(November 22, 2011) – The effects of large
endowment losses are still being felt in Harvard Yard.
According to Harvard
Magazine, the University ran an operating deficit of $130 million in the
fiscal year ending June 30, 2011. This was partially the result of large losses
in Harvard’s endowment in 2008, when the fund lost 27% of its value. “In
2008-2009, the $11-billion decline in the value of the endowment caused the
University to retrench and to begin reducing subsequent distributions from the
endowment to support the operating budget—an effect that diminished the largest
single source of revenue in fiscal 2010 and 2011,” according to the school.
Daniel Shore—vice president for finance and chief financial
officer for Harvard—stated that the University was continuing to adapt to the
reduction in contributions from the endowment, which is managed by the Harvard
Management Company and CEO Jane Mendillo. “Those adaptations involve taking
steps to enhance efficiencies and reduce costs ‘with urgency, but a thoughtful
urgency’—for example, multiyear transitions to new administrative structures
and processes for the large library system, and consolidated information-technology
operations,” the magazine wrote.
The deficit was actually mitigated by an uptick in endowment
distributions (as measured by percentage) to the University, according to the
school—although this uptick percentage (4%) was based upon a lower endowment
capital base, the result of the 2008 crisis. (The current endowment size is
still approximately $5 billion below its high-water mark.) A further increase
in endowment distribution is expected in the next fiscal year.
The University has also altered the way it smoothes endowment
returns, according to the school. “For the past two fiscal years, Shore said,
the Corporation has determined the future endowment distribution using a
so-called ‘smoothing rule’ that adjusts gradually for large swings in endowment
value (in either direction), in place of a more informal rule of thumb,”
according to the magazine. “That has the effect of sustaining University
operations despite a severe decline in endowment value, like that suffered in
fiscal 2009, and taking advantage only gradually of the occasional very strong
In response, there has been “very significant progress” regarding
steps taken to lessen the University’s holistic financial risk, according to
Shore. One major step: greater liquidity.
This is not the first mention of liquidity improvements at
the nation’s largest endowment. In October 2010, as part of the school's
strategic shift towards a more liquid portfolio, the
university revealed it has more than tripled its reserves of cash, US
Treasuries, and other liquid assets to $1 billion by the end of fiscal year
2010 from $300 million in June 2008.