Monday, November 17, 2008

The Economy and Academia

Last week, I wrote about the impact of the economy on my healthcare IT spending at Harvard Medical School and Beth Israel Deaconess Medical Center. Since that blog entry, Universities throughout the country have outlined their strategies for reduced capital and operating spending. The common features of these plans include hiring freezes, operational reductions, construction delays to avoid additional debt, and contingency planning for further reductions in the next fiscal year. However, all institutions have committed to maintain their current levels of financial aid, recognizing that the demand for aid in an economic downturn will increase.

Here are a few of the letters sent out by Deans and Presidents:


Includes a hiring slowdown, linking faculty recruitment to new endowment contributions, holding departmental budgets flat, delaying construction and reducing discretionary spending

Includes an optimistic view of operational budgets but suggests a delay in some construction projects

Includes a Hiring Pause,a Construction pause, and an operational review to identify cost savings opportunities

Includes a reduction in operational budget, planning for a three percent cut, a five percent cut and a seven percent cut, and a review of all construction project.

Includes a Hiring Freeze, 5% budget cuts, planning for a five percent cut, a ten percent cut and a fifteen percent cut, and delaying construction

Harvard's letter is below. My commitment is to maintain highly reliable, secure, and efficient applications and infrastructure, ensuring that all maintenance and appropriate replacement is done despite the economic climate. I will adjust project scope and timing so that my staff can continue to thrive in a resource constrained environment.

To Harvard Faculty, Students, and Staff:

I write today about the global economic crisis and its implications for us at Harvard.

We all know of the extraordinary turbulence still roiling the world's financial markets and the broader economy. The downturn is widely seen as the most serious in decades, and each day's headlines remind us that heightened volatility and persisting uncertainty have become our new economic reality.

For all the challenges such circumstances present, we are fortunate to be part of an institution remarkable for its resilience. Over centuries, Harvard has weathered many storms and sustained its strength through difficult times. We have done so by staying true to our academic values and our long-term ambitions, by carefully stewarding our resources and thoughtfully adapting to change. We will do so again.

But we must recognize that Harvard is not invulnerable to the seismic financial shocks in the larger world. Our own economic landscape has been significantly altered. We will need to plan and act in ways that reflect that reality, to assure that we continue to advance our priorities for teaching, research, and service.

Our principal sources of revenue are all likely to be affected by these new economic forces. Consider, first, the endowment. As a result of strong returns and the generosity of our alumni and friends, endowment income has come to fund more than a third of the University's annual operating budget. Our investments have often outperformed familiar market indexes, thanks to skillful management and broad diversification across asset classes. But given the breadth and the depth of the present downturn, even well-diversified portfolios are experiencing major losses. Moody's, a leading financial research and ratings service, recently projected a 30 percent decline in the value of college and university endowments in the current fiscal year. While we can hope that markets will improve, we need to be prepared to absorb unprecedented endowment losses and plan for a period of greater financial constraint.

The economic downturn also puts pressure on other revenues that fuel our annual budgets. Donors and foundations will be harder pressed to support our activities. Federal grants and contracts for sponsored research will be subject to the intensified stress on the federal budget. Tuition remains an important source of revenue, but in times like these we want to keep increases moderate, mindful that many students and families are facing economic strain.

Over the past several weeks I have been meeting individually and collectively with the deans of the faculties, as well as the Corporation, to share ideas on how we can best respond to this changed economic environment. We need to sustain our high academic ambitions at the same time that we bring greater financial discipline to all our activities. We have to think not just about what more we might wish to do, but what we might do at a different pace or do without. Tradeoffs and hard choices that can be avoided in times of plenty cannot be averted now. And, given the ongoing volatility and uncertainty, we need to plan and budget with a range of contingencies in view, including scenarios for reducing our spending both this year and next.

As we plan, we must also affirm our strong commitment to financial aid for our students. In Harvard College, that will mean carrying forward our recent years' initiatives to make a Harvard education affordable for outstanding students from low- and middle-income families. As before, families with incomes below $60,000 will pay nothing to send a child to Harvard College, and families with incomes up to $180,000 and typical assets can expect to pay no more than approximately 10 percent of income. Across our graduate and professional schools, we will maintain financial aid budgets at least at their current levels -- and ensure that our students still have access to needed loans, even though many banks are making them less readily available.

We have long been dedicated to research and the discovery of new knowledge across a wide range of fields of scientific and humanistic inquiry. In recent years we have made significant investments toward breaking down intellectual barriers across disciplines and across Schools to generate new knowledge and to develop new courses and educational opportunities for our students. These commitments must continue to guide us as we make decisions and choices in a significantly more constrained fiscal environment.

Harvard values its reputation as a stable and supportive employer, and we view our workforce as a critical part of all we do. We recognize as well the responsibility that comes with being one of the largest employers in the commonwealth of Massachusetts. At the same time, changing financial realities will require us to look carefully at compensation costs, which account for nearly half the University's budget.

We are assessing all aspects of our ambitious capital planning program, including the phasing and development of our campus in Allston.

We are working with administrative and financial deans from across the University to develop new approaches for generating both savings and new revenue sources, building on the ideas and best practices of each of the Schools.

Harvard is a famously decentralized place, and one size will not fit all. Each School will face its own particular challenges. But we must at the same time join together to address these new circumstances with creativity and a spirit of common enterprise.

Today, perhaps as never before, we need to work collectively to develop approaches and efficiencies that will allow every part of Harvard to thrive in the years to come. Together, we must continue to advance the priorities that define us.

For all that has changed in recent weeks, we remain devoted to attracting the very best students, faculty, and staff to Harvard. We will undertake the daily work of education and scholarship with the same intensity and imagination. We will set our academic sights just as high, and we will ensure that the ambitions and vibrancy of our community and the strength of its commitment to the pursuit of truth remain unsurpassed.

Drew Faust


Unknown said...

Most universities have been taking advantage of cheap money made available by goverment backed student loans to fund tuition.

Tuition has increased well ahead of inflation yet the end product has not kept pace. The universities have used the money for buildings, faculty incentives and some for research and development of programs and services.

Harvards facilites in Cambridge are in horrible condition when you compare it to its peer Ivy league institutions.

With the money drying up we see that all universites have to make some changes to spending. To say that Harvard (with the largest endowment anywhere in the world)is
having any issues with money is laughable. They could weather this crisis with NO cuts to anything and come out just fine when the recession ends.

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