Harvard going Bust?

Mr. Bennett himself -- Harvard's Treasurer -- provided one answer in an interview with the CRIMSON last April 22 ('68):

Whenever a new project stalls for lack of funds, a cry rises to the effect of "Well, if we're worth a billion dollars and we have the largset endowment of any private university in the country, why can't we spend a few puny millions to build . . ." a new athletic building for instance. That billion is capital (Bennett stressed), and once we start cutting into capital we're going to get busted.

All that the university can spend from its riches for the fiscal year 1967 is the $30-40 million it will realize in income.

By income Mr. Bennett is referring to dividends and interest which that year amounted to a little more than predicted--$42.5 million. Yet not even all of this was spent. Two and one-half million was transferred to the principal of the endowment funds and another six million stayed in a fund entitled "Investment income reserved for future distribution," which is Harvard's way of saying that the money was just reinvested. That reserve fund, in fact, is an excellent example of income disuse; it has grown 2,590 per cent since the end of the Second World War (or more than four times as fast as the value appreciation of the general investments) so that it now amounts to more than $64 million.

Saving and More Saving

Bennett used the word "busted" then to mean that Harvard would risk insolvency in the future if it spent any of its capital ganis (or even all of its dividends and interest?)

But is it true that if the Treasurer started cutting into anything more than the dividends and interest from his investments, he would "get gusted"? Not in the legal sense, certainly. In the first place, according to an official in the Treasurer's own office, only about 40 per cent of the endowment is restricted to principal. The other 60 per cent could be spent in its entirety if the Corporation saw fit. Yet even for that part whose income, by the terms of the bequest, is all that can be used, the principal is legally defined as only the original amount of the gift and certainly not the market value of the stocks bought with it. Thus, even a fund restricted to principal could be delivering spendable income at the rate of 10 per cent a year, if the Corporation wanted to spend it.

A recent Ford Foundation study called "The Law and the Lore of Endowments" chided colleges for not using their capital gains and for their investment policies. One of its recommendations was that colleges in doubt, but wanting to use those gains, should file suits to have their capital gains classified as income (front page, N.Y. Times, April 23, 1969).

The emphasis in Harvard finances on saving reflects the belief that the billion dollars must grow as a protection against future higher expenses. Everyone is forced to save.

The Corporation sets the example by not distributing the bulk of the income from the endowment, but each department follows suit by cautiously not spending all of the income allotted to it. The Faculty as Arts and Sciences, for example -- although the hardest hit by the financial squeeze from the top -- has still managed to save a little. It has a fund for unexpended income amounting now to $3.2 million. And during the last ten years it has only had two in the red; the rest delivered a quite comfortable margin.

In fact, in this period the Faculty had a total net surplus (income over expenditures) of over $8 million. More than four and a half million dollars of this was transferred into the principal of the endowment and most of the rest ended up in various reserves and loan funds.

Even last, year, when the Faculty ran its much-advertised deficit which depleted the departmental credit balance by $131,000 and thus "necessitated" an increase in student fees, it shifted nearly twice that amount from the balance into the endowment (invested it), still leaving almost $600,000 unexpended endowment income for the year.

The reationale behind all this saving is that the maximum which prudence allows is being spent from endowment income. Taking a larger share of the load not borne by fees would be, on the long run, suicidal. Is this true? From the end of the Second World War to 1967, the market value of the general investment almost sextupled, which means an average increase of about 8.4 per cent a year compounded. This annual rate of increase is made up mainly of value appreciation but it also includes gifts for capital and undistributed "income." Put in more general terms, the investments have increased about two and one-third times every ten years, which leads us to predict that by 1977 they will be worth about $2.4 billion. Isn't this enough -- perhaps even more than enough earning power for the long run? To answer this, we will calculate the long term effects on the investments of increased immediate expenditures and proportionately less saving.

Why Not Abolish Tuition?