Wednesday, November 19, 2008

HCL Management on Harvard and the Economic Crisis

[November 17, 2008]

To: HCL Staff

From: Nancy Cline
Susan Fliss
Rebecca Graham
Dan Hazen
Marilyn Wood

Re: Recent staff survey, current economic conditions

Thanks go out to all employees who responded to the recent Harvard Staff Survey. Participation across HCL was slightly over 71% (just shy of the University-wide response rate of nearly 74%). While it will be some time before the evaluative data are reported back to us, the first step to having useful data is to have strong participation in the survey process.

On the economic front, we are aware that many questions have been arising after the recent e-mail communications from President Faust and Dean Smith. Their messages from November 10 indicate that Harvard, like other colleges and universities, will be facing exceptional fiscal challenges, but it is also clear that there is not a simple or single set of directions for us to implement. Work is underway to determine how the changing economic conditions as well as the budget planning processes within Harvard and FAS will affect the Library. Once we have some specific planning objectives, we will be sharing the information within HCL and working with HCL Senior Managers and others on a wide range of budget issues.

In the meantime, we appreciate and share the personal uncertainties that the troubled economy may bring. If you have questions about what is happening in the economy or need personal assistance, please consult the resources for staff on the Harvie site: http://harvie.harvard.edu/working/economy/.


------------------------------------
[November 19, 2008]


To: HCL Staff

From: Nancy Cline
Susan Fliss
Rebecca Graham
Dan Hazen
Marilyn Wood

Subject: Update on the impact of economic conditions

At Tuesday afternoon's meeting of the FAS Faculty, Dean Smith spoke about the impact of the global economic crisis on the FAS, parts of which will be covered in the news. We want to assure you that HCL, as a part of FAS, will be working to develop plans for adjusting to the rapidly changing economic conditions, and as we do so, we will work to balance our commitments to Harvard's students, faculty, and other researchers. The Library's staff, collections, and programs are important for meeting the expectations of the diverse academic programs here at Harvard and in maintaining relationships with other institutions around the world. We know that the challenges ahead will be both complex and continuously changing. The conditions that we must work with are being defined by world events that are having an impact on all aspects of society. This will require us to draw on all our strengths, creativity, knowledge, and abilities to determine the best ways to move forward.

HCL's Senior Managers will meet next Monday to address some of the Library's near-term planning and budget processes.

As we work together on HCL's response to the economic conditions, we will maintain communications across all our libraries and units, and will also seek ways of engaging staff ideas and input. Please know that we are working diligently to stay abreast of rapid changes, staying in close contact with Communications, Human Resources, and Financial units as well as with the Dean's Office. In concert with the Senior Managers, we will be putting into place mechanisms to share information regularly.

Thursday, November 13, 2008

Michael D. Smith, Dean of the Faculty of Arts and Sciences, letter to FAS staff following Faust's email, 11/10/2008

Dear FAS Faculty and Staff,

Earlier today, President Faust sent a letter to the University community addressing the impact of the global economic crisis on Harvard. I am writing to give you a sense for what her statements mean for the Faculty of Arts and Sciences. This is the first of many communications on this topic.

As her letter stated, leaders from across the University have met regularly during the last weeks to discuss the global economic crisis and how we as a university and as individual schools should react. From these meetings, two major conclusions became clear. First, the University cannot follow a one-size-fits-all plan moving forward, because each School has a different dependence on endowment income, sponsored research, student tuition, and current-use giving. Second, though the future of the global economy remains unclear, we must recognize that the severe economic downturn has fundamentally changed how we must approach our current activities as well as plan for our future.

At this time, neither I nor the rest of the FAS Academic Leadership have decided on the full range of specific actions that we should take to mitigate the negative impact of the current economic downturn on the finances of the FAS. Even so, we are today, more than ever before, carefully considering how we spend (or do not spend) each dollar that we have, and I ask that you do the same.

As President Faust wrote, "[w]e 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. ... 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." Fortunately, the new budgeting process we launched this year takes its direction from the academic priorities coming out of our departments, centers, and schools. We have thus begun to lay a foundation for the tradeoffs and hard choices mentioned in the president's letter. Our faculty and administrative staff have embraced this priority setting process, and through a series of fall meetings, are delivering to the deans exceedingly wise and carefully considered requests.

Yet to deliver financial results this year that are below budget and create future budget scenarios that reduce our recurring expenses will require us to take an even harder look at what we do and how we do it. The FAS is not unfamiliar with proverbial belt-tightening, but given the current crisis we will need to go significantly further.

Let me try to paint the FAS financial picture beyond the immediate crisis so that I can put what we have to accomplish in a more complete context. The last half-decade has seen the FAS undertake unprecedented expansion in its faculty, programs, and facilities. The major driver of this expansion was the exceptional growth of our endowment; in fiscal year 2008, endowment income paid for more than half of the total expenses of the FAS. Simultaneously, the growth in the FAS endowment allowed us to vastly reduce the cost to low- and middle-income students of attending Harvard.

As the president mentioned in her letter, "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." A reduction in the size of our endowment of this magnitude is not one that we can hide by averaging the income we pay out of the endowment over several years of returns. Given the prominence of endowment income in our finances, we must consider budgeting scenarios that significantly reduce our annual operating expenses.

The academic and administrative deans and I have already begun to think about how best to approach this unparalleled challenge. I say that this is unparalleled, because we often consider how we might slow the growth of our expenses, but we almost never discuss how we can roll back the clock to spend less. The plans emerging from this challenge will almost certainly affect the FAS unevenly, although the size of this challenge will guarantee that every one of us will be affected in some way.

