Harvard’s Finances in a Challenging Year

Harvard’s annual financial report for the fiscal year that ended June 30, 2024, published today—an academic year of campus tumult, an overturned presidency, and speculation about the resulting effects on alumni and donor support—reveals some new strains but no calamitous change in the University’s circumstances. Revenues and expenses both continued to rise, again yielding an operating surplus (extending a record now dating more than a decade); but the surplus narrowed from the fiscal 2023 result. The investment return on endowment assets rose smartly, increasing the endowment’s value overall: key metrics, since distributions from the endowment remain by far Harvard’s largest source of operating revenues. Highlights include:

• The University recorded a $45–million operating surplus, down from $186 million in fiscal 2023. Revenues increased 6 percent, to $6.5 billion, and expenses 9 percent to $6.4 billion. The latter include some unspecified, but not trivial, sums for the costs of contending with campus protests and augmenting security, complying with information requests from Congress and the U.S. Department of Education, and responding to lawsuits—all prompted by the political fallout from the Hamas attack on Israel October 7, 2023, and the ensuing war.

• Harvard Management Company (HMC) realized a net 9.6 percent rate of return on endowment investments, up from the 2.9 percent reported in the prior year.

• The aggregate endowment investment gains of $4.5 billion, reduced by the $2.4 billion distributed to Harvard’s operating budget (in turn partially offset by $368 million in gifts for endowment, plus other changes and transfers), increased the endowment’s value by a meaningful $2.5 billion, to $53.2 billion as of June 30, 2024, up 4.9 percent from $50.7 billion one year earlier.

An Investment in People

The University’s new president and financial leaders emphasized in their introductory letters to the annual report that investments this year had been in people and community.

President Alan Garber wrote that the report “offers a broad financial perspective on our core mission of teaching, learning, and research, and gives a glimpse of what we accomplish as a community committed to those ends.”Alluding to the campus unrest precipitated by events in the Middle East in October of 2023, he continued, “Last year was not an ordinary one. Yet it was typical in important ways: In classrooms and laboratories, students faced challenges and found inspiration; researchers and students pursued, expanded, and disseminated knowledge in nearly every field and discipline; and news of discoveries and breakthroughs from every corner of the University came daily.”

Befitting a financial report, Garber added that:

“We at Harvard are incredibly fortunate to have at our disposal resources of extraordinary diversity that support and speed our work — from cutting-edge equipment in our facilities to unmatched collections in our libraries and museums to one-of-a-kind sites for academic research on our campus and far beyond it. Around the world and at home in Harvard Yard, we find ourselves heirs to centuries of generosity motivated, in part, by the promise of perpetual contributions to knowledge and progress. And, year after year, our thoughtful stewardship of physical and financial resources ensures their endurance for generations to come.”

But departing from the language typical of such annual assessments, Garber continued, “our resources are not our greatest strength. Our community is what matters most. That is why its renewal and care are paramount, and why we have launched efforts to understand where and how we can improve.” He cited the establishment of task forces to combat antisemitism and anti-Israel bias, and anti-Arab, anti-Muslim, anti-Palestinian bias, all “focused on rebuilding not only a sense of belonging but also genuine acceptance among members of our community.”

Referring to the challenges of maintaining academic and intellectual vitality at a time when speech has become strained and at times constrained, he wrote, “Our future as an institution depends, in part, on our ability to reinvigorate a robust culture in which ideas are exchanged freely in a spirit of mutual respect, so that every person at Harvard has the opportunity to grow and thrive.” He ended his letter by expressing his conviction that “Our University will emerge stronger from this time — not in spite of being tested, but because of it.” And he pledged to do his “utmost to work with our community to pursue excellence in our core mission as I continue to acknowledge and celebrate the many ways in which that excellence manifests itself—and the many ways in which we make the world better.”

The financial management team of Ritu Kalra, vice president for finance and chief financial officer, and Tim Barakett, University treasurer, emphasized the University’s continuing strengths, both financial and human: the fourth largest undergraduate applicant pool in Harvard history; the highest rate of matriculation in five decades, and eight percent growth in professional and lifelong learning programs in executive and continuing education.

