Drew Gilpin Faust and the Incredible Shrinking Harvard
Guiding a university through this recession would challenge any president, and some of Harvard’s competing institutions—Yale, Princeton, Stanford, MIT—also find themselves under financial duress. But the situation at Harvard is worse and the consequences will be more dire.
One reason is the growth in university spending, most notably in the Faculty of Arts and Sciences. The last time the endowment stood at $25 billion, in 2005, the FAS budget was $812 million. Now it’s $1.2 billion—a particular problem because FAS depends on the endowment to provide more than half its annual budget. During the past decade, FAS embarked on a giddy hiring binge—according to Harvard Magazine, the number of FAS professors has increased by 126, a 22 percent jump—and a building spree including some $800 million in science labs alone.
Those labs were funded by taking on new debt, which has doubled from $538 million to $1.1. billion since 2005, a now-regrettable change of course for Harvard. In the past, the university would first find a donor, then erect a building, but its confidence in the endowment’s ability to beat the market made taking on debt seem safe. Servicing that debt now costs FAS about $85 million a year.
Then, of course, there was the hugely ambitious plan, driven largely by Summers, to develop a second campus across the Charles, in Allston. The land purchases and the planning cost millions and millions; the actual construction of the 350 acres of new housing, laboratories, museums, parks, and athletic facilities would cost billions and billions. Just the projected maintenance for the first building under construction, a $1 billion new home for the Harvard Stem Cell Institute, has been said to be $100 million a year. This February, Faust announced that the university would finish the basement, then stop work on the project. She has said the halt is temporary, but few are convinced. Allston residents worry that their neighborhood will be left with a massive hole in the ground.
Some of the scientists who had been looking forward to working in shiny new labs are also upset, muttering about leaving Harvard for greener pastures—not a threat that the university has heard much in recent years. But the fact is, the investment strategy that was to have paid for Harvard’s kudzulike growth was unsustainable.
The roots of Harvard’s fiscal crisis go all the way back to 1990, when money manager Jack Meyer left the Rockefeller Foundation and assumed the reins at the Harvard Management Company (HMC). Breaking with the traditionally conservative approach, Meyer was in the forefront of university portfolio managers who integrated complicated financial instruments into endowment investments. He reduced the amount of stocks and bonds in Harvard’s portfolio to less than 30 percent and diversified into illiquid assets such as commodities, real estate, timber, hedge funds, and private equity. He also ventured into financial tools such as derivatives and emerging market debt that carried more risk than stocks and bonds but promised much larger returns. "There’s not much plain vanilla in our portfolio," Meyer told BusinessWeek in late 2004.
When Meyer came to Harvard, the endowment stood at $4.7 billion. When he left 15 years later, that number was $22.6 billion. From 1995 to 2005, the endowment averaged a nearly 16 percent annual return, beating the benchmark for peer universities by more than 50 percent. During that run, Harvard’s financial success became a source of fascination for the nation’s business press, generating countless articles with titles such as "How to Invest Like Harvard." Harvard may or may not have been the world’s best university—there were nagging questions about the commitment to teaching and the coherence of the undergraduate curriculum. But those concerns were always eclipsed by the fact that Harvard was the world’s richest university. The wealth glossed over its imperfections like fresh paint on an old house.