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Harvard’s operating deficit rises to $34 million

Harvard faces broad fiscal hurdles, said Drew Gilpin Faust.

Matt Rourke/Associated Press/File

Harvard faces broad fiscal hurdles, said Drew Gilpin Faust.

Harvard University’s budget deficit rose to $34 million in the year ended June 30, a gap that will prompt the world’s richest school to trim near-term spending even as it proceeds with ambitious building plans and fund-raising.

The results, reported in the university’s fiscal 2013 annual report released Friday, show Harvard is in better financial condition than it was five years ago, during the financial crisis. But the budget deficit is up from $7.9 million in 2012, and school officials indicated they will stay sharply focused on costs.

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Harvard’s “ability to stay in financial balance,” Daniel Shore, chief financial officer, wrote in the report, will depend largely on its “commitment to cost management and an embrace of innovative revenue opportunities.”

The report did not suggest moves as serious as those undertaken at Harvard in 2009, when the university faced a major cash crunch and laid off employees. However, it said Harvard will change health care benefits for future retirees to save money. The university also is looking to narrow the list of vendors for contracts campuswide and reorganizing libraries and technology services to make them more efficient.

To raise new revenue, Harvard said it hopes to do more with the sale of technology developed at its schools.

Harvard also said cuts in federal spending could present challenges for the university’s research laboratories, although it managed to make up for those shortfalls last year with private funding.

With a sprawling $4.2 billion annual budget, $34 million in overspending may appear relatively insignificant. But Harvard has been under the microscope of US debt-rating agencies since the financial crisis. To keep its AAA ratings, the university pledged not to borrow any more money after its debts peaked at $6.3 billion in June 2011. Total borrowing has since declined to $5.7 billion.

Harvard also reported continuing losses incurred by terminating interest rate derivative contracts. The university said it lost $345 million unwinding those contracts in the last fiscal year, bringing the total cost to nearly $1.3 billion since 2008. Harvard had entered into the swaps nearly a decade ago to protect against potential interest rate increases as it prepared aggressive real estate development plans in Allston. The contracts became a financial albatross when rates actually declined and development plans were postponed.

The university recently unveiled plans to raise $6.5 billion from donors over the next five years. It also resumed a major expansion in Allston that had been sidelined due to the slumping economy and the university’s investment losses. And it is involved in several other projects, including the construction of a new art museum and improvements at undergraduate houses.

Even with the bolder plans progressing, Drew Gilpin Faust, Harvard president, said in a letter included in the report that the university, like all academic institutions, faces broad financial and cultural challenges. “A faltering economy has raised questions in the public’s mind about the value of a college education,” she said.

Harvard has the benefit of a $32.7 billion endowment — the largest of any school — that helps fund operations. The university received $1.5 billion from the endowment last year. Still, Faust said, “every revenue stream upon which institutions of higher learning depend has come under pressure. Harvard has not been immune to these trends and we have to adapt.”

Beth Healy can be reached at Beth.Healy@globe.com
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