Faced with soaring benefits costs, the Harvard Corporation voted yesterday to loosen its purse strings, taking the rare step of revising funding levels it had already set for the next fiscal year.
After voting in November to increase the endowment income Harvard doles out to its various schools by 2 percent for the Fiscal Year 2005—the year beginning next July 1—the University’s top governing body opted yesterday to increase that raise to 4 percent.
Vice President for Finance Ann E. Berman said the additional two percent raise will provide an extra $16 million, in an attempt to help schools offset a $89 million increase in benefits expenses last year.
Part of that 36 percent jump in benefits costs came from a recalculation intended to account for a sputtering economy. That recalculation revealed that last year’s expenses were much higher than originally anticipated—pensions costs rose 100 percent, post-retirement welfare costs rose 61 percent and health care costs jumped 18 percent.
“This came as a surprise to everyone, because we had not always forecasted accurately,” Berman said. “The schools and the rest of the University are very, very concerned about this. It’s a big hit—and we don’t see the health insurance piece slowing down.”
Berman said the funding boost was in response to these surprisingly large pension and healthcare costs.
She said University President Lawrence H. Summers suggested the most recent payout increase in a meeting with her two weeks ago, in which Summers worried the benefits costs would place too tight a squeeze on the University budget.
“He was quite concerned that this was such a big one-year hit that it would be difficult for the schools to deal with,” she said.
Berman added that although revising previously set payout was virtually unprecedented, the Corporation wanted to ease the burdens facing the University.
“The Corporation decided this was just the sort of extraordinary event they wanted to deal with by changing the payout arrangement,” she said.
This decision comes just months after the Corporation warned it might not raise payout at all for FY05 due to lackluster endowment performance.
Berman said November’s about-face was prompted by a better-than-expected fourth quarter for the endowment.
After FY03 returns of 12.5 percent, many faculty questioned the initial decision to increase payout a meager 2 percent, but Summers defended the move as necessary to protect the value of the endowment. And even with the extra funds approved yesterday, the University’s cash-strapped units will likely continue to face serious financial constraints.
“An additional two percent on the endowment is not very much,” Berman said.
As she and University Provost Steven E. Hyman proceed with their annual unit-by-unit review of Harvard’s budget, they will encourage schools to keep expenses in check. “We expect schools to live within their budgets,” she said.
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