Dear FAS faculty and staff:

I write today to update you on the discussion that took place in the Faculty Meeting on Tuesday, December 9. This letter reviews the highlights of my presentation, answers some questions that have been raised following it, and offers ways that you can help.

My presentation built upon my letter to faculty and staff on November 10, in which I described the importance of the endowment to our operations and opened a discussion on the potential impact of the global economic crisis on our finances. Since that time, the global economy has continued to deteriorate, President Faust has confirmed (http://www.president.harvard.edu/speeches/faust/081202_economy.php) a University-wide planning assumption of a 30% loss in our endowment this year, and I have worked closely with the faculty and the FAS administrative team to understand the nature and size of the budget gap that we now undeniably face.

I have talked with a number of faculty and staff groups both to share what we now know and to hear their concerns. I have continued to consult with the academic deans, as well as the Caucus of Chairs, the Faculty Council, and the newly formed Priorities Committee, composed of faculty leaders who are not members of the other three groups. I have also met with department administrators, and Dean for Administration and Finance Brett Sweet has held multiple discussions with senior members of the FAS administration and leaders of the FAS "tubs". I am grateful to all for the clear expressions of care and deep concern that so many of you have expressed for the institution. What follows is in large part a response to what I've heard.

The Size and Nature of the Gap

In the most recent Faculty Meeting, I began with an explanation of how projected changes in our annual income and expenses would produce a financial gap of $100 to $130 million, depending on the endowment distribution (i.e., the amount that is paid out from the endowment) authorized by the Corporation for FY 2010 (the next academic year). I also presented several actions that the FAS has taken to curtail incremental expenditures that would, if left unaddressed, increase this already sizeable gap.

The $100 to $130 million gap between our expected revenues and our expected expenses results from more than just the change in endowment value, though that is the most significant underlying factor. As you know, our planning is based on an expected 30% decline in the value of our endowment. The University will not, however, reduce the actual endowment distribution for FY 2010 by that percentage - in fact there may not be a reduction in the total dollars we receive from the endowment at all. At best, we expect the endowment distribution to remain flat, which would give the FAS the same amount of endowment income to spend in FY 2010 as it was given in FY 2009 (this academic year). But, because of the continuing uncertainty in the global markets, I have also asked the FAS to develop a contingency plan in which the endowment distribution for FY 2010 is 5% less than we received in FY 2009.

Note that in either scenario, the FY 2010 distribution will be taken from an endowment that is substantially smaller than it was last year. This will mean that the endowment payout percentage, under either distribution scenario, would be greater than 6%. Even with this higher-than-usual payout rate, we still face the large gap in funding.

It is important to understand the components of the $100 to $130 million gap. They include:

• An estimated $20 million decrease in net revenues from tuition as a result of increasing demand for financial aid;
• An approximately $20 million increase in expenses due to higher interest rates associated with the repayment of debt for recently constructed capital projects;
• An approximately $15 million increase in expenses due to the maintenance and utility costs of new buildings coming on line;
• An approximately $10 million increase in expenses due to the arrival of new faculty and previously negotiated salary increases for non-exempt staff;
• An estimated $10 million in unavoidable growth of costs due to inflation; and
• An approximately $25 million gap carried forward from FY 2009 where our unrestricted expenses outstrip our unrestricted income.

Taken together, the result is a $100 million shortfall assuming a flat endowment distribution; the $130 million figure assumes a 5% decrease in the endowment distribution from approximately $650 million in FY 2009 to $620 million. To put the size of this gap into perspective, our FY 2009 expenses are estimated to be just under $1.2 billion. I should also emphasize that this gap does not include the costs of any new activities of any kind.

This estimate of the size of the gap does have some inherent risks. It assumes that some sources of income, such as gifts from our alumni/ae, will remain constant, although our alumni/ae have been by no means immune to the effects of the financial downturn. It assumes that we will be successful in holding many of our expenses flat. Also, it assumes that the performance of our endowment will recover in future fiscal years, so that cost of living increases, new activities, and inflation in future years will be again be covered by increases in the value of our endowment.

Immediate Measures

A financial challenge of this size has no historical precedent at Harvard. During the Great Depression, for example, there was no loss of endowment principal, although the market crash and subsequent economic downturn greatly reduced growth. In looking at the history of how Harvard has faced past, albeit lesser, financial challenges, the approach most similar to that needed today was pursued by Dean Henry Rosovsky during the financially difficult, but fundamentally different, times of the 1970s. As then, we must engage in a process of scaling back our operations to a size we can responsibly support; this will require prioritization and planning, as we have been doing this fall. As Dean Rosovsky noted, "to do more of one thing will require less of another."

