Surviving a Pandemic at Harvard Endowment

The school’s CFO explained how an endowment actually works in contrast to popular opinion.

The endowment has been adversely affected by the economic downturn and the recent declines in the capital markets. As you mentioned, and contrary to the oft-voiced public opinion that the endowment is hidden away and unused, earnings from the endowment are distributed annually without fail and represent Harvards largest source of revenue for teaching, learning, and research.

Moreover, a singular Harvard endowment does not exist; there are 13,000 individual endowments across the University, and earnings from these 13,000 endowed funds cannot be spent freely. Harvard has to honor each donors wishes through legally binding gift agreements that specify two inescapable fiduciary obligations: First, 70 percent of Harvards endowed funds must be spent on specific, donor-chosen restricted purposes, and second, 100 percent of Harvards endowed funds must distribute earnings annually and in perpetuity. This means that endowed funds are not savings accounts that can be all saved up for a rainy day, used for whatever is judged the most important purpose at the moment, or liquidated by choice. Think of the endowment as a collection of annuities, mostly restricted in purpose, whose annual distributions are affected by the capital markets and inexorably tied to the market value of the endowment. We cannot escape the fact that a lower market value for the endowment means less revenue for Harvard.

Also, contrary to popular perception, Harvard does not have unlimited wealth. Harvard’s resources, whether measured in annual revenues or the endowment’s capacity to make distributions, are subject to the economy, capital markets, and the generosity of donors. As a reminder, during the 2008‒2009 recession, the endowment lost approximately 25 percent of its value, and distributions had to be cut approximately 20 percent.

Amid darkening clouds, the best road forward, The Harvard Gazette

Payout this year will be much less than previously expected.

The distributions from the endowment will be reduced by 2 percent during fiscal year 2021; prior guidance had led to budgets based on the assumption that the distribution would increase by 2.5 percent. Those figures reflect the funds disbursed from each unit in the pooled investments held by each school, unit, or program that has endowment assets. In addition, a 3 percent assessment will be levied on all distributions—resulting, effectively, in a 6 percent decrease in the funds received from endowment distributions, widening the gap from the prior budget guidance to 8 percent or more. 

For perspective, endowment distributions provided $1.91 billion for academic operations in fiscal 2019, the latest year reported (up from $1.82 billion in the prior year). Deans and others might have expected the sum to increase to roughly $2.0 billion in the year about to begin: the 2.5 percent budgeted increment, plus a like amount for distributions from new gifts for endowment that result in more units owned (largely proceeds from the $9.6-billion Harvard Campaign as pledges are fulfilled). Instead, it may decline to perhaps $1.8 billion to $1.85 billion—a nine-figure reduction from budgets drawn up this past spring.

But the funds yielded from the 3 percent levy on endowment distributions will be recycled to the deans, providing resources to defray the added costs of coping with the pandemic, possibly including investments in remote learning; physically altering research and teaching spaces to maintain social distancing; supplying personal protective equipment; testing for the virus; and so on. Effectively, the Corporation has decided to tap funds distributed from all endowments to contend with school-level large, continuing costs of responding and adjusting to the coronavirus, to sustain the overall academic mission safely. Each endowment-supported academic function undergoes a one-year drop in support, to pay in part for sustaining the larger academic entity.

The deans are thus proportionally less squeezed by the new distribution rules for fiscal 2020. But they have the enormous challenge of figuring out how to defray higher costs (coronavirus adaptation; potentially, financial aid as well) with likely lower revenues (for example, as residential executive and continuing education is suspended; possibly from reduced tuition, room, and board income as foreign students are deterred by visa restraints and travel hurdles,  and as all students consider the health outlook and some decide to defer enrolling or take a gap year rather than accept remote rather than residential teaching).

Several Harvard Professional Schools Move Online for Fall, Harvard Magazine

Unfortunately, there is more pain to come if this pandemic continues and the campus remains closed.

As we look forward to the late summer and fall, I am compelled to underscore that the University is facing significant financial challenges which will require difficult decisions in the coming months. In our April 13th letter to the community, President Bacow, Provost Garber, and I stated that our institution has not been spared the economic consequences of this pandemic. We now estimate the University’s revenue for this fiscal year to be $415 million less due to the COVID-19 crisis. This figure includes, among other things, refunding room and board for the last half of the semester and providing moving, travel, and other financial assistance to students who were required to depart campus. It also includes the necessary step of cancelling in-person Continuing and Executive Education courses and programs, and the loss of funding from federal and non-federal sources due to the closure of labs. Additionally, for fiscal year 2021, which begins July 1, we are now projecting a revenue shortfall of $750 million compared to the original budget plans for the year.

These significant losses will require difficult cost saving measures to ensure that the University can continue to advance its core mission of teaching and research. Last month, we announced several initial steps that are already being implemented. These include salary freezes for all faculty and exempt staff, a University-wide hiring freeze, deferring or cancelling all discretionary spending, a review of all capital projects to determine which ones can be deferred, and voluntary salary reductions for senior leadership. As we stated last month, given the magnitude of the financial losses the University has sustained and the projected loss of revenues, it is clear that additional cost saving measures will be needed in the coming months including the possibility of furloughs and layoffs of some members of our workforce.

Harvard Projects $750-Million Revenue Shortfall in Next Academic Year, Harvard Magazine

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Post by Marcelino Pantoja