Echoes of Harvard Endowment Trouble Heard

(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 recovery years.”

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.