Gifts for current use—a key component of the operating budget—“reached the second highest level in Harvard history,” at more than $525 million. While fundraising overall surpassed $1 billion, the pair cautioned that “such levels may not be sustainable looking forward,” as gifts overall fell, probably as a consequence of the campus turmoil of the past year. (In a statement, however, Garber noted that “As the University addressed longstanding challenges that were highlighted by the events of the past year, alumni and others demonstrated both their concern and their care for the future of the institution through growing levels of support over the course of the year”—a welcome development.) Kalra and Barakett wrote, “We are grateful to those who have continued to direct their philanthropy to the University as a reflection of their commitment to Harvard’s academic mission.”

To support ongoing and future capital projects, the University’s carefully stewarded balance sheet has been invaluable in the bond markets. The University issued “$1.6 billion in debt in fiscal year 2024 through a two-part bond issuance,” Kalra and Barakett wrote: “$750 million taxable and $855 million tax-exempt, including a tender to refinance outstanding bonds for interest savings. Harvard secured favorable borrowing costs with historically low credit spreads, a reflection of confidence in the University’s long-term stability.”

But in order to support the University’s mission effectively—to enable pursuit of knowledge in new fields such as AI and quantum science, and existing strengths in rapidly evolving areas such as data science and the biological sciences, as well as capital investments in accessibility and sustainability—they signaled a need for better operating margins in the future. (Speculatively, an institution such as Harvard would probably aim for margins closer to the three to five percent range). Writing that “We live in a world of persistent uncertainty, underpinned by economic volatility and geopolitical unrest,” they emphasized “Increasing pressures on our operating performance” as growth in expenses exceeded growth in revenue for a second year. Although there was an overall surplus, it was “smaller…than had been budgeted and a substantially lower operating margin, at under one percent of revenue, than has been characteristic of recent years,” pointing to “the need to improve our financial capacity.”

Returning to the theme of sustaining a vibrant academic community, Kalra and Barakett’s letter noted that expenses in fiscal 2024 were “driven primarily by our investments in people.” Salaries accounted for more than half the increase in compensation, “with the balance from new faculty and staff to support University activities.” Associated increases in benefits, as well as the cost of labor, higher operational expenses, and “heavier burdens from regulatory and oversight demands” they wrote, have affected research universities across the country.

On the subject of the endowment, Kalra and Barakett highlighted the intergenerational nature of financial stewardship. “Harvard’s financial capital,” they wrote, “acts as both a catalyst to accelerate learning and discovery today, and as a stabilizing force to ensure that future generations of scholars have the same opportunities.” They continued:

The principle of intergenerational equity is foundational: Harvard’s endowment funds—of which 80 percent are restricted to particular purposes, including financial aid, professorships, and specific fields of scholarships within specific schools—exist to support the University’s teaching and research in perpetuity. Our financial resources, built over years through disciplined planning and sound financial management, allow Harvard’s schools and units to withstand shocks. They also provide the capacity to invest in new programs and pedagogies, fostering the academic excellence that is both Harvard’s hallmark and its aim.

During “a difficult and trying year,” Kalra and Barakett concluded, “We remain energized by the prospects for progress, as the University is a community of remarkable resilience that strives continuously and with humility to deliver on its extraordinary promise.”

The Fiscal Year in Review

REVENUE. Harvard’s operating revenue increased 6 percent during fiscal 2024, to $6.5 billion from $6.1 billion in the prior year (all figures are rounded).

Looking at major sources, endowment distributions (37 percent of the total) rose from $2.2 billion to $2.4 billion: about 9 percent. The increase reflects the 4.5 percent increase in the distribution per endowment unit owned by schools, approved by the Corporation for fiscal 2024, plus the increase in the number of units owned (from gifts); a smaller 2.5 percent increase is authorized for fiscal 2025. (These measured increases smooth the lagging effect of the outsized gains in the endowment’s value from fiscal 2021, when the investment return was 33.6 percent, while buffering budgets from years of negative or only modestly positive returns, like fiscal 2022 and 2023.)

