President Faust’s 2009 Opening Year Address to the Community

Sanders Theatre, Cambridge, Mass.

As prepared for delivery

Good afternoon, everyone, and thank you for coming.

The past two Septembers I’ve shared my thoughts at the start of the year in a letter to the community. This September seemed a good moment to talk in person. We went through an unusually challenging year in 2008-09. But, thanks to a great many of you, it was also a year of real accomplishments. A newly launched program in General Education. A newly created doctoral degree in education leadership. A new institute for biologically inspired engineering. A strengthened commitment to the arts and to public service and to sustainability. A surge in opportunities for learning abroad. Seventy new members of our ladder faculty across the schools. Three outstanding new deans. And the enrollment of the most diverse freshman class in Harvard history.

We start this new year with a renewed sense of purpose and possibility — knowing we’ve made encouraging progress in adapting to our changed financial landscape, and understanding that difficult challenges remain. I want to talk a bit with you today about where we are and where we’re going. And then we’ll have time for some questions.

Let me say, first, how grateful I am for your hard work during these harder-than-usual times. It’s an old adage that adversity makes you strong. Our predecessors have steered Harvard through wars and depressions, epidemics and episodes of unrest. We are the beneficiaries of not just their resilience but their creativity — their commitment, as the song goes, to keep Harvard “rising through change and through storm.” We owe it to them to meet this moment with equal devotion.

There’s no question about the importance of our work. Economic uncertainty and financial systems in flux, climate change and threats to sustainability, infectious diseases and inadequate access to health care, persistent inequality as well as religious and cultural strife: What we do here can make a great difference in how these and other problems are understood and addressed — through research that generates fresh ideas, through the discovery of promising solutions, through the education of students we send into the world. While much of the world’s focus is so often on near-term results, we have a distinctive opportunity to take the long view — to see the issues of the moment in the light of history, and with eyes on a horizon beyond tomorrow’s headlines. And we have a distinctive obligation not just to serve but to doubt — not just to help shape prevailing wisdom, but to question it. At a time when higher education faces new financial constraints, our work here has never mattered more.

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Let me turn now to those new constraints and how we have been navigating our changed financial situation.

As announced two weeks ago, our investment returns for the year ending June 30 were minus 27.3 percent — close to our forecast, but slightly better. In dollar terms, when you subtract what we spent from the endowment last year, and add in new gifts, the endowment fell from nearly $37 billion to $26 billion in one year’s time. That’s an $11 billion drop — in a source we’ve come to rely on for more than a third of our annual income.

What does that mean for our revenue picture? In a given year, a university commonly spends around 5 percent of its endowment’s value. So, to put it in highly oversimplified terms, losing $11 billion in endowment value would typically mean losing on the order of half a billion dollars in support of our annual operating expenses. In reality we’re aiming to spend close to 6 percent from the endowment this year, and then gradually less in future years — to make sure the impact of the endowment’s decline isn’t too abrupt and jarring. Even so, we have a serious set of challenges. We have grown rapidly, and have a structural revenue gap to confront. We have increasingly depended on income tied closely to volatile markets, and have learned costly lessons about risk. Expense reductions are a necessity, and a fact of life.

What about our revenue sources beyond the endowment?

Net student income — tuition and fees, minus our contributions to financial aid — actually dipped slightly last year, as we’ve tried both to moderate tuition growth and to provide generous aid.

Our fundraising results for fiscal 2009 were mixed. Gifts for current use were significantly up — but overall giving was down, in the range of 10 percent. We owe special thanks to our donors at a time when a great many of them were feeling their own financial pressures. Still, the results underline how the world has changed around us, and for us.

Sponsored research funding, especially in science, presents a somewhat brighter picture — up around 7 percent last year. But even there, as we compete aggressively for grants, we need to recognize the explicitly short-term and targeted nature of research funds tied to the federal stimulus plan — and make sure we don’t ramp up new activities in ways that will create a dangerous cliff two years down the road.

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How have we begun to confront this changed economic landscape?

Last December, after the markets’ sharp decline, we announced that we anticipated likely investment losses of around 30 percent by the end of the fiscal year in June. Historically, Harvard has discussed endowment results only after the fiscal year ends. But in the extraordinary circumstances of last year, it seemed essential that our whole community begin to face the implications of this very important reality.

Then and now, we’ve recognized that — even with a skillful investment team and a reasonable rebound in the markets — it will very likely be a long time before the endowment recovers its steep losses.

And we’ve recognized that, in Harvard’s decentralized environment, our schools and other units face challenges that differ in both magnitude and kind — and they need flexibility to shape solutions locally.

At the same time, we’ve worked to ensure that local decisions take shape within a set of overarching university considerations.

