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Harvard Mans Up to its Financial Woes

Harvard Financials 2012a.jpgAs befits a school that leads rather than follows, Harvard has issued a forcefully pessimistic 2012 annual report regarding its financial situation. History might view the document as the beginning of the end for the higher education bubble. From Dartmouth’s perspective, the report is of note because Harvard’s financial situation is far better than our own, given the gross mismanagement in Hanover over the past fifteen years. President Hanlon might want to sound the alarm in a similar way, rather than deluding the Dartmouth community, as our last two and a half Presidents have done.

Harvard’s report details the University administration’s concern that the financial landscape has changed for the worse for the indefinite future. To ensure that the fine-print message gets across to the Cambridge community, an extensive story on the school’s difficult financial prospects appeared in the Harvard Alumni Magazine simultaneously with the release of the 2012 financials. Its title: Harvard’s Sober Annual Financial Report.

First up, the story enumerates the many ill-advised investment decisions taken by Harvard over the past decade. The details will be no surprise to readers of Dartblog; Dartmouth made all the same moves at virtually the same time:

● Harvard has taken on far too much debt, and its indebtedness has grown far faster than the endowment. Any more loans would lead to the loss of Harvard’s AAA credit rating. (As we have noted, the College has also ramped up its borrowing. And our credit rating has already been cut below the coveted AAA to AA+, an action that increases the interest rate that we pay on our bond offerings). Harvard’s debt has tripled since 2002: going from $2BN to $6BN. (Our own debt has tripled since 2002, too, going from $395M to $1.13BN). However, for every dollar of debt, Harvard still has five dollars in its endowment. (Our ratio is only 1:3).

Harvard Financials Endowment Debt.jpg

● The University incurred massive losses due to the investment of its working capital in illiquid investments. (The College did the same, though it has not admitted the losses publicly. We reported on the fiasco here.)

● Huge losses occurred after Harvard’s ill-advised investments in interest rate swap derivatives. (This space reported on Dartmouth’s terrible investments in these instruments, too; the College has not acknowledged them.)

Harvard’s report then looks at the University’s excessive spending in many areas:

● The cost of employee health insurance is repeatedly singled out as unsustainable. At Harvard:

Nonunion employees earning less than $70,000 have paid about 15 percent of the cost of health insurance; those earning $70,000 to $95,000 have paid about 20 percent; and those earning more than $95,000 have paid about 25 percent. As of January 1, the University is increasing the share of costs for those two upper tiers by about 2 to 3 percentage points.)

(In contrast, at Dartmouth, single union members — of which there are about 200 — pay nothing at all towards their health insurance.)

● The Harvard report also notes the high cost of non-health related benefits. Yet, as we have noted, Harvard’s contribution towards employee pensions is less generous than Dartmouth’s, and Dartmouth long provided perks like a death benefit that Harvard does not offer. (The College recently cut the death benefit, but it will not see savings on the move for many years.)

● Overall Harvard’s spends 31.8 cents on benefits for every dollar that it spends on salaries. (We spend 34.6 cents; happily for Dartmouth, that figure is down from 40.6 cents in 2011.)

● Harvard’s need for tighter staffing and wages is repeatedly noted, as well:

The University is committed to offering fair and competitive compensation to all its employees, but ultimately must balance our responsibilities to the workforce with our need to pursue the University’s broader objectives.

Translation: We’ve reached the point where we have to decide between continuing way-above-the-market compensation to our employees and providing a high-quality education to our students. (This emphasis is a contrast to Dartmouth’s Trustees’ repeated note of satisfaction that the last round of budget cuts was effected without reducing the College’s burgeoning headcount.)

As a result of its re-assessment of its financial situation, Harvard has cut back its building plans in many areas, the most important one being the Allston campus expansion. The University has gone so far as to sell real estate that was to be used as swing space during the Allston project.

Will Dartmouth do the same with regard to monster projects like the 122,000-square-foot North Campus Academic Center, and the 160,000-square-foot Williamson Translational Research Building — the total cost of these projects is well over $150M?

The best that one can say about both Harvard’s and Dartmouth’s budgets is that they are barely in balance. Cost pressures appear to remain strong, and neither school — but especially Dartmouth — is prepared to handle another downturn. Let’s hope that Phil Hanlon chooses to act with more prudence than that shown by our Wall Street Board of Trustees. Harvard is setting an example.

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