Net student income (21 percent of the total, reported after financial aid) increased $51 million, to $1.4 billion: up 4 percent. Degree programs (undergraduate and graduate) yielded 2 percent more revenue. College enrollment, some 7,063 students in fiscal 2024, which had been elevated as undergraduates who took leaves or deferred admission during the pandemic resumed their programs, fell toward more typical levels; the expectation is that the undergraduate cohort, normally about 6,600, will remain outsized for perhaps another academic year (boosting tuition and fee income for a while longer, and perhaps financial aid spending, too). According to the report, fee income—board and lodging revenue—rose 4 percent, to $231 million, primarily reflecting graduate students’ return to campus housing. The real standout for a second year was executive and continuing education, (9 percent of the total) which rose 8 percent, to $587 million—reflecting the continued impact of resuming in-person programs. These operations may face more competition now, given other institutions’ pandemic pivot to online executive education, but Harvard’s executive education programs maintain a strong reputation across a broad array of offerings involving most of its schools, so this important source of revenue growth may well be back on track.

Sponsored support for research (16 percent of revenue) decreased by $13 million, with federal (68 percent of the total) increasing $10 million (1 percent) and nonfederal (32 percent, from corporations and foundations) decreasing $23 million (7 percent) as certain large projects wound down.

Gifts for current use (8 percent of revenue) increased $42 million, to $528 million (9 percent). This support is broad-based: “more than 75 percent of the number of gifts in fiscal year 2024 averaged $150 per donor.”

Other revenue (18 percent), a catch-all category, increased $91 million, to $883 million—about 11 percent—mainly due to increases in royalties from agreements to license intellectual property, which fluctuate from year to year.

EXPENSES. The University spent $6.4 billion on operations in fiscal 2024, up a half-billion dollars from $5.9 billion in the prior year: 9 percent.

Salaries and wages rose $211 million, to $2.6 billion from $2.4 billion, or 9 percent. More than half that increase is attributable to merit increases and other adjustments for nonunionized employees, and to negotiated contracts for unionized staff. The rest reflects growth in the workforce—principally from filling positions that remained vacant following the pandemic. The pace of growth in new employees is expected to moderate in fiscal year 2025 and beyond. Employee benefits spending increased $62 million, to $690 million (up 10 percent)—closely aligned with the increase in salaries and wages. As in fiscal 2023, interest rate changes had the effect of reducing Harvard’s operating cost for pension and retiree healthcare costs, moderating the reported benefits expense. As the workforce expands at current, higher salaries (compared to prior vacancies) and pressure increases on healthcare costs, this expense merits future monitoring.

Other expense categories exhibiting notable growth largely reflected the resumption of full University operations and increased in-person use of facilities. Space costs rose $78 million (8 percent), as more people worked more hours on campus, and as energy prices increased. The University spent $136 million more (13 percent) on supplies and servicesincluding “significant investments in information technology, with a focus on enhancing security, integrating artificial intelligence, and developing advanced cross-campus learning platforms…to expand access and enable more students to benefit from a Harvard education.” And the grab-all other line (12 percent of total expenses) rose by $17 million (a modest 3 percent), as expenses such as travel, which rose rapidly in fiscal year 2023 post-pandemic, returned to more typical levels of growth.

CAPITAL SPENDING. Harvard’s outlays for fixed assets—buildings and equipment—rose to $639 million in fiscal 2024 from $512 million in the prior year. Activity remains far below the level at the end of the last decade, when billion-dollar years were the norm. The increase reflects an increase in the number and average cost of active projects, including the new American Repertory Theater facility and affiliate housing tower in Allston.

THE BALANCE SHEET AND GIVING. Bonds and notes payable increased 15 percent, as Harvard issued $855 million in tax-exempt bonds (for capital spending and to refinance a portion of the University’s outstanding debt from 2016), and $750 million in taxable bonds (to supplement working capital). These two borrowings increased total indebtedness to $7.1 billion from $6.2 billion at the end of fiscal 2023 (after maturities and amortizations). Interest expense was $225 million in fiscal 2024, up from $207 million. The effective interest rate on all of Harvard’s borrowings is 4.1 percent, and the University maintains its AAA/Aaa credit ratings.