We must also be careful not to allow prudent financial planning for worst-case scenarios to leak over and affect our programs. We don't know the future. We don't know how long this crisis will last or how severe it will be. We must approach it with eyes open, but be on guard to ensure that negativism does not prevail.

As we enter this difficult period, I want to assure you that I will approach this challenge in a thoughtful, communicative, and consultative manner. When it comes time to make painful decisions, I pledge that they will not be made lightly. I can only hope that this period will offer us a chance as a community to focus our vision of what is truly important in the work that we do.

With all of this said, I will repeat what I said to the faculty before the current financial crisis occurred: We cannot stand still, or stop the pursuit of our most important academic priorities. The FAS remains committed to attracting the best faculty, students, and staff. I join President Faust in asserting that, in spite of the unparalleled challenge before us, "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." Harvard was built by alumni/ae, faculty, students, and staff working together toward a shared purpose, and together we will overcome this challenge and create a Harvard that is even stronger than the one we enjoyed before this crisis.

Sincerely yours,


Michael D. Smith

Letter from Harvard president Drew Faust

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

Tuesday, July 1, 2008

Harvard Endowment before the crash - July, 2008

Harvard Endowment Posts 9 Percent Return in 10 Months
Harvard endowment post strong growth, bests benchmarks despite turnover in leadership
Published On 7/1/2008 2:52:58 PM
Harvard's endowment posted returns of approximately 9 percent through the first 10 months of this fiscal year, according to data from the University. The increase puts the endowment's value at around $38 billion as of this April, up from $34.9 billion as of last June.

While the returns fall short of last year's exceptional 23 percent performance for the full 12-month period, they are comparatively strong given that they come amid a bear market that has seen the S&P 500 index, a standard baseline for stock-market performance, lose eight percent during the same July to April period.

Harvard's fiscal year runs from July 1 to June 30, with the most recent one ending on Monday.

While May and June—the months for which data is currently unavailable—were rough for the equity markets (the S&P index fell an additional 8 percent), the endowment weathered a similarly poor five-month stretch from October to March, preserving the gains that it made from July to September 2007.

Harvard—which has the largest endowment in higher education, though it trails some peers on a per-capita basis—usually announces official annual returns in late August or September.

For this story, approximate endowment returns were calculated from data on the monthly values of "endowment units" that Harvard entities can purchase just as investors buy shares of a company's stock. Changes in unit value for the past decade have tracked changes for Harvard's total endowment over the same periods, but lag overall growth by approximately two percent each year.

To account for this discrepancy, monthly unit changes were adjusted upward by one-sixth of a percent for each month in the graph above, and two percent was added to the overall growth in the endowment units. (This two percent differential may reflect deductions for management fees or levies on the endowment like the 0.5 percent tax for development of the new Allston campus. A Harvard spokesman was not immediately available for comment on this difference as well as the endowment's returns for this fiscal year.)

While officials from Harvard Management Company (HMC), which manages the University's endowment, refuse to discuss specific investment decisions with the media, HMC's most recent "John Harvard Letter" suggests that growing investments in commodities—a high-performing asset class as of late—may explain much of the endowment's superior performance.

Prices for commodities—goods such as copper, wheat, or oil—jumped by almost a quarter for the first 10 months of the fiscal year, according to the Dow Jones-AIG Commodity Index. The letter, released last August, estimated Harvard's investment in commodities at 17 percent of the endowment for fiscal year 2008, making it their single largest investment by asset class. That number reflects a near tripling of the share of the endowment invested in commodities since 2000.

If this heavy investment insulated Harvard's endowment from rocky market conditions through April, it likely aided returns for the last two months as well. The Dow Jones-AIG Index commodity prices rose another 12 percent in May and June based largely on spikes in the prices of oil and corn futures.

Speculation in the commodities markets has come under fire in recent weeks, with Senator Joseph I. Lieberman arguing that it is responsible for increased prices of food and energy and championed several proposals to limit investing in commodities markets.

Though many in the financial community have viewed Lieberman’s attacks as political posturing—particularly his proposal to bar institutional investors, firms with more than $500 million under management, from trading energy or agricultural futures—both major presidential candidates have echoed Lieberman’s criticisms of speculators in recent days as consumers have continued to feel the adverse effects of high oil and food prices.

Harvard's solid investment returns come at a time of leadership transition for HMC.

While HMC returned to permanent leadership Tuesday with new CEO Jane L. Mendillo, who worked at HMC for 15 years before managing Wellesley College's investments from 2002 to 2008, it spent much of the past year with interim leadership after its former leader, Mohamed A. El-Erian, announced last September that he would return to a high-ranking executive position at Pacific Investment Management Company, a bond-specialist based in Los Angeles.

During his 22-month tenure, El-Erian was tasked with bringing stability to an organization rocked by the 2005 departure of its long-time CEO Jack R. Meyer, who left with a large fraction of HMC's staff amid heated criticism over multimillion dollar compensation packages for him and his top money managers. Meyer and several of his former lieutenants now run the Boston-based hedge fund Convexity Capital Management.

Robert S. Kaplan, a former vice chairman at Goldman Sachs and a professor at Harvard Business School, served as interim CEO after El-Erian stepped down late last year.

—Staff writer Clifford M. Marks can be reached at cmarks@fas.harvard.edu.

—Staff writer Nathan C. Strauss can be reached at strauss@fas.harvard.edu.