Drew Gilpin Faust and the Incredible Shrinking Harvard

Suddenly, unthinkably, the World's Richest University finds itself forced to reconsider what it can afford to be. (Losing $11 billion will do that.) But if its president has a master plan for leading the school out of its financial crisis—other than letting Larry Summers take the blame—she's keeping it to herself.

drew gilpin faust harvard

Illustration by Bill Mayer

For her first commencement address as president of Harvard University, just a year ago this month, Drew Gilpin Faust spoke in defense of money. The school’s endowment, swollen by years of double-digit returns, had grown to almost $37 billion. As a result, Faust explained to her audience, it had become “something of a target, publicly both envied and maligned.” Politicians like GOP Senator Charles Grassley were proclaiming that Harvard had so much money, it had a moral obligation to spend down its endowment—then the largest in the world by the comfortable margin of $15 billion or so.

Yet Harvard was not as well-off as it might seem, Faust said. True, the endowment was big. But it supported a growing institution of great public import. Harvard had 20,000 students and 16,000 employees. It contained “a huge and very costly research enterprise,” satellite campuses around the globe, and “libraries and museums that house priceless collections of books, manuscripts, artworks, cultural artifacts, and scientific specimens.” Paying for it all required staggering sums: To meet its $3 billion annual budget, the university relied on $1.4 billion a year in endowment payouts. Take away that easy cash, and Harvard would be—to paraphrase—up a creek.

If the endowment weren’t so enormous, Faust concluded, the university would face a choice: Seek more money from alumni and the federal government, or “do less—less research, less teaching, at a lesser level of quality.”

Nobody, of course, really expected that to happen. But today that is exactly the choice Harvard confronts.

Last November 10, with the economy and the Dow in free-fall, Faust e-mailed a worried letter to the university community. “Harvard is not invulnerable…,” she wrote. “We need to be prepared to absorb unprecedented endowment losses.” Just how bad was it? Faust couldn’t say: Most of Harvard’s endowment was tied up in illiquid investments whose values were fluctuating (i.e., plunging) daily. But Moody’s, the financial ratings firm, was predicting a 30 percent decline for university endowments for the fiscal year that ends this month. In a subsequent letter, Faust went further, warning that a drop so precipitous seemed probable.

Such a plunge would claw the endowment back by more than $11 billion. Subtract the endowment’s $1.4 billion contribution to the university’s operating costs for this year—a contribution paid for in previous years by endowment returns, but which this time would represent a withdrawal—and Harvard would be left with $24.4 billion. As the old saying has it, “A billion here, a billion there, and pretty soon you’re talking about real money.” Especially since, up until recently, the university’s expenses had grown as fast as its account balance. Over the past decade, Harvard spent money—on new construction, planning for a multibillion campus in Allston, land purchases, a major expansion of the professoriate, new financial aid programs, and general bureaucracy creep—as if the good times would never end. Combined with the shrunken endowment, that profligacy has Harvard facing ongoing deficits and needing to make budget cuts of hundreds of millions of dollars.

While the failed presidency of Lawrence Summers generated more headlines, this quiet crisis is actually a greater threat to Harvard. The university has been so rich for so long that most of its denizens can’t remember a time when money was a concern. While Harvard officials are doing their public-face best to downplay the problem, the numbers don’t lie, and this economic crunch will leave the school a profoundly changed place. Harvard will have to become smaller and academically more modest, and as it does it will chafe at having grand plans without the resources to fund them. For the first time in decades, it will worry about merely paying its bills. The university will have to decide: If it is no longer so rich that it doesn’t have to make choices, what does it really value? What are its priorities? It won’t be a comfortable debate.

“We are in trouble,” says one Crimson professor. In the aftermath of deep and damaging cuts, “there is a real chance that Harvard will no longer be considered the best there is.”

As many around campus are saying these days, this isn’t what Drew Faust signed up for. But then, no one at Harvard anticipated its current state of affairs. Ever since taking over from the outsize Summers, Faust has been a figure of modest ambitions and subdued presence. To lead Harvard through this transition, she will have to grow in stature. Whether she can is an urgent—and open—question.