Profs, Deans Content as FAS Deficit Nears

A uniform message about the Faculty’s anticipated budget deficit flows out of University Hall these days. As Dean of the Faculty William C. Kirby put it last week, “If we were in financial difficulty, people would know.”

The Faculty of Arts and Sciences (FAS) will spend tens of millions more than its annual income in the coming years. The budget deficit is projected to top $40 million this fiscal year and could double before it gets smaller.

And professors have started to feel the pinch. Earlier this semester, the administration abruptly curtailed the pace of faculty hiring, drawing protest from department chairs who said they were blindsided by the policy change.

But on the heels of strong faculty criticism of a lack of transparency in financial affairs, Kirby’s administration is making the case that those deficits reflect a responsible decision to dip into the Faculty’s $12 billion endowment for projects the dean and many professors say are critically important.

As a result, professors are increasingly echoing Kirby’s confidence in the Faculty’s financial state.

“I think I’m comfortable that we are a little closer to the edge than we usually are,” said Watts Professor of Music Kay K. Shelemay, a member of the FAS Resources Committee, which advises the administration on finances.

Given the stellar growth of the endowment in recent years coupled with needs in the life sciences and a push to grow the Faculty, top deans and professors say the looming deficits represent a wise and overdue use of Harvard’s billions.

“It wouldn’t have been responsible [to] delay that any longer,” said Olshan Professor of Economics John Y. Campbell, also a member of the committee.

Already underway, the investments include three construction projects with price tags in the hundreds of millions—the just-completed Center for Government and International Studies, the Laboratory for Integrated Science and Engineering, and the Northwest building—and dramatic growth in the Faculty’s size, an expected increase from 636 full-time faculty positions three years ago to 750 in 2010.

The fast pace of faculty hiring, which the administration says is still on track despite this year’s slowdown, will cost FAS $28.5 million annually by 2010, according to the committee’s presentation at the Faculty meeting last week.

The administration’s decision to pursue these expensive initiatives despite the resulting deficit is indicative of its strategy to spend first and raise much of the money later. Kirby and professors on the Resources Committee have argued that this approach makes fundraising more effective.

“We want to show alumni and others that we are using—not just saving, not simply hoarding—resources,” Kirby said.

Additional fundraising is slated to pay for about 15 percent—or $15 to $19 million—of the anticipated deficit in fiscal year 2010, according to last week’s presentation, which examined that year as a cross-section of the administration’s long-term financial plan.

The administration’s estimate assumes a 9 percent growth rate in overall FAS fundraising—which, in turn, means “a reasonable growth rate of our baseline funding,” “a reasonably aggressive view in the sciences,” and “reasonably optimistic” timing on a handful of large, individual gifts, according to Scott A. Abell ’72, the FAS dean for development.

Much of the administration’s financial plan depends on the success of FAS fundraising, and particularly on the timing of the University-wide capital campaign. The campaign has been in a “quiet phase” since 2004 but its public launch has likely been delayed until 2008 or beyond. Abell and professors on the committee said that while FAS is “ready” to mount its own fundraising campaign, it will only do so in concert with the rest of the University.

“That does not mean we can’t increase the amount of fundraising done within FAS, particularly on items that we would ramp up toward a campaign,” Abell said. Those items, he said, are primarily endowed professorships, financial aid, “improving undergraduate life,” and building projects.

Once a concerted push for alumni donations is underway, FAS would be able to reduce its heavy reliance on the endowment to pay for the new expenses on buildings and faculty hiring, Campbell said.

The administration’s current plan for 2010 calls for about half of the new expenses to be paid for by $60 million in additional income from the Faculty’s endowment. Sixty percent of that income will be raised by a University-determined increase in the payout rate of the Faculty’s annual income from the endowment. The other 40 percent—about $24 million—will come via a direct withdrawal from the endowment, in a process known as decapitalization.

Endowments are often decapitalized in order to pay for large-scale building projects, though usually as a one-time withdrawal rather than over a period of several years.

But the resources committee and the FAS financial staff “talked through” whether to borrow annually or withdraw a lump sum and chose the latter, Campbell said, because they expected the endowment to grow faster than the interest rate on debt. University President Lawrence H. Summers told the Faculty at its meeting last week that the Corporation—the University’s highest governing body—has approved the decapitalization “in recognition of what is by the FAS an extraordinary period of growth.”

With the University’s endowment at $25.9 billion and the Faculty’s slice at nearly $12 billion, administrators and professors see the huge numbers as compelling reasons for the rapid and costly expansion of FAS.

“I see the [deficit] as a sign that we’re doing the right thing, going the right direction, using this endowment appropriately,” said Arthur Kleinman, chair of the anthropology department. “And there have been questions to the contrary.”

Those questions were raised prominently in a 2,500-word article on the cover of the Wall Street Journal’s Pursuits section in December. Entitled “When $26 Billion Isn’t Enough,” the article quoted Harvard alumni who criticized their alma mater for doing too little with its extensive resources.

Kirby mentioned that article in an interview with The Crimson last week.

“It could be embarrassing not to be using our endowment for important initiatives,” he said.

—Staff writer Anton S. Troianovski can be reached at atroian@fas.harvard.edu.