With the 2019 budget year closing June 30, Harvard officials have been crunching the numbers that go into the University’s annual financial report. There is good news to share, according to Executive Vice President Katie Lapp and chief financial officer and Vice President for Finance Thomas Hollister. Fiscal 2019 ended with a $298 million surplus, a positive outcome, albeit one tempered by a forecast of challenges in the coming years. Lapp and Hollister sat down with the Gazette:
Katie Lapp and Thomas Hollister
GAZETTE: So how did Harvard do in fiscal ’19?
HOLLISTER: It was a good year financially. Any time we have increased spending on financial aid and scholarships, University-funded research, investments in faculty and staff, and renewed classroom, lab, and common spaces, we’ve had a great outcome. A key point is that the University’s surplus is a consolidation of the Schools’ and units’ results. Surpluses are earned and used locally. They are a source of money for investment in the mission of Harvard, and it is the deans and department heads who make decisions about how to invest those monies, or whether to set them aside in rainy-day reserves, which will be very helpful when more troubling economic times come.
LAPP: I would add that the surplus is a reflection of the great work that’s being done across the University — by the deans, by the faculty, by the administrators, by people throughout the University — in determining how to use our resources to support research and education, figure out ways to be more efficient and reduce duplication, adopt new processes and technologies, and invest in our infrastructure and our people.
HOLLISTER: We should point out that about $112 million came from one-time revenues: an increase in royalty income of $72 million — which is hard to predict — and a $40 million gift that came in at the end of the year, of which little was spent before the year closed. As a percentage of revenue, our consolidated surplus is in the range of most AAA-rated peer institutions.
GAZETTE: The report looks ahead and says that we need to prepare for more difficult financial times. What do you see happening in the higher-education economy in the years ahead?
HOLLISTER: We’ve talked about this in the last few years. Higher education itself is changing demographically: The number of students is plateauing. There are affordability pressures and students and families are having difficulty paying for higher education. The other traditional sources of revenue are also all under pressure: Beyond tuition, federal funding of sponsored research is not increasing, and the outlook for endowment returns doesn’t look promising, according to most economists and investment market participants.
LAPP: There have really been some interesting changes. Executive education’s funding stream has been a source of additional resources to the Schools without changing their ultimate mission. Another change we’ve been talking about for some time is the digital landscape and understanding how that can be used to be more effective in how we educate students and use our talented faculty.
GAZETTE: It was interesting to see that the tuition from executive and continuing education is just a few million dollars shy of traditional tuition. Do we see that surpassing traditional tuition — it had a 12 percent growth rate — next year?
LAPP: It certainly could. I think this represents a shift in the way people view higher education. For many, it’s no longer just a four-year engagement or a two- or three-year engagement at the graduate level. Many people, in our alumni base and elsewhere, understand that the change in skills, in jobs, in what’s expected of people requires lifelong learning. Continuing education and executive education is tapping into that need. It has allowed the Schools to find ways to bring what they do, day in and day out, for their student body to a broader population.
HOLLISTER: The trajectories of the last few years suggest it will cross this year: There’ll be more tuition revenue from executive and continuing education than traditional degree-seeking programs. It’s important to say “net tuition” because the face value of tuition for traditional degree-seeking education, before financial aid and scholarships, was about $1.1 billion, but the net tuition that we received from students was about $500 million. The $600 million difference, which is financial aid and scholarships, is evidence that Harvard is trying to make education accessible to anybody who can apply and earn admission.
GAZETTE: The financial report talks about preparing for the next recession by building a downside into the next five-year budget. Why is that needed?
HOLLISTER: You could probably add “recession” to that old expression, “you can always count on death and taxes.” We’re 123 months into the longest economic expansion maybe in U.S. history, and we see indications that we’re toward the end of the cycle, with a backward-sloping yield curve and increasing volatility in the market. Led by Katie and others, the University is anticipating that a recession will occur and is taking the types of steps that will help prepare for it. All of our Schools and units are doing scenario planning, thinking through what they can or should be doing now to prepare for a variety of economic pressures. By the way, this certainly isn’t just about cutting costs. It’s really stepping back and asking, “What is essential to the mission? What do we intend to carry forward no matter what? Where will we invest more, perhaps while being efficient as well?”
GAZETTE: Let’s talk about the endowment. What is its importance to the University budget and how did that play out in the past year?
HOLLISTER: Philanthropy is crucial to Harvard’s aspirations for excellence in teaching and research. Fully 43 percent of the annual budget comes from philanthropy: 35 percent of it is the annual endowment distribution and the other 8 percent is current gifts. So, it is alumni and donors past and present who allow Harvard to try to realize its pursuit of excellence.