Harvard Faced a Recession Eleven Years Ago. Today, It’s Facing Another. What Has It Learned?


Harvard is better prepared for a potential economic downturn due to the coronavirus outbreak than it was for the 2008 recession, according to Vice President for Finance and Chief Financial Officer Thomas J. Hollister.

“We’ve done a lot of recession-based scenario planning, and the University is in a much better position than we were following the 2008 financial crisis with respect to liquidity and the capacity to withstand stress,” Hollister said in an interview with the Harvard Gazette, a University-run publication.

In the aftermath of the Great Recession in 2008 and 2009, the total value of the endowment declined by almost 30 percent. In 2008, before the crisis, the endowment was valued at $37 billion. After the economic crash, it came out at just $26 billion, on par with its 2005 level.

At the time of the financial crisis, the endowment aimed for a minus 5 percent cash allocation, leaving the University so strapped for cash it was forced to issue around $2.5 billion in bonds over the 2009 fiscal year, increasing its total debt to over $6 billion.


It took the endowment another six years — until 2015 — to bounce back to its pre-recession total. As of 2019, Harvard’s endowment was valued at $40.9 billion dollars, 2 percent of which was allocated to cash.

Timothy J. Keating ’85, the president of Keating Wealth Management, wrote in an emailed statement that how a recession will impact Harvard depends on whether such changes will provide it with a “sufficient buffer.”

“The actual impact will be a function of Harvard’s allocation to cash, and whether there is sufficient buffer to absorb the shocks,” Keating wrote. “The low/zero/negative allocation to cash is what cooked Harvard and Yale’s endowment gooses in 2008-2009.”

Darrell Duffie, a professor at the Graduate School of Business at Stanford University, agreed that the University’s ability to weather a recession comes down to its cash holdings.

“The Harvard endowment last time didn’t have enough cash in the last financial crisis,” he said. “Whether it set aside enough cash this time, I personally don’t know.”

Hollister credited N.P. “Narv” Narvekar, the CEO of Harvard Management Company, with making the endowment “comparatively liquid” to its status in the 2008 recession.

“In addition, the University itself, which provides working capital to the operating activities across campus, is in a healthy and liquid position,” Hollister said. “This means that the University is positioned to withstand an interruption in normal operations, an economic downturn, and other stress scenarios.”

Each year, a five percent payout of the endowment covers 35 percent of the University’s annual operating expenses.

But the percentage of each of Harvard’s 12 schools' budgets that comes from the endowment varies. In fiscal year 2019, it ranged from 87 percent at the Radcliffe Institute to 18 percent at the Business School and School of Public Health. The Faculty of Arts and Sciences received the third-most, at 50 percent.

Duffie said the impact of coronavirus on the school’s endowment is not a question of whether it will be bad, but of “how bad.”

“Unless Harvard’s endowment has been set up to hedge against just this sort of macroeconomic shock, one would guess that it’s a question of just how bad it is,” Duffie said.

Hollister said in the interview that the University began preparing for a potential recession “about 18 months ago.” University President Lawrence S. Bacow, who is an economist, championed such preparations early in his tenure.

Recession planning is part of a University’s general financial management, according to Keating.

“Harvard’s time horizon is perpetual, and recessions (which are regular occurrences) are fully baked into the overall investment planning,” Keating wrote.

At Harvard, preparing for a potential recession occurs via scenario planning at each school, since deans have authority over their school’s resources.

“Under the direction of their deans, each of Harvard’s Schools as part of the annual multi-year financial planning process, as well as the annual budgeting process, examined how an economic downturn could impact their operations, and they began to scenario plan different responses,” Hollister said. “We wanted to be prepared in the event that our revenues were diminished in order to try to concentrate our resources on the vital core mission of teaching and research.”

Representatives of Harvard’s 12 schools did not provide The Crimson with information about existing recession plans.

Jane Huber, a spokesperson for the Radcliffe Institute, wrote in an emailed statement that it is “too early” to comment on their financial response to the outbreak.

“At the moment, Radcliffe’s primary focus is on the safety and well being of our community,” Huber said. “The pandemic is in its early stages and any longer term financial impact on the Institute is not yet calculable.”

Despite the plans in place, Thomas Parker — a senior fellow at the Institute for Higher Education Policy — wrote in an emailed statement that cuts will be difficult.

“No one will like it. Overnight, every expense center will be convinced that it is the one expense center which is absolutely necessary to the University’s survival,” he wrote. “The administration will have to sort through competing claims and make unpopular decisions. That’s its job.”

The hit to the endowment in 2009 resulted in tangible changes across Harvard, including significant cuts to the Faculty of Arts and Sciences’ budget, a delay in the campus expansion project in Allston, and the demise of hot breakfast at upperclassmen houses.

Hollister acknowledged that, despite advance planning, a recession will be hard for University affiliates.

“These efforts put us in a good position, and give us the ability to focus on aligning our resources behind our academic mission, but they will not eliminate adversity or difficulty in the event of a recession,” Hollister told the Gazette. “Given what is happening, we expect to see a decline in revenues due to, for example, increased financial aid needs, a slowdown in philanthropy, and a lower distribution from the endowment, and we will need to adjust our spending accordingly.”

Hollister also referenced a few areas of the University’s budget where cuts are already being considered.

“We are already examining and reducing all discretionary, nonessential spending,” Hollister said. “There are other places where we can look to reduce costs, beginning with slowing the pace of capital projects, limiting the use of consultants and third parties, and renegotiating contract costs and terms with outside suppliers.”

“We don’t know what the depth and duration of this downturn will look like or how it will rebound, and so it’s wise for us to plan and prepare for the worst. This downturn could be more severe than 2008,” he added.

Hollister noted that the University has an obligation to uphold its mission amid any economic crisis.

“Harvard is relatively well resourced compared to many other universities, but contrary to popular perception, Harvard does not have unlimited wealth,” Hollister said. “It’s true that our endowment is large on an absolute basis, but it is committed to supporting existing vital academic programs and campus activities. In short: Every penny of the annual distribution from the endowment is subscribed and utilized in support of our mission.”

—Staff writer Ellen M. Burstein can be reached at Follow her on Twitter @ellenburstein.

—Staff writer Camille G. Caldera can be reached at Follow her on Twitter @camille_caldera.