The size of the budget gap depends on how well we can rein in incremental costs. If we cannot do this effectively, the gap grows larger by the incremental costs. To address this, we have decided to implement several immediate measures to limit incremental costs that, while painful, are necessary given the size of the challenge we face. These include:

• In line with University guidance, all faculty and non-union staff salaries will remain flat next year.
• All originally authorized tenure-track and tenured searches have been reviewed and most have been postponed until a point in time when our financial situation has improved. A small number of searches remain underway (selected with an eye toward minimizing costs and maintaining priorities), and all search chairs have been informed of the disposition of their searches.
• To minimize the cost of visiting faculty, new non-ladder faculty appointments, and purchases of faculty time from other Harvard schools, we will only authorize requests for these types of instructional faculty to fulfill essential curricular needs. If such a need is demonstrated, we have asked that departments first consider filling the positions using Ph.D.s recently graduated from Harvard or other local institutions.
• As was announced (http://www.fas.harvard.edu/home/dean-and-administration/deans-office/communications/staff-review-committee-12042008.shtml) earlier in December, only urgent and critical staff hires will be made at this time. (This policy does not apply to positions funded entirely by sponsored or start-up money.) Please contact the FAS Office of Human Resources if you have any questions concerning this new policy.

Although these measures will have a significant impact on our faculty and staff, they do not address the $100 to $130 million shortfall we face. They simply stop us from adding to this challenge with new costs.

Common Questions

Do we need to undertake such significant measures?
Of the many suggestions I have received, some have counseled that now is the time to recruit aggressively, to take advantage of a soft market to bring in the best faculty, staff, and graduate student talent. And I have heard the opinion that we are curtailing faculty searches, staff hires, and graduate student admissions to save money. The rhetoric of "saving" indicates a misunderstanding both of what is possible in the current environment and of the scale of the actions needed to balance the costs of our activities with our revenues.

The measures described above are not being adopted as a means to save money, as counterintuitive as that may sound, but are meant to reduce the rate at which we are spending down our savings. We are spending our savings now (and will be for the foreseeable future) to cover our current operations. Spending another dollar simply further reduces our already depleted endowment and reserves (much of which was invested with the endowment), and this has the effect that it will take that much longer for us to recover and return to normal operations. Real change must happen, and we must start now. We cannot finesse our way through this challenge.

Are we still pursuing our priorities during this time of financial crisis?
Yes, we are. Although some paths we had hoped to follow will not be taken at present, we cannot stand still, or stop the pursuit of our most important academic priorities. These priorities are central to our unique identity as a community, one whose commitment to academic excellence, innovation, and discovery remains unsurpassed.

For example, the Faculty of Arts and Sciences remains unwavering in its commitment to our students and to our financial aid program. Our students and their families have not been immune to the economic downturn, and the demand for financial aid is projected to rise. Our recent financial aid initiative has helped to create one of the most diverse freshman classes in the history of Harvard College. A community of true academic excellence is by necessity a diverse community, and our financial aid program is an important tool for advancing this vision for the FAS.

We will similarly continue to pursue diversity in the hiring of our faculty and staff, even as we hire fewer people.

Affirming our commitment to our current graduate students is equally important. They, like all of us, have been hit hard by the economic downturn. The Graduate School of Arts and Sciences is considering a range of actions to help them weather these stressful economic times. For instance, both to support our recently graduated Ph.D. students (who are entering what promises to be a very difficult job market) and to help our departments meet their teaching needs by spending less than at present, the FAS is developing a new program akin to a teaching post-doc. This is just one of what we hope will be many innovative programs to come from our efforts to address the budget gap.

Are we still committed to a tenure-track system for our junior faculty?
The FAS remains committed to a tenure-track system, and internal promotions will continue to be based on academic merit alone.

Is it still important to develop academic plans?
Absolutely. It is imperative that we continue with the academic planning process so that we understand what are the foremost priorities of the FAS now and in the future. Although we do not know when, the University will again launch a capital campaign, and when that occurs, the FAS must be prepared to participate fully.

Will we eliminate $100 to $130 million from the FAS FY 2010 budget?
No, we will not bridge this gap in one year, but even reaching our target over several years will require more than simple belt-tightening. It will require a sincere and coordinated planning process.

What You Can Do

Faced with a financial challenge of the magnitude described above, the FAS needs all members of its community to take part in working aggressively to identify opportunities to bridge the gap. I ask that each of you who control a budget funded by an endowment or an unrestricted subvention work with your administrators to devise a plan to cut 15% of your annual expenses. Please communicate this plan to the director of your unit or an appropriate academic dean, and with those with whom you work most closely. We are a very interconnected organization, and any actions we take will need to be carefully coordinated across the internal boundaries of our organization.

Even if you do not control a budget, you can still help. Speak with those who do control the budgets in your area and help to generate ideas. If you have expense-reducing ideas outside your area, please send them to priorities@fas.harvard.edu. We are considering how to acknowledge and reward the best of the ideas that we receive.

Finally, let me emphasize that this is a time for planning, and planning is not the same as implementation. In order to determine the extent and magnitude of what is possible, we first must understand what is feasible, and we need to weigh the consequences of these changes on our ability to pursue our mission. I consider this an iterative process, where, through a series of conversations, we find the balance between opportunities for meaningful reductions and the pursuit of our priorities. Only then will we be in a position to implement our plans.

Although the challenges before us are sobering and the expense reductions certainly painful, I am convinced that we can use this financial crisis to build a stronger, healthier, more vibrant institution. I am encouraged by what one faculty member sent me recently: "[We must] rethink the ways in which we organize and configure our programs and come up with structures that are less costly but just as effective in intellectual terms." With this attitude, we are guaranteed success.

Sincerely yours,

Michael D. Smith