Q&A with Dan Shore

Harvard University’s latest annual report reflects the effects of difficult strategic choices made during tumultuous economic times. The results are encouraging, but Chief Financial Officer Dan Shore says that Harvard will need to continue managing its expenses cautiously as it works through the lingering ramifications of the Great Recession. Shore spoke with the Gazette about the latest snapshot of University finances.

GAZETTE: This report represents the first full fiscal year after Harvard had to make some adjustments to meet changed financial circumstances. What’s the bottom line?

SHORE: I think the year went very well. The most important thing we needed to do was to realign our organization and our finances with the reality of the endowment having lost 27 percent in fiscal 2009. We were able to do that in very significant ways. We reduced our overall spending. But perhaps even more impressive, we reduced our controllable, nonsponsored spending by 6 percent year over year, and in the process saved $130 million — the equivalent of a new $2.6 billion gift to the endowment. That was a major success for the year, and it’s something that everyone should be very proud of. It took a lot of coordinated work across the entire University to achieve our budgetary objectives.

GAZETTE: There were a number of difficult choices made as the University worked through its financial challenges: wage freezes for faculty and exempt staff, work force reductions. Did those measures have a direct effect on the operating results for the past fiscal year?

SHORE: Yes, you can absolutely see that the mandated belt-tightening, as well as some of the more difficult steps, made a big difference. Expenses related to supplies and equipment declined by 11 percent, utility and maintenance costs dropped by 19 percent, travel expenses were down 13 percent. In total, expense-management efforts yielded about $88 million in savings. Personnel costs were trimmed by 3 percent, for about $31 million in savings.

GAZETTE: Now, the operating result was still a $4.7 million deficit, and of course a deficit never sounds like good news. But can you put that in perspective relative to the overall size of the University’s budget?

SHORE: The University’s overall budget is $3.7 billion, and if you take that as the context, then $4.7 million is a shade over a tenth of 1 percent of that budget. You never want to have a negative operating margin, but if you’re going to have it, you might as well have one of this magnitude. We have achieved an approximately break-even result, which is a good place to be, given everything we needed to get done this past year.

GAZETTE: There were a lot of questions around the risk factor in the University’s portfolio after the previous annual report. Is Harvard in a more conservative position now?

SHORE: We are. There are two dynamics to look at. One is our endowment, and Harvard Management Company’s judgments about the optimal risk profile and management approach for our endowment funds. I’d refer you to [President and CEO] Jane Mendillo’s excellent report on the Management Company’s strategies, and her successes for the year.

The second area in which we think about portfolio risk is what we have invested alongside the endowment. This year, we are in a better position. We have reduced risk in our operating accounts by converting some of our related investments into cash and other highly liquid securities held outside the long-term investment pool. From a liquidity-management standpoint, this is a safer posture for the University.

GAZETTE: That makes the University a little more nimble in a volatile financial climate, so that it can react more quickly to any challenges that may present themselves.

SHORE: That’s exactly right. If the Management Company is charged with looking at a very long-term investment horizon, you want to have financial resources somewhere else at the University with a much shorter investment horizon, and over the past couple of years we have been doing more of this. We will continue to think about the best investment mix for the University — one that optimizes our long-term investment returns without jeopardizing our ability to satisfy nearer-term spending needs.

GAZETTE: While there have been checks on spending in many areas, the report says that financial aid increased by 4 percent. Given the change in the University’s economic circumstances, are such increases sustainable?

SHORE: That is a very important priority for the institution. We are committed to making sure that we can attract the best candidates for our degree programs and that a Harvard education is accessible to all qualified students, regardless of their economic circumstances. To the extent that requires further investments in financial aid, we will do whatever we can to accommodate those incremental funds in our budget. Offering robust grant aid is a very strong institutional commitment that we have every expectation of continuing into the future.

GAZETTE: Are there any other parts of the report that you would like to highlight?

SHORE: Well, I would point to our success in earning sponsored awards from the federal stimulus program. That is a testament to the quality of researchers that we have across the University. We were able to get awards that over the next several years will provide almost $200 million worth of revenue. In the past year, we spent about $50 million of that amount. At a time when reduced endowment payouts might have meant something very different to our labs, the stimulus funding allowed them to continue to thrive.

The other thing that’s noteworthy in our financial statement this year is the slowed growth in debt. It went from $6 billion at the end of 2009 to $6.3 billion at the end of fiscal 2010. That is the result of a very conscious set of decisions to bring our capital program into closer alignment with our financial circumstances and our core academic priorities.

We will continue to think about opportunities to use debt advantageously, particularly because we are still in a very attractive environment for interest rates. But we’ll be judicious as a general matter with our overall debt load.

GAZETTE: What challenges do you see facing the University over the next year or two?

SHORE: With an 11 percent investment return on the endowment, you can be lulled into a sense that whatever we went through in the past no longer presents challenges for the University. But the reality is that our primary sources of funding all face considerable uncertainty: The endowment is very dependent on macroeconomic conditions and capital markets that continue to be volatile; research funding is largely subject to budgetary uncertainties at the federal government level; and most of our incremental tuition revenue gets plowed back into financial aid.

All three of those funding sources easily could be under considerable pressure over the next several years, and so we will continue to think about smart things that we can do to operate more efficiently, and thereby free up budgetary capacity.