Harvard money: Not so smart, after all?

From Vanity Fair, on the collapse of the Harvard endowment, once the world's largest, and the financial turmoil it has caused for a university once used to the largesse that its massive endowment enabled:

Only a year ago, Harvard had a $36.9 billion endowment, the largest in academia. Now that endowment has imploded, and the university faces the worst financial crisis in its 373-year history. Could the same lethal mix of uncurbed expansion, colossal debt, arrogance, and mismanagement that ravaged Wall Street bring down America’s most famous university? And how much of the turmoil is the fault of former Harvard president Larry Summers, now a top economic adviser to President Obama? As students demonstrate, administrators impose Draconian cuts, and construction is halted on an over-ambitious $1.2 billion science complex, the author follows the finger-pointing.

~~~ ~~~ ~~~

Early last May, I attended a town-hall meeting of undergraduates at Harvard University in Cambridge, Massachusetts. The topic that evening: cost-cutting. As I settled into my chair, in Boylston Hall, student activists, members of the “Student Labor Action Movement,” were making their way through the auditorium, handing out flyers. “Rethink. Resist,” urged the bold black letters. It was a call to action. “no layoffs!” At the top of the printed page was Harvard’s historic coat of arms: three small open books. Cleverly, the university’s Latin motto—normally inscribed on the books as “ve-ri-tas“—had been replaced with a near anagram, “av-ar-ice.”

Ignoring the agitators as best he could, Michael Smith, dean of the Faculty of Arts and Sciences, Harvard’s biggest division, called the meeting to order. Sitting casually on a desk, wearing jeans and a short-sleeved polo shirt, Smith, a professor of engineering and applied sciences, and a former competitive swimmer, looked more like an athlete than an administrator. He got straight to the point: his division—which includes Harvard College, the Graduate School of Arts and Sciences, and the School of Engineering and Applied Sciences—was facing a budget deficit of $220 million.

That’s a huge sum: $220 million! Nearly 20 percent of the Faculty of Arts and Sciences’ current budget had to be cut. “That frightens me,” Smith said forthrightly. “It should frighten you. We obviously can’t sit around and do nothing. We’ve got to find a way to try and get the income back in alignment with the expenses.”

Smith’s audience listened intensely. Already, they had seen evidence of the cutbacks Smith was alluding to. All across campus, as a preliminary measure, thermostats had been lowered during the winter months, from 72 degrees to 68 degrees. Students and faculty were no longer entitled to free coffee at the university’s Barker Center. The Quad Express, which shuttles students between the Radcliffe Quadrangle and Memorial Hall, would soon be running every 20 minutes, not every 10 minutes. More recently, despite loud protests from Harvard’s athletes, among others, it was announced that hot breakfasts would no longer be served on weekdays at undergraduate residential houses. Instead of bacon, poached eggs, and waffles, students would have to get by on cold ham, cottage cheese, cereal, and fruit.

Such cost-cutting measures—“alignments” and “resizements,” as Harvard prefers to call them—are painful for everyone involved. In the words of a university staff member, as quoted by The Harvard Crimson, “Harvard’s the richest place around here. If they can’t even afford the coffee, it makes us wonder, you know.”

But this evening at Boylston Hall, Michael Smith seemed to be suggesting something bigger, more serious, than the absence of free coffee. “What will that mean for students in practical terms?” asked one coolheaded member of the audience. “Are we going to have fewer resources in terms of advisers? Are we going to have fewer office hours for our professors? Are we going to have fewer professors?”

Smith would not be specific. “The resizing that we’ve done is nothing compared to what we’ve got coming up,” he said, hinting at imminent upheaval. ...

Read the rest here, for an interesting look at the hubris, big egos and overspending that is causing one of the nation's finest universities such grief.

I suspect, like many institutions of higher education, both public and private, that Harvard's costs have outpaced inflation for years, possibly decades. The growth in expenses is often reflected in sky high tuition costs at universities throughout the country, which in the past I think have often routinely outpaced inflation. Perhaps the current, and potentially long-lasting round of economic adversity will inject a dose of reality into the sheltered and insular world of academia. When the lowest paid Harvard professors (according to the article) are pulling in $150,000 plus (for a nine month school year), and full professors averaging $192,600 plus benefits, it's hard to feel all that sorry for them. To put the magnitude of the Harvard budget in perspective, the $220 million shortfall the Faculty of Arts and Sciences faces is less than a fifth of their total budget! Their shortfall is greater than the entire operating budgets of many small cities.

Unfortunately, economic reality has hit hard for the Crimson:

Then came the Great Recession. In the second half of 2008, even more quickly than it had taken off, Harvard’s overheated endowment collapsed. Last December, in a letter written to the university’s deans, Harvard’s president, the historian Drew Gilpin Faust, and its executive vice president, Ed Forst, revealed that Harvard’s endowment had lost $8 billion, or 22 percent, in the first four months of the fiscal year, from July through October 2008. To put that number in context: $8 billion is greater than Columbia University’s entire endowment ($7.1 billion as of fiscal 2008). Not since 1974, when Harvard’s endowment shrank by 12.2 percent, had the university seen losses of such magnitude. Anticipating more dire financial news, Faust warned her deans to expect a 30 percent loss in the endowment for the year. Other universities were showing big losses in 2008, but at Harvard, given the scale and size of its endowment, the numbers seemed inconceivably large.

Right away, some commentators said that Faust was being far too optimistic. On the Huffington Post, the financial journalist Edward Jay Epstein argued that, adjusted for the true value of Harvard’s illiquid assets—that is, its private-equity partnerships and other assets that don’t sell on the open market—the endowment’s losses for those first four months alone were closer to 50 percent, or $18 billion. Forbes magazine, noting that Harvard faces a staggering $11 billion of unfunded commitments—money promised, but not yet paid, to various private-equity funds, real-estate funds, and hedge funds—concluded that the university was in a kind of death spiral, forced to sell healthy portions of its portfolio just to stay afloat.

If Harvard were a serious business facing a liquidity crisis, it would have done something drastic by now: fired senior employees, closed departments, sold off real estate. But Harvard, like most other leading universities, is stubborn and inflexible. “None of these schools has the ability to cut expenses fast enough” is how a hedge-fund manager who counts Harvard among his investors explained the problem. Running the numbers for me, proving how impossible it is for a shrinking endowment to keep up with the university’s bloated, immovable costs, the hedge-fund manager concluded, “They are completely fucked.” ...

While it's tempting to indulge a sense of schadenfreude at Harvard's budget woes, realize that a lot of other colleges and universities, public and private, are probably going through the same thing, just on a smaller scale. In the end, colleges and universities are going to have to adjust their budgets to economic reality. I suspect that the days of double digit tuition increases are over, at least for some time. That means dealing with overly generous salaries and benefits for an often bloated roster of professors, administrators, and administrative staff. Those that can't, or won't take the necessary and painful measures needed will likely and rightly cease to exist.