To the Board of Overseers of Harvard College:

With this letter, we submit the annual Financial Report of Harvard University, which covers the University's financial affairs for the twelve-month period ending on June 30, 1981. Data related to investments have been provided by the Treasurer and the balance of the Report has been assembled by the Financial Vice President.

On June 30, 1981, the market value of Harvard's investment and current assets was $2,106,154,000. The General Investment Account net of liabilities, had a market value of $1,733,773,000, an increase of $138,723,000 over the prior year. The University's endowment is the largest participant in this account and represents 94.0% of the total while the remaining 6.0% includes pension reserves, life income funds, pooled income funds, and charitable remainder trusts. The market value of the University's endowment increased by $131,674,000 during the year to a level of $1,622,734,000. Seventy-one percent of the endowment represents funds which have been restricted to endowment purposes by donors while the remaining 29.0% constitute departmental funds which have been designated by the Corporation to function as endowment on a temporary basis. At year end, the general investment portfolio was invested approximately 62.0% in equities and related instruments and approximately 38.0% in cash and fixed-income securities. The annual report of the Harvard Management Company, which supervises the University's investment program, together with summaries of the general and special investments held by the University on June 30, 1981, are included on pages 71 through 87 of this Report.

The market value of a general investment unit increased to $140.50 on June 30, 1981 from $135.10 one year earlier and $97.60 on June 30, 1970 when the unit system was established. Net general investment income earned during the year was $113,068,000, or $9.52 per unit. Total return from income and appreciation was $14.92 per unit, or 11.0% of average unit value. Of the investment income earned in 1981, 75.4% will be distributed to participating funds during the year beginning on July 1, 1981 through a distribution of $7.18 per unit while the balance $2.34 per unit will be added to the income stabilization reserves which are maintained separately for each fund. During the year, $6.97 per unit was distributed to participating funds, an increase from $6.77 in the prior year. In addition, $14,684,000 in income previously earned but not distributed was capitalized from the income stabilization reserves into the various funds to purchase new units for each fund.

The book value of the University's General Operating Account, after subtracting liabilities, was $372,381,000 on June 30, 1981, an increase of $40,562,000 from the prior year. This account was invested approximately 69.0% in construction advances; 18.0% in loans to students, faculty, staff, and others; 8.0% in general investments; 2.0% in advances to the departments for various purposes other than construction; and 3.0% in other items.

Gifts for capital received during the year were $51,646,000 and gifts for current use were $39,323,000, a total of $90,969,000 as compared to $76,180,000 in the prior year. The large increase in gifts reflects the generous response of alumni and other friends to the Harvard Campaign.

Income from tuition and other student fees increased by 15.4% to $132,247,000 and income under federal programs to support research and training increased by 8.0% to $105,962,000. Total expense incurred by the University were $446,319,000, increase of 13.4%. Total income used in operations also rose by 13.4% to $446,648,000. The unrestricted operating surplus of the University was $329,000, the sixth consecutive year that the consolidated results have shown a small positive balance.

During the year, progress was made in resolving various matters related to the Medical Area Total Energy Plant. Construction of this Plant, however, remained one of the University's principal financial concerns. The Plant has been designed to apply fuel efficient technology to meeting the utility needs both of Harvard departments and of a number of medical institutions affiliated with the Harvard Medical School and located in the area surrounding the Medical School in Boston. The new Plant began operation in the fall of 1980 and has been producing steam and chilled water for the related institutions. Contracts covering utility use have been signed with user and the old plant which previously provided steam and chilled water has been closed and demolished. During the year, the Department of Environmental Quality Engineering of the Common wealth of Massachusetts gave its approval for construction of electricity. The diesel generators have been moved to the Plant and final installation and testing of these engines and of them components of the Plant related to the generations of electricity is now underway.

The balance of this Report includes both an analysis of the results for the year and the various financial schedules. This material discusses the financial performance of the University and contain detailed financial information for the several faculties and other departments. The analysis focuses on the development of the University's financial management systems and indicates how this development is being coordinated with the University's general educational planning. Particular attention is given this year to budgeting, financial planning, and research management.

George Putnam Thomas O'Brien

Treasurer Financial Vice President