Fiscal Portrait

The University’s annual financial report for fiscal year 2013 (ended last June 30), published in November (download PDF), reveals a nearly 5 percent growth in operating revenue, to just more than $4.21 billion; a greater increase in expenses—up 6 percent, to $4.25 billion; and, therefore, a wider deficit of $34 million (compared to a negligible deficit in fiscal 2012).

The nearly $200-million gain in revenue principally reflects a larger distribution from the endowment ($77 million), increased giving for current use ($49 million, presumably reflecting the gathering force of The Harvard Campaign), and higher tuition income ($29 million, primarily from graduate- and professional-degree programs). Total funding for sponsored research rose 1 percent, to $845 million, as federal monies (77 percent of the total) shrank 2 percent and other sources increased 17 percent.

Harvard’s spending in fiscal 2013 was driven by costs other than salaries, wages, and employee benefits—in contrast to the prior year (see “Sober Finances,” January-February 2013, page 47). Compensation costs, which continue to account for about half of operating expense, rose 4 percent, with salaries and wages up 4 percent. Employee benefits rose 6 percent—in line with the growth in fiscal 2012 after accounting for a one-time adjustment.

But non-compensation expense increased 7 percent, including costs for a number of “strategic initiatives” listed in the report: the edX online collaboration, development of Allston properties, and the capital campaign itself. Some one-time items apparently increased these expenses, which were, however, also decreased by $19 million compared to fiscal 2012, reflecting lower interest expense as Harvard’s debt has been reduced from $6.3 billion to $5.7 billion during the past two years (and, where possible, the cost of debt outstanding trimmed by refinancing). Adjusting for that savings, non-compensation expense rose a robust 8 percent. In the report’s footnoted functional classification of operating expenses, the cost of the libraries (one of the major operations being consolidated, as noted in the introductory letter by Daniel S. Shore, vice president for finance and chief financial officer, and James F. Rothenberg, treasurer) decreased by 3 percent, to $230 million: below the fiscal 2011 level. The institutional-support category (including general administration, fundraising and development, and other costs, including some of those one-time items not detailed) expanded $77 million, or 12 percent, to $734 million.

Among other noteworthy items:

Beyond its operating budget, Harvard is spending a lot on capital projects, including the art museums, the Business School’s Tata Hall, and the undergraduate House renovation (a total of $404 million in fiscal 2013, up 19 percent), with much more in prospect as the campaign underwrites further business school building, the Allston science complex and other projects recently approved in the institutional master plan, and so on.

Accrued retirement obligations decreased by $302 million in fiscal 2013, driven principally by postretirement health benefits. That change reflects the recent rise in interest rates, different assumptions about future healthcare costs, and changes in the retiree medical plan. Further changes in retiree health benefits, effective January 1, 2014, affecting nonunion employees with more than five years to eligibility for coverage, will reduce the University’s share of the premium cost for the coverage, and to varying degrees, increase the number of years of service to attain the maximum subsidy. For employees hired after that date, the minimum years of service and the age to qualify for coverage both increase; the number of years of service to attain the maximum subsidy rises (by a decade); and the University will cap the growth in its contribution to insurance premiums at 3 percent annually from 2020. In the aggregate, these represent potentially large reductions in Harvard’s future liability for retiree healthcare.

Tending to past business, Harvard spent $345 million during the year to get out of the last of the interest-rate swap agreements it put in place a decade ago to help finance and build a vast Allston research campus—plans later radically downsized and pushed back. According to the University’s figures, the cash costs incurred in undoing these swaps (intended to protect against rising interest rates, they yielded enormous losses and demands for collateral when interest rates declined following the financial crisis in 2008) now total $1.255 billion. The remaining interest-rate exchange agreements shown in the financial-statement footnotes pertain to debt outstanding, and are a part of normal management of interest costs.

Looking to the future, total giving (including the current-use gifts cited above) climbed to $792 million from $650 million in fiscal 2012. Pledges receivable, another indicator of the fundraising campaign, rose to $1.24 billion at the end of fiscal 2013, up from $909 million the prior year.

Characterizing the year, Shore said of higher education generally, “There are continuing challenges for the sector” to which Harvard is not immune. This is the third year of essentially break-even results. (That includes taking into account the 2011 and 2012 reclassification of the 0.5 percent “administrative assessment” on the endowment as operating revenue, rather than a separate capital item—a change that bettered reported results for fiscal 2011 by $129 million compared to the previously reported figure, rising with higher endowment distributions in the subsequent years. See “An Allston Accounting Adjustment,” January-February 2013, page 48.)

He pointed to “pent-up spending aspirations” in the face of continued pressure on revenues from tuition, sponsored research, and endowment investment returns. Indeed, the University would apparently be happy if sponsored support from all sources remained level in the current fiscal year. Reflecting the Corporation’s spending rules based on investment results over time, budgeted distributions from the endowment to support academic operations, up 5 percent in fiscal 2013, are scheduled to increase just 2 percent this year—a significant constraint for deans.

Hence the importance of embracing “innovative revenue sources,” as Shore and Rothenberg wrote in their letter. The campaign is the largest such opportunity at hand, and deans have a clear incentive to work with donors to pledge and accelerate payment on gifts for endowment, so they can expand distributions beyond the meager budgeted number. Technology transfer from inventions in Harvard laboratories is another. And at some point, in some way, collecting revenue from the edX online courses will likely figure in the mix.