In Letter, Faust Warns of Potential Financial Losses

In the face of the greatest financial meltdown in decades, University President Drew G. Faust made one thing clear: Harvard’s $36.9 billion endowment would be affected.

In a letter to the Harvard community Monday, Faust wrote that the turbulent economic climate will impact the University’s finances, but that administrators have not yet laid their plans to mitigate the effects of the financial crisis. Because all three of the University’s primary sources of revenue—endowment income, donations, and tuition—are expected to take a hit, Faust said that the University will be tightening its belt and determining which initiatives to maintain or to scale back, and if necessary, to cut.

Endowment income currently covers about one third of the University’s operating budget.

In a phone interview, Faust declined to discuss specific budgetary changes, only stating that each of the University’s schools will be responding to the financial strain in its own way. She also declined to say definitively whether the University would slow down its physical expansion or limit the growth of the faculty, saying only that deans would look to achieve cost savings by wringing out administrative inefficiencies.

Because each school is funded through different mixes of the three income streams, Faust said that University leaders will tailor solutions to the individual schools. The Faculty of Arts and Sciences, for example, receives a substantial portion of its budget from the University endowment income, whereas the Harvard School of Public Health depends heavily on sponsored research grants.

FAS Dean Michael D. Smith wrote in a letter to FAS faculty and staff responding to Faust’s announcement that given the magnitude of the reduction in endowment income, the academic and administrative deans must look into cutting back on annual operating expenses.

“We often consider how we might slow the growth of our expenses,” Smith wrote in the letter obtained by The Crimson, “but we almost never discuss how we can roll back the clock to spend less.”

But Faust emphasized several times in the interview that despite tough economic times, the University will maintain current levels of funding for financial aid.

“We must, even in these difficult times, keep our eye on this priority and make choices that continue to enable us to advance our highest priorities University-wide and in individual schools,” Faust said, adding that hiking up the tuition is not a solution to closing the gaps in the budget.

Last spring, the University rolled out a series of financial aid expansions, including ones at the College, Harvard Law School, and Harvard Medical School—initiatives University officials billed as Harvard’s commitment to student need. Families making less than $60,000 annually do not shoulder the burden of tuition at the College, and those earning up to $180,000 pay no more than 10 percent of their income.

Faust hinted that the University may need to cut costs and push back timelines for certain initiatives, such as expansion plans in Allston.

“It’ll be a high priority for us to continue with our construction projects already underway,” Faust said. “But as we plan for the future, we have to look at matching our ambitions in construction with our resources.”

Though construction for the first science building in Allston, which began this spring, was slated to near completion in July 2011, it is unclear whether this date will be postponed as the University assesses current spending.

Additionally, Faust warned that the University, one of the largest employers in Massachusetts, will be evaluating its payroll. Compensation costs currently account for almost half of the University’s budget.

But budgetary plans have yet to be laid out, in part because University officials do not yet have a full report of the state of its endowment. In the interview, Faust declined to comment on the performance of the endowment—the largest in higher education—noting that the University discloses its investment returns once per year.

Faust reiterated that she and her colleagues hope to identify the University’s priorities and whether Harvard can continue to advance them at the same pace.

—Staff writer Athena Y. Jiang can be reached at ajiang@fas.harvard.edu.

—Staff writer June Q. Wu can be reached at junewu@fas.harvard.edu.