I. Introduction
The traditional university financial report has been largely an accounting document which focuses on a detailed review of income, expense, and investment performance for the year under consideration rather than a planning document which addresses the major financial issues which the institution faces. In order to provide more comprehensive and useful information. Harvard began several years ago to include in the annual Financial Report an Analysis of Financial Results which seeks to achieve three important purposes: to summarize the financial results for the year; to identify and discuss the significant factors which these results reflect; and, most important, to select one or more major financial issues and opportunities which face the University and to discuss the University's planned actions in the related area within the broad context of the major administrative, financial, and educational initiatives being undertaken by the University.
Under this format, the Financial Report for 1978 summarized the trends in Harvard's income over a forty-year period and reviewed the changing reliance on income from the four major sources: tuition, endowment, current use gifts, and sponsored research. The Report for 1979 focused on the effects which inflation has upon the endowment and out-lined the reasons why private universities need continually to increase their capital bases if they expect both to maintain financial strength and to assure the future flexibility which is so critically important to their success. In 1980, the Report described the University's financial structure and explained the primary planning and control systems which Harvard uses to promote financial effectiveness within its several departments. That Report pointed out that, while the University's management system continues to be based on Harvard's traditions of departmental responsibility and financial conservatism, revisions to that system are made continuously to assure that it adapts to the changing scale, scope, and nature of the University's activities: recognizes the increasing complexity of the University community and of the society which it serves; and reflects the development and availability of new methods of management, new technologies, and new techniques.
During 1981, Harvard gave considerable attention to the revision and reorganization of several areas in the financial administration, including budget planning and research management. The Report for this year focuses on these two activities both as important changes in and of themselves and also as representative examples of the opportunities which Harvard has to further improve its management.
H. Summary of Financial Results for the Year
Income
Income earned during the year totaled $446.6 million. Income components are displayed graphically in Exhibit I, while Table 1 compares the amounts of income from the various sources used by the University during selected years in the past decade. During 1981, $6.97 per unit was distributed to participants in the University's general investments. Departments utilized $82.1 million in investment income, an increase of 7.3% over the level in 1980. The increase in income from endowment funds, while sizable, did not keep pace with the rate of expense growth within the University community. As a result, endowment income represented only 18.4% of University income during 1981, a decrease from 19.5% during the prior year. The importance of this trend and the University's actions and plans in the area of endowment management are discussed below under the caption "Capital Activities." Gifts for current use and other receipts for special purposes used during the year represented 16.3% of the University income, an increase from 15.9% in 1980. The amount utilized during the year, $72.6 million, was 15.8% over the amount used during the prior year. This level of growth exceeded the rate of inflation and reflects both increased level of current use gifts and substantial increases in support of University programs of restricted nature from other sources such as research agreements with industry, grants from foundations, and support from public organizations other than the federal government. Tuition and other fees increased by 14.8% to $104.6 million. As the number of students increased by less than 1.0%, the increase in tuition and fees represents a real increase in the cost of attending Harvard College and the various professional schools of the University. Tuition continues to provide an increasing share of income to compensate for lower rates of growth in other income sources. Tuition how represents 23.4% of income. Income from fees charged to students for board and lodging increased by 17.4% to $27.6 million to reflect the relatively higher growth rate in the expenses such as building maintenance and operation which these fees must cover. During the year, a number of preliminary plans were developed for major renovations to the University's housing facilities, particularly the undergraduate residential houses. These facilities, the majority of which were constructed between 1920 and 1940, are in need of substantial maintenance. The specific projects to be undertaken and the source of their financing will be major topics for discussion during 1982. Receipts from the federal government under grants and contracts which support the University's educational and research programs exceeded $100.0 million for the first time and grew to $106.0 million an increase of 8.1%. Income covering direct expenses--those items such as salaries, benefits, equipment, supplies, trainee stipends, travel, and like items which are attributed to individual research programs--increased by 5.1%, a rate substantially less than inflation. Income covering indirect expenses, which represent reimbursements to the University for costs such as general and departmental administration, library use, operation and maintenance of facilities, and depreciation, none of which can be directly associated with single research projects but which must be aggregated and distributed pro rata to all projects, increased by 16.4% to $29.1 million. Total receipts from the government constituted 23.7% of University expenditures, a decrease from 24.9% during the prior year. The relatively large increase in indirect costs reflects the combined effects of increases in the annual costs of building operations, the addition of the Biochemistry Building to the University's plant, added costs associated with more accurate facilities depreciation and several renovations to the plant, improved methods of cost allocation which divide the costs of space more accurately between teaching and research programs and which assign relatively high energy costs to the laboratories which generate those costs, and recovery during 1981 of indirect costs incurred in prior years but not recovered at that time. Indirect costs represent an average overhead of 37.8% on all direct costs. However, the manner in which federal research funds are awarded and managed requires that indirect costs be spread over only certain direct costs. As a result, indirect cost rates are frequently higher than this average. It is important to note that no federal research program permits full recovery of indirect costs. For example, the government does not consider interest to be a cost and individual federal agencies may not permit the University to charge the indirect cost rate which has been negotiated with the government for the period in question. Receipts from other sources represented 12.0% of University income, an increase from 10.6% one year earlier. This category of income increased by 28.2% to $53.7 million. This large increase reflects substantial growth in the University's housing, conference, and publications programs as well as additional space rental. Expenses Read more in NewsRecommended Articles
