Difficult Budget Choices

Not long ago, the Harvard Gazette interviewed Dan Shore, Vice President and Chief Financial Officer of the Harvard Management Company about the Harvard endowment, the year to year budget, and Harvard’s finances in general.

Right away the article went over the fact that Harvard, for the last two years, has run a deficit. Last year, Harvard was $34 million in the red with an operating budget of $4.2 billion. Although $34 million is only 0.8% of the overall budget changing the Harvard budget in the short term is extremely difficult; costs are largely fixed with half the budget being compensation and a quarter being facilities management.

Harvard, like every college and university has to be careful when it comes to the yearly budget (as do corporations and individuals). Public institutions need to be weary of state appropriations now more than ever and private institutions need to monitor endowments and revenue streams (they all need to do this). Costs such as facilities management need to be monitored, projects need to be carefull planned, and the costs associated with people needs to be constantly reviewed.

Back to Dan Shore and the Harvard management Company. At Harvard, the year to year operating budget come from tuition, federal funding, and a third of the budget comes from endowment distributions. With a third of the budget coming from the endowment the Harvard Management Company has be very careful to mitigate risk; distributions are plentiful when times are good, and bad when times are lean. To combat this type of budgetary reality, Dan Shore stated that even at Harvard, higher education institutions can no longer be additive:

“We can no longer live in a world where things continue simply to be additive. The next new and exciting thing that we think it’s important to do can’t simply be layered on top of all of the other things that we’ve been doing. It’s just not a sustainable model. And I think the entire higher education industry is feeling the need to move away from that way of doing business.”

Brilliant. This statement can be applied to all of higher education and lessons can be learned; even Harvard, with its endowment larger than many countries GDP has to be weary of projects, initiatives, and expenses running up the budget from year to year. Later in the interview, Dan Shore discussed the core mission of a higher education institution such as Harvard.

“That’s very difficult in an academic institution, where you’re not working toward a bottom-line financial result, you’re working to have impact”

Although this statement is a bit dreamy and idealistic, it is true. Every higher education institution from Harvard, who educate high performing students who are super-prepared for college and high SEC, to community colleges, who serve students who are often not academically prepared for college and low SEC work hard to make an impact not only on their students and community, but the world at large. This is where budgets come back and the new(ish) fight to not be additive. During the 80s and the great bull market of the 90s many institutions were additive; they added programs, initiatives, outreach programs, and even added overseas campuses. These all cost lots of money and when times get tight and budgets are scrutinized and/or cut, everything is on the line. This leads us to two final quotes of Dan Shore.

“There are things that we can do to avoid having to make some very painful choices about some of our academic initiatives, but they involve things like benefits, which people feel very strongly about — for good reasons, given the cost trends that we’ve seen in things like health expenses.”

“In the end, though, those are the kinds of difficult choices that we have to make, and we need to engage the community so that everyone understands and can lend their perspectives to those choices.”

For me the most important statement here is the need to engage the community; engaging every part of an academic community is the only way to change. The only problem with this approach is that in simple terms, it is hard. Often, faculty do not trust administration; administration is at odds with faculty, the president is a noted national or international personality, and the board of directors are not really beholden to anyone (although they say they are).

Presidents, boards of directors, administration and faculty of every college and university around the country need to learn from Dan Shore. When change occurs the entire academic community needs to be engaged so if painful decisions have to be made those changes can be decided openly, with input from all stakeholders and with the full understanding of everyone involved.