We asked the schools and other units to budget for the current year assuming an 8 percent reduction in dollars distributed from the endowment. We also asked them to assume a likely reduction of at least that size for 2010-11.

Some schools have moved to absorb reductions as quickly as possible; others, more in phases. Some efforts have been essentially local; others, more institution-wide. We in the central administration cut our own budget by 8 percent. Across the university we made significant spending reductions in the course of the past academic year, and our overall financial results show meaningful savings against our original FY09 budget.

Realigning our personnel costs — roughly half our expenses — has been one important element of our response. We’ve taken four major steps. First, we’ve made aggressive efforts to slow both new hiring and the filling of vacant positions. Second, we offered voluntary retirement incentives for long-serving staff, and more than 500 chose to accept. Third, we undertook a painful but important round of reductions in force, affecting more than 275 of our colleagues, many of whom had served Harvard ably for years. Fourth, we have held salaries flat for both faculty and exempt staff.

At the same time, we have slowed our ambitious capital plans — most obviously, with regard to our long-term aspirations in Allston. Overall, we expect to reduce by roughly half the capital spending we had originally anticipated for the next several years.

We have probed how we can coordinate the purchase of goods and services university-wide, to take better advantage of our purchasing power. There’s nothing glamorous about changing how we do procurement. But we need to change it. Local decision making is important for certain things we need. But when each of us has discretion to decide which of 30 different shades of Crimson to put on our business cards, we’ve carried things too far.

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Think of it this way. The university is the vehicle the world most relies on to educate students and advance knowledge. The vehicle we’ve built here has been enormously powerful and productive over many years. Now, in the spirit of the times, we’re challenged to ask ourselves: how can we create a nimbler, more modern, more fuel-efficient vehicle to drive us forward?

Let me articulate some of the principles that will guide us.

First, we need to protect priorities. That means always having in mind what we’re here for — education and research of the very highest caliber, which depends on attracting students, faculty, and staff of the very highest caliber from the broadest and most diverse pool possible. It also means considering tradeoffs and making choices. To succeed in supporting what is most important, we’ll need to decide there are certain things we will not do, and certain areas where we will have to make do with less.

Second, we need to move — promptly but thoughtfully — toward what others have called “a new normal.” That means not entertaining the illusion that, if we’d just close our eyes and wait a bit, our economic situation would simply bounce back to where it was.

Third, we must embrace the opportunity, and the necessity, to work more efficiently and cooperatively. This means distinguishing ends — education and research at the highest level — from means — the precise structures that we use to achieve those ends. We need to take a hard look at some practices we’ve come to take for granted. It also means finding new ways to work across institutional boundaries — to learn more from each other, to lower bureaucratic hurdles and maximize resources available for our core purposes. It means finding new ways, in a time of financial constraint, to benefit from what people in each part of Harvard can offer one another. In short, we must dedicate ourselves — individually and collectively — to harness the power of a more unified Harvard. At least since the time of Charles William Eliot — who ended his term 100 years ago — Harvard presidents have called for a more collaborative, more integrated university. I do so at a time when the intellectual problems we face, the evolving structures of knowledge, and now our changed resources make it imperative.

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Our new economic circumstances may not permit us to grow as we have before, or to be all things to all people, or to say yes to every good idea. But, even as we find ways to adjust, we will also find ways to advance.

We will continue to bring the most talented people to this university — by seeking out the most outstanding scholars in the world, and by opening our doors as wide as possible to students of exceptional ability and promise. Providing broad access to a Harvard education is an essential expression of our meritocratic values — and of our responsibility to the nation and the world.

We will press ahead with the effort to encourage academic connections across our schools — whether the focus is the future of cities or the future of the global economy, stem cell science or climate change, the meaning of human rights or the interplay of politics and religion. More and more, our students and our faculty should come to see themselves not just as members of separate schools or departments, but as members of a university, with all it has to offer.

We will renew and extend our commitment to the liberal arts tradition — not only through our new Gen Ed program, but by encouraging all our students, at every level, to see the problems of the moment in their larger historical and intellectual context — by expecting them to challenge conventional wisdom — by bridging the divide between scientific and humanistic inquiry, and recognizing that creativity resides in both — by pressing back against any notion that pursuing knowledge for its own sake is somehow antithetical to creating knowledge for the world.

We will need to reshape structures and practices that create roadblocks to collaboration or tend to value individual prerogative at the expense of common progress. No easy or overnight task — but an important project that has become an urgent one, especially in a time of suddenly greater constraint.

And we need to engage the world, locally and globally — as responsible citizens committed to public purposes, as students and scholars ready to help solve complex problems with rigor and imagination, as people who live by the ethical standards we teach, as individuals who repay the privilege of being in a rare place like this by using our knowledge to help advance the well-being of people in the world beyond our walls.

- Drew Faust