With the report last week of a 27.3 percent drop in the university’s endowment, the Harvard community now knows the true magnitude of the impact the global economic crisis is having on our operations. Here and across the country, university officials are adapting to a “new normal baseline” of funding. But precisely what does that mean to us when Harvard’s apparent baseline is still $26 billion?

As the person charged with overseeing the Faculty of Arts and Sciences and its budget, people often ask me: “Sure, Harvard and the FAS have lost a lot of their endowment, but you still have tens of billions of dollars. Can’t you spend more of it now to avoid making difficult or painful budget cuts?”

The simple answer is that we are spending more this year from the endowment, more than we ever have previously, to smooth the transition to this new normal. But if we want Harvard to remain Harvard, we cannot do that for long, for every dollar of endowment we spend is a dollar that cannot generate income in the future.

The description of the endowment can be a confusing one, because many people see it as something that it is not—a savings account, a rainy-day fund, a fully usable financial umbrella for the kind of economic deluge in which we now find ourselves. But it is not that at all: The money in the endowment is investment capital. It is money that creates a revenue stream just as tuition and research funding are revenue streams.

Fortunately, on the same day that Harvard Management Company publicly reported the university’s endowment losses—the first such loss since 2002 and only the fifth reported loss since 1971—another equally unique event occurred to remind me of the endowment’s true role. That afternoon, hundreds of students, faculty, and staff witnessed a cow grazing in Harvard Yard for the first time in living memory.

Harvey Cox, who recently retired as the Hollis Professor of Divinity, the oldest endowed chair in America, decided to exercise the traditional grazing rights that originally came with that position. As I watched Professor Cox and the Jersey cow named Faith reenact this venerable, and now slightly amusing, tradition from a window in University Hall, it seemed that he had provided the perfect metaphor for the purpose of the endowment.

The endowment is like a herd of dairy cows, grazing just like Faith in Harvard Yard. Each day we milk the cows and sell the milk to help pay the bills of Harvard College.

Sometimes the milk we sell brings in more money than our current bills. This allows us to buy more cows and, on the expectation that we’ll be able to sell more milk, increase our annual expenses by launching new programs, constructing new buildings, or hiring new faculty.

At other times, the milk we sell brings in less money than our current bills. To pay our bills, we have to sell some of our cows. But we must be very cautious how we thin the herd, because selling cows to fund current expenses means that we will have less milk to sell next year and less money to fund future expenses. If we don’t plan carefully, we will have to sell even more cows at the end of next year, or begin to cut our future expenses.

In this fictional world, the global financial crisis that affected Harvard and all of us last fall is a disease that killed off 27.3 percent of our herd. Looking to the future, we know the remaining cows will not produce enough milk to pay our bills.

In the real world, the financial crisis has depleted the value of the endowment, leaving us with less income to fund operations this year and for years to come. So what’s the answer? As I mentioned, one answer is to spend more from the endowment—to thin the herd—so that we can bridge the gap between annual income and annual expenses.

But as my analogy demonstrates, spending down the endowment too far (selling too many cows) leaves us with too little money to sustain our operations in the future. Like a farmer with too few cows to sustain his farm, spending too much from our endowment can exacerbate the problem of too little operating cash, making more budget cuts necessary in the future.

I am proud about the way the FAS community came together these past six months and thought carefully about the difficult balance that needed to be struck between continued spending to support our core mission today and thoughtful budget cuts to ensure that Harvard remained Harvard in the future. By having made difficult choices and by husbanding our financial resources early, we acknowledged the needs of both our current students and the future generations of students yet to matriculate. The process has also produced ideas that will make Harvard stronger and better prepared to tackle the challenges and embrace opportunities of the 21st century.


Michael D. Smith is the Dean of the Faculty of Arts and Sciences.