Why Should Anyone Care About Harvard's Finances?

11/03/2017 07:35 am ET

Every solution offered by a college or university faces a pending crisis in a different way. Wealthy institutions have the resources to weather challenges by kicking the can down the road, often for decades. That’s why it is significant that Harvard University last week issued a warning about its financial constraints that every American college and university must heed.

The good news is that Harvard ended the 2017 fiscal year with a $114 million surplus, which is $37 million larger than last year’s surplus. Most of the surplus was due to the money the University saved by refinancing its debt.

Kris Snibbe/Harvard Staff Photographer

Writing in the Boston Globe, Deidre Fernandes reports: “The university’s financial chiefs cautioned that the surplus may reflect a ‘high water mark’ for the foreseeable future – a sign that the financial disruption experienced by universities and colleges across the country is hitting the biggest brand in education, too.”

In Harvard’s annual report, Vice President for Finance Thomas J. Hollister co-wrote, “The business model of higher education is under enormous pressure. Large research universities have been to date somewhat less affected, but they are not immune.”

The sticker price of many elite institutions – now approaching $65,000 - $70,000 at places like Harvard and Boston University – fails to reflect their need to increase financial aid to make it possible for their students to attend their institutions. Fixed costs, including faculty and staff compensation, facilities growth and maintenance, and technology, for example, increase the pressure further.

Harvard’s concerns grow when the weak performance of its endowment, compared to many other richly resourced schools, are factored into the equation. This year, the Harvard Management Company reported that the University’s endowment grew to $37.1 billion, an increase of 8 percent, up from a 2% return in 2016.

That having been said, Harvard continues to invest heavily in areas like its physical plant. But what is perhaps most interesting is that the University is aggressively seeking new sources of revenue.

Even Harvard is Seeking New Sources of Revenue

To this end, Harvard is growing its continuing education and executive education programs, which are less dependent on financial aid to attract students. To illustrate: “Between 2015 and 2017, the income Harvard generated from undergraduate students increased by just 7 percent, and graduate degree programs brought in 11 percent more revenue. But revenue from continuing education programs jumped by 19 percent during that period, from $345.5 million to $410.7 million.”

Why Should Anyone Care About Harvard’s Finances?

Why should anyone else care what happens at endowment-rich Harvard? The University’s detractors come at them from many sides, of course, but most of them argue that a wealthy, elitist institution with a massive endowment is not a suitable object of pity. They respond that Harvard could self-fund its undergraduate colleges simply by drawing interest off its endowment.

What these detractors miss, of course, is that American higher education institutions serve a variety of purposes, offer different missions, have varied histories, and undertake their academic programs by relying on whatever sources of support that they can put together. Harvard does it better and for longer than most.

The fact is that Harvard has both a mission-driven institution and is an economic engine that fuels the regional and national economy. The draw on its resources comes from innumerable needs, supporting its position as a global incubator, research and medical powerhouse. But the fact that Harvard should find new sources of revenue by looking at its continuing education and executive education programs has a spillover effect on the rest of higher education because the Harvard brand is so strong.

So whatever you think personally, what happens at Harvard bears watching.

The lesson from this year’s annual report is that America’s colleges and universities do not have a sustainable economic model, no matter who they are or how successfully they put their funding pieces together.

It appears that Harvard recognizes that its high sticker price, dependence on an uncertain economy’s effect on its endowment, and people-heavy and land-centric base require entrepreneurial solutions that did not matter before.

History of American Higher Education is at Inflection Point

The lesson for the rest of America’s colleges and universities is clear. We are at an inflection point in the history of American higher education. The way that American colleges and universities finance their academic programs is broken. For some, time is running out as their discount rates approach 70 percent, their fundraising remains weak or anemic, and their endowment returns do not offer the safety valve that Harvard enjoys. Those that can should use this time to plan for how they can survive by shifting priorities and approaches within their finance model.

One lesson is especially telling. A rebounding economy or improving wages, should these even occur, will not be sufficient to return America’s colleges and universities to a misty, distant past where revenue met expenses, even with increasing sticker prices offset by increased financial aid.

What is equally certain is that higher education is nimble and creative. Most institutions will likely find a way to modify what they must do to remain relevant. But it is no longer possible to kick the can down the road.

This article was first published on the blog of The Edvance Foundation.

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