Harvard's annual Financial Report to the Board of Overseers of Harvard College, released last November, reveals an institution in prime financial condition with a booming endowment making solid progress towards completing its Capital Campaign.

"Overall, the institution is in good shape," said Elizabeth C. "Beppie" Huidekoper, Harvard's vice president for finance.

"We definitely had a good year," Huidekoper said. "[With] record current-use gifts, record gifts to endowment, record returns on endowment."

But in a period when the University's endowment has been growing exponentially, the amount of income from Harvard's endowment that is devoted to operating expenses has leveled off, causing the percent paid out of the endowment to fall to the lowest level since 1987.

To guard against inflation, much of the endowment's annual income from interest and dividends is not spent in a given year, instead reinvested to increase the size of the endowment.

"In order to maintain the purchasing power of the endowment, you have to plow back every year a fairly substantial portion [of returns]," Huidekoper explained.

The income that is not reinvested, called the payout, goes directly to operating expenses--faculty salaries, employee benefits, scholarships, supplies and equipment.

"Our long-term objective is to pay out between 4.5 percent and 5 percent of the market value in a year," Huidekoper said.

"We're below that right now," she said.

Harvard's current endowment payout--3.7 percent of market value--is the lowest since 1987 and significantly below Harvard's long-term average of just more than 4.5 percent.

In nominal terms, the endowment payout has actually increased over recent years, rising from $260.3 million in fiscal year 1993 to $332.3 million in fiscal year 1996.

However, according to this year's financial report, the total endowment payout remained steady at $332.3 million between fiscal 1996 and 1997 - despite a 25.8 percent return on the endowment during fiscal 1997, and a rise in the market value of the endowment from $9.1 billion to $11.2 billion.

Huidekoper attributed the decline in the payout percentage and the platteauing of the total payout to the endowment's stellar rise.

She said the University strives to avoid drastic changes to the total amount of annual endowment payout, relying instead on steady increases in payout to reflect the rising value of the endowment.

"If the market went up by 25 percent, we don't want the payout to go up by 25 percent the next year because the market might go down by 25 percent, and then you have to take the money away," Huidekoper said.

She added that the endowment payout percentage will continue to increase in coming years to reach the target range of 4.5 to 5 percent.

"We're very much trying to shift the onus [of generating income] a little less on students, and a little more on endowment," Huidekoper said.

Over the past 10 years, steady increas- es in endowment payout have translated intobenefits for students, Huidekoper said.

In 1987, tuition represented 35 percent ofHarvard's income, but today only 31 percent ofrevenue comes from students, to a large extentbecause payout from Harvard's endowment has jumpedfrom 16 percent to 22 percent of income.

Undergraduate tuition increased by 4.8 percentin fiscal 1997--the lowest increase since1969--and significantly less than the 8.4 percentaverage annual tuition rise over the past 20years.

Moody's Investors Service, whose reports onHarvard's bonds, continues to rank Harvard with a"Aaa" credit rating, the highest possible onMoody's lead analyst for Harvard's credit.

"All in all, Harvard is comfortably within itsrating category of triple [A]," said NaomiRichman, Moody's lead analyst for Harvard's credit

Analysts at Moody's emphasized the strength ofHarvard's endowment as a critical factor inmaintaining its growth and financial stability.

"The driving force of Harvard is the stellarendowment, both from investment return andtremendous fundraising," said Thomas E. Calibeo,an analyst at Moody's who also studies Harvard'scredit.

Other institutions within the prestigious "Aaa"club include Princeton, Columbia, Stanford,Dartmouth, Yale, MIT, Notre Dame and the U.S.government. But while the government was placed ona "credit watch" during the shutdown of 1995,Harvard has held onto its prestigious "Aaa"ranking without interruption since February 1974.GraphicRachel E. KramerConservative Spending Decreases in thepercentage of the endowment used for Harvard'soperating costs followed booms in endowment returnin 1985-86 and 1996-97.