The school’s endowment is over 380 years old.
The endowment dates back to 1638, starting with John Harvard’s gift of 400 books and half his estate that made him the University’s namesake, according to University President Lawrence S. Bacow.
Other accounts trace it back to 1649, when four alumni donated a parcel of real estate — “a once upon a time cowyard” — to the College. Today, Widener Library occupies that land. In 1669, a number of lumber merchants pledged to donate 60 pounds to Harvard for each of the next seven years, a commitment they sometimes fulfilled with lumber products.
“This development has been assembled really over hundreds of years, literally hundreds,” Bacow said. “Having been assembled over centuries, we can’t just spend it all at once.”
What many don’t realize about endowment funds is that it can’t be spent as freely as they believe it should be.
Administrators also point to legal restrictions on the endowment — which is made up of over 13,000 individual funds — that prevent administrators from distributing money at will.
“The vast majority of the endowment is highly restricted, and we cannot redirect funds that are restricted for one purpose to be used for another,” Bacow said. “Legally, we cannot do that. So, our ability to dip into the endowment is limited.”
In a 2016 letter to Congress, Faust explained that just 16 percent of the funds are considered “unrestricted,” though that figure includes funds dedicated to a specific school. Around 80 percent of endowment funds today are dedicated to individual schools.
[Former University President Derek C.] Bok noted that many of Harvard’s top donors give to a particular cause or initiative that they want the University to pursue. Common restrictions are funds dedicated to professorships and faculty salaries, financial aid, research, specific initiatives, and support for libraries and museums.
Campus projects can be delayed for years after a financial crisis.
The science complex was the first project from the 50-year Institutional Master Plan to begin construction. But while Harvard broke ground on the first building in spring 2008, University officials continued to debate the fate of the additional buildings into the summer of that year.
These debates were interrupted in February 2009 after then-University President Drew G. Faust announced that the University would slow all Allston construction for the remainder of the year. Faust would then completely halt construction in early spring 2010 upon completion of the multi-story, below-ground foundation.
Faust’s announcement came after an unprecedented 30 percent drop in the University’s endowment the previous fiscal year. The strain of the financial crisis at the time all but wiped out Harvard’s multi-million dollar Allston development fund, according to University officials.
“That was a big one,” SEAS spokesperson Paul Karoff said of the 2008 economic crisis-induced disruption. “The foundation was built, which, when people hear ‘the foundation was built,’ they think there’s a slab of concrete that was poured. It was a three-story structure below ground and several acres large.”
“With the markets collapsing and the impact on the Harvard endowment, the difficult decision was made to just halt construction,” he added.
The University spent a significant amount of money to mothball the site and ensure that the foundation would not suffer deterioration in the years following the economic crisis, according to Karoff.
Harvard is not the only nonprofit confronting deep budget cuts.
The endowment issue is confronting universities, think tanks, hospitals, social service organizations, all kinds of nonprofits that have been damaged by the pandemic. The conversation has grown intense among arts organizations, especially smaller ones that are staring at particularly bleak futures. Their audiences have vanished in the short term and they can’t count on a high-profile donor coming to their rescue.
“When your entire business model is being compromised by a pandemic, we have to reconsider everything,” said George Suttles, the director of research at Commonfund Institute, whose parent company manages the assets of about 50 cultural institutions nationwide.Still, many arts organizations, despite the economic stresses they face, say they simply will not touch their endowments.
Why? Because earnings from properly invested endowment funds are a precious revenue lifeblood for many arts organizations. Typically, the organizations can cover only a portion of their operating expenses with money from things like ticket sales and donor contributions. Many rely on endowment earnings to provide 30 percent, or more, of their operating income.
So each year, the organizations take an amount, “the draw,” from the endowment to put toward operating expenses. Preferably, the draw never extends beyond 5 percent of the money held in the endowment. To take more is to risk outspending what a conservative investment portfolio can earn, and to end up eating into the corpus, or principal, of the endowment. The concern is that shrinking endowments result in shrunken investment earnings that are no longer large enough to provide meaningful operating revenue.
You should never eat your seed corn, if it can be helped.
Post by Marcelino Pantoja