The Harvard Management Company, housed in the Boston Federal Reserve building, manages Harvard's endowment and related financial holdings.

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Harvard ended fiscal year 2023 with a $186 million budget surplus — less than half of last year’s value — as the school faced rising costs from investments in its workforce and renewed activity on campus following the pandemic.

The University brought in $6.1 billion in operating revenue over the last fiscal year, a 5 percent increase over fiscal year 2022. During the same time period, operating expenses grew by 9 percent — almost twice the revenue growth rate — an increase fueled by full-capacity campus operations and inflation.

Harvard released its fiscal year 2023 results on Thursday in its Annual Financial Report, which outlines the state of the University’s finances and offers rare insights into the school’s investment strategies.

“Our pace of spending cannot continue unabated without a commensurate increase in revenue,” Harvard Vice President for Finance Ritu Kalra and Treasurer Timothy R. Barakett ’87 wrote in a note included in the report. “Looking forward, we must respond prudently, by prioritizing activities which most consequentially contribute to our mission, and by identifying and operationalizing ways to use our financial, physical, and technological resources more effectively.”

Forty-five percent of Harvard’s revenue during fiscal year 2023 came from philanthropic sources — which include current use gifts and endowment distributions — representing the largest revenue source for the school.

Harvard distributed $2.2 billion — 37 percent of its total revenue — from the endowment towards its operating expenses. The University also received $486 million in current use gifts during fiscal year 2023, a small decrease from the $505 million it received during the year prior.

Cash gifts to the endowment totaled $561 million in fiscal year 2023, down slightly from $584 million in the previous year.

Harvard’s endowment reported a modest 2.9 percent return on its investments during fiscal year 2023. After accounting for distributions towards the University’s operational budget and new gifts, the value of the endowment stood at $50.7 billion at the end of the fiscal year — the first time in two decades that Harvard has reported two consecutive years of endowment drops.

Consistent with previous years, the Radcliffe Institute for Advanced Study, Harvard Divinity School, and Faculty of Arts and Sciences were the Harvard schools most dependent on endowment distributions, with each relying on the payouts for more than 50 percent of their operating revenue.

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Both the Harvard School of Public Health and Business School relied on the endowment for just 20 percent of their revenue.

Despite the budget surplus, Kalra and Barakett wrote in their note that financial challenges “lie in wait.”

“On the heels of the most substantial interest rate tightening cycles since the 1970s, the cost of capital is anticipated to remain elevated, which may impact future investment returns,” they wrote. “The end of the era of economic expansion, which we have written about in previous letters, may be upon us.”

“Indeed, while we are deeply appreciative of the capable navigation of complicated markets by CEO Narv Narvekar and his colleagues at Harvard Management Company, the 2.9% return on the endowment this year is below our long-term target return of 8%,” Kalra and Barakett added.

As Harvard officials have stressed in the past, Kalra and Barakett wrote that endowment funds need to be used in a sustainable manner.

“We must be judicious in the way we access the endowment to support our operations, as it is not a checking account, but rather must be managed to support both current and future generations of students and scholars,” they wrote. “Nevertheless, the endowment distribution increased by 4.5% in fiscal year 2023 and is budgeted for the same level of growth for fiscal year 2024.”

Though the University faces financial challenges, Kalra and Barakett wrote that Harvard’s finances “remain strong” due to the growth in its net assets, increased reserves across Harvard’s schools in anticipation of future constraints, and “modest new debt” in fiscal year 2023.

—Staff writer Krishi Kishore can be reached at krishi.kishore@thecrimson.com. Follow him on X @tweetykrishi.

—Staff writer Rohan Rajeev can be reached at rohan.rajeev@thecrimson.com. Follow him on X @rohanrajeev_.