Liquid, short-term investments held outside the endowment to support operations were $2.0 billion at the end of fiscal 2024, up from $1.4 billion a year earlier.

Total gift receipts (in which Harvard includes nonfederal sponsored research grants) fell from slightly less than $1.4 billion to 1.2 billion, down about $204 million from fiscal 2023, perhaps signaling a weakness in donations during a difficult year. Pledges receivable (including for current use, nonfederal research support, construction, and endowment) fell to $2.6 billion from $2.7 billion in fiscal 2023. Pledges for endowment increased just $4.5 million, to about $1.26 billion.

Endowment Results

How ought one To assess Harvard Management Company’s 9.6 percent return (net of investment expenses) for the year? First, it is smartly above the 2.9 percent recorded in fiscal 2023. Second, the fiscal 2024 performance is slightly better than most peers. Admittedly, that is not an important criterion, given each school’s unique financial needs and investment strategy, and the short time span compared to an endowment’s perpetual goals—but it is still reassuring.

Reporting on fiscal 2023 results last October, this magazine said, “This was the sort of year that vexed managers of large, diversified endowments like Harvard’s,” as public market indexes soared, driven by a handful of large-capitalization technology stocks, outperforming the results of large permanent endowments, which diversify their assets and invest heavily in private securities.

That held true in fiscal 2024.The MCSI All Country World Index (ACWI) of stocks rose 19.4 percent, and the S&P 500 (larger-capitalization U.S. stocks) 24.6 percent. According to the Wilshire Trust Universe Comparison Service, which assesses the performance of pension plans, endowments, and similar pools of assets, all such plans underperformed a traditional 60 percent public stocks/40 percent bonds portfolio (driven by public stock appreciation). But for once, larger plans outperformed smaller ones because the latter hold more bonds, which lagged while interest rates remained high.

Among diversified endowments that have reported results to date, the University of Virginia Investment Management Company’s main asset pool gained 7.5 percent, with results notably held back by the 4.3 percent return on private equity assets. Duke returned 8.0 percent on its long-term pool of investments, while Dartmouth reported an 8.4 percent return, as did Stanford. MIT earned 8.9 percent on its pooled investments, and Brown returned a strong 11 percent.

Under CEO N.P. “Narv” Narvekar, Harvard Management Company has become largely silent in describing returns by asset category—but he did note that “HMC’s public equity and hedge fund portfolios stood out for their strong performance” in fiscal 2024. In his letter in the annual report, he observes that “This is a particularly positive indicator, since HMC’s hedge fund portfolio has less equity exposure than most hedge fund indices, yet still outperformed during a strong year for equities.” Overall, significant outperformance over relevant benchmarks—“a reflection of HMC’s strength in its process of selecting managers—has reduced the drawbacks of a comparatively under-equitized and lower-risk portfolio.”

HMC’s reported asset allocation differed relatively little from that of fiscal year-end 2023, with the shifts in public equities and hedge funds presumably reflecting, in large part, their recent relative performance.

As a rough calculation, the arithmetic suggests that given the reported returns for public equities and hedge funds (a bit more than 40 percent of assets at the beginning of the fiscal year), the remainder of HMC’s portfolio produced modest single-digit returns.

Narvekar observes that “For the second year in a row, private equity returns lagged those of public equity markets.” Public equities declined sharply in value during fiscal year 2022 as interest rates rose, but private equities—whose values are reported with a lag, and somewhat at the investment managers’ discretion—did not. (“[I]n FY22, private managers did not reduce the value of their investments in a manner consistent with declining public equity markets at the time,” in Narvekar’s phrasing.) Given that decision, he writes now, private asset managers haven’t increased the value of their investment holdings in fiscal 2023 and 2024 as public equities have appreciated—instead, in effect, spreading the pain.

