cover the core activities it undertakes lead to a tension between the power of the center, sitting atop the University hierarchy, and the perception that it cannot fund itself.

What this report underscores is that much more of center's funding comes from returns on investing the GOA than from these assesments.

Both sources of income lead the Faculty to view their assets as the prime source of the center's funding and, therefore, claim a stake in how the money should be spent.

The report also gives a glimpse into the complex finances of the central administration.

Generally, the center's activities are divided into two categories: services to which the faculties can subscribe, such as the Faculty Club and Harvard Dining Services, and core administration--necessary activities for the day-to-day operation of the institution--which are funded by general assessments on the Faculties.

The core administration budget totaled $83 million in fiscal '96 and came from four major sources: $23.3 million from the University Assessment, which requires each faculty to pay an annual fee of 6.75 percent of its salaries to the center; $9 million from the University's share of research overhead from the federal government; $11.7 million from miscellaneous fees and expenses, and $39 million from interest on the GOA.

The report stems from an 18-month investigation by the Resources Committee. The committee was founded in 1995 following nearly a year of concern over the University's handling of a crisis in the funding of health and retirement benefits.

The committee is charged with identifying and discussing issues, projects, proposals and trends that may affect the allocation of significant resources within the FAS or between the central administration and the FAS

"One obvious concern is that a serious downturn in investment markets would have a detrimental effect on the current account of the University and would require alternative financial sources, very possibly from the Faculties," the report says.

The report notes that the central administration has undertaken its own review of the GOA, led by Vice President for Finance Elizabeth C. "Beppie" Huidekoper.

The GOA was created in the 1970s, and at the time, the administration did not invest the money but got most of its funding through fees assessed on the Faculties based on their sizes. Harvard began investing the account in the 1980s.

The report also called for the central administration to report its finances with more lucidity and to be more accountable to the Faculties--particularly the FAS--when making major financial decisions.

Former Provost Albert Carnesale prepared a letter to the Faculties this summer, which summarized the center's finances, though some Faculty members said they had hoped for a more substantive analysis, something akin to Dean of FAS Jeremy R. Knowles' annual budget letter.

The center is currently implementing Project ADAPT, a $50 million initiative to coordinate financial record-keeping University-wide, a move that should improve its ability to report on its finances.

"The committee's greatest concern...is that the University does not have formal governance structures to ensure consultation for major decisions by the Center, or by other Faculties, that will have an impact on all parts of the University," the report says. "No structures have been put in place to protect us from another MATEP."

The University constructed the Medical Area Total Energy Plant (MATEP) in the 1970s to provide steam, chilled water and electricity to the Longwood Medical Area and the affiliated hospitals.

Original projections placed the plant's cost at $50 million, but final construction costs ballooned to nearly $350 million.

"The bigger general question is that there's no great accountability about what's going on in the center and the Faculty would like to have more accountability," Paul said.

Much of the report's significance and conclusions stem from the way power and money flow at Harvard--a policy those in administration circles dub, "every tub on its own bottom." This approach gives each unit, school or organization within Harvard final financial responsibility for itself.

Because the central administration has few income sources of its own, the fees it assesses each of the faculties to cover the core activities it undertakes lead to a tension between the power of the center, sitting atop the University hierarchy, and the perception that it cannot fund itself.

What this report underscores is that much more of center's funding comes from returns on investing the GOA than from these assesments.

Both sources of income lead the Faculty to view their assets as the prime source of the center's funding and, therefore, claim a stake in how the money should be spent.

The report also gives a glimpse into the complex finances of the central administration.

Generally, the center's activities are divided into two categories: services to which the faculties can subscribe, such as the Faculty Club and Harvard Dining Services, and core administration--necessary activities for the day-to-day operation of the institution--which are funded by general assessments on the Faculties.

The core administration budget totaled $83 million in fiscal '96 and came from four major sources: $23.3 million from the University Assessment, which requires each faculty to pay an annual fee of 6.75 percent of its salaries to the center; $9 million from the University's share of research overhead from the federal government; $11.7 million from miscellaneous fees and expenses, and $39 million from interest on the GOA.

The report stems from an 18-month investigation by the Resources Committee. The committee was founded in 1995 following nearly a year of concern over the University's handling of a crisis in the funding of health and retirement benefits.

The committee is charged with identifying and discussing issues, projects, proposals and trends that may affect the allocation of significant resources within the FAS or between the central administration and the FAS