Harvard University has reported its first operating deficit since 2013, a sign of how much economic havoc the pandemic has caused in higher education.
In its latest financial report released on Thursday, Harvard said it closed the fiscal year, which ended in June, with a $10 million budget deficit, compared with a $308 million surplus the previous year and a $196 million surplus in 2018. Harvard also warned that it expects revenues to be down for a second straight year, a problem the world’s wealthiest university last encountered in the 1930s.
Harvard officials haven’t given any indication yet whether they will have to make deeper cuts this fiscal year to offset the anticipated revenue shortfalls. The university has already offered 1,600 eligible staff members a voluntary early retirement package that about 700 employees have accepted.
“Even at a place like Harvard, it is feeling what feels like pain,” said Rick Staisloff, a senior partner and founder of RPK Group, an Annapolis-based financial consulting company that works with colleges and universities. The pandemic is likely to hit less wealthy institutions even harder.
Most colleges have money squirreled away in reserves and got federal aid to help weather the early months of the pandemic, but this current fiscal year will be difficult and the next one even harder, Staisloff said.
“Higher education held its breath going into the fall semester and was hoping beyond reasonable hope that it wouldn’t be bad," he said. "They’re waking up to the fact that spring isn’t going to look better. They’re starting that next budget cycle and going ‘uh, oh.’”
Harvard blamed most of last fiscal year’s deficit on lost revenue after the university refunded room and board charges when it sent students home in March, closed research labs, canceled executive education programs, and shut down most events and reunions due to the pandemic. It also absorbed the cost of the early retirement program.
A $10 million deficit in Harvard’s $5.4 billion operating budget may seem small, but it represents a sharp reversal for a university and comes primarily from a decline in revenue. Harvard in recent years has reported 3 percent to 4 percent in revenue growth, and the last time the university reported a decline was during the 2008-2009 economic crisis.
“The financial effects on Harvard from the onset of the pandemic in March of this year were significant and sudden,” Thomas J. Hollister, Harvard’s vice president for finance, cowrote in a message Thursday that accompanied the university’s annual financial report. “Sound financial management allowed the university to be in a position to cover sudden losses from operations, while also investing in the mission.”
The value of Harvard’s endowment increased to $42 billion and offered a bright spot by providing 7.3 percent in returns and helping increase the university’s net assets by 2 percent to $50 billion.
But Harvard officials said that this current fiscal year also could end with operating deficits. The university is offering only online classes this fall and only first-year students and those facing hardships are staying in dormitories this semester, meaning that Harvard is forgoing significant room and board revenue. The university also is spending money to test students for coronavirus and reconfiguring labs to ensure social-distancing rules and safety.
“How we manage declining revenue and rising need for investment in excellence amid new and necessary health protocols will, in part, determine our successors' ability to endure and thrive,” Harvard President Lawrence Bacow said in a message to the university community.
Universities across the country faced significant losses last fiscal year when they had to suddenly move to remote learning to curb the spread of the novel coronavirus. Many have continued to teach online and reduced the number of students in their dormitories to meet social distancing rules. Student enrollment has also dropped at many campuses, as entering first-year students opted to defer college for a year instead of paying for a mostly-online experience.
Institutions, even wealthy ones, are going to have to start looking at making cuts to faculty, staff and programs, Staisloff said.
In the past, many colleges have contained their cuts to low-wage workers, by outsourcing food services or cleaning or cutting back on contracted employees. But they will likely have to make more significant reductions that could hit faculty due to the pandemic, Staisloff said.
“For the first time, you’re going to see widespread impact,” he said.
Some of the financial challenges to higher education predate the pandemic, as families have balked at high tuition costs and questioned whether degrees always led to better paying jobs. The number of college-age students has also been declining, Staisloff said.
“Covid has turned the dial up to 11,” he said. “Higher education’s business model is not sustainable in the long term.”