Lagging private equity returns have a huge influence on HMC’s results in any given year, since such assets represent 39 percent of the endowment holdings. Private equity investors’ strategy is focused on the longer-term potential of such holdings. In fiscal 2021, the 77 percent return on private equity assets (an astonishing 27 percentage points above the return on public equities) propelled HMC’s historic 33.6 percent net return—underpinning Harvard’s endowment growth for much of an economic and market cycle: the goal of investment managers charged with augmenting value in perpetuity.

Looking forward, HMC can point to several potential strengths. First, as in years past, Narvekar points to “strong” manager selection boosting performance. Second, with the organization’s restructuring now well in the past, and results improving, the conversations between HMC and the University about Harvard’s needs have resulted in an increased tolerance for investment risk (more equity exposure)—and Narverkar suggests that the organizations are actively working “to determine if future increases to risk tolerance are warranted.” If so, that would point to possibly higher returns, with possibility of greater near-term volatility. Third, at some point the period of lagging private equity performance should end; lower interest rates will help, and if and when investors again become amenable to initial public offerings (IPO), private equity managers may be able sell portfolio holdings more readily, realizing gains for their clients like HMC.

In other words, it comes down to HMC’s execution and its asset manager partners’ performance. During the first couple of years of Narvekar’s tenure, which began in late 2016, he both reorganized and downsized HMC’s staff dramatically and disposed of assets whose returns were subpar or whose characteristics did not suit his team’s strategies and return metrics—principally, real estate and natural resources holdings. Both steps involved costs, which reduced reported performance.

The latter portfolio restructurings, and subsequent sales of some private equity assets on the secondary market (rather than waiting out their scheduled maturity and receiving distributions from the outside investment managers), turn out to have had unanticipated benefits for HMC, beyond the strategic aims. The real estate sales and spinoffs preceded the pandemic, which has fundamentally changed work and shopping, impairing the value of investments in office buildings and retail facilities generally. That has depressed other managers’ performance (real estate is a significant asset class) and caused them to restructure their portfolios—problems that are in HMC’s rearview mirror. And learning how to dispose of assets nimbly on the secondary market has become increasingly useful (and increasingly acceptable among pension and endowment managers) as the disrupted IPO market has made it more difficult for private equity managers to return gains to their general partners.

Peering still farther into the future, HMC in 2022 opened an office in Singapore, to access investment opportunities directly from the burgeoning Asian and East Asian economies: a forward-looking commitment to the kinds of technology and venture ideas Narvekar has written about in recent letters. That kind of nimbleness will be increasingly required if an organization with assets the size of Harvard’s is to sustain long-term performance consistent with its 8 percent annual return goal (approximately 5 percent for distributions to support the University’s academic work, and 3 percent growth to maintain purchasing power over time).

For now, Narvekar writes, reflecting on HMC’s results during the past seven years, “the risk-adjusted returns to date show that we are on the right track.” Given the University’s reliance on endowment distributions for 37 percent of the operating budget, Harvard needs HMC’s performance to continue on that trajectory. The organization is motivated to do so, he concludes, “by the fact that our efforts directly support an institution that serves as a global leader in teaching, learning, research and the groundbreaking advancements its community makes each day.”

Looking Ahead

The trend of growth in expenses outstripping growth in revenue “is not a long-run sustainable path,” Kalra noted in a Q&A with the Harvard Gazette. But behind the numbers, she added, are strategic investments “intended to foster future growth:” in technology infrastructure, AI capabilities and renewal of campus facilities to “enable types of research that were unimaginable just a decade ago.” That implies “the need for prudence going forward.”

Barakett added that a “long-term perspective is essential. The University has investments it must make in the near future,” in areas from financial aid—tuition is now free to students from families earning less than $85,000 a year—to sustainability in University operations, as Harvard transforms the generation and distribution of energy across the campus to meet its goals and commitments. “In our planning for the years ahead,” he concluded, “we must create the financial capacity to make room for these investments”—no small task in the current fraught political and economic environment.

The 2024 annual financial report is posted at the Harvard financial administration website. Read the Harvard Gazette conversation about the financial results with executive vice president Meredith Weenick, vice president for finance and CFO Ritu Kalra, and University Treasurer Timothy Barakett here.