Consistent with the School’s campus planning processes, the last phase of significant campus investment at HBS concluded several years ago. Capital spending has generally declined since then. The School’s total capital expenses of $11 million for fiscal 2010, net of gifts used for capital projects, compared with $19 million for the prior year, and marked the probable low point for the foreseeable future. In the absence of any large capital construction or expansion projects in fiscal 2010, the School’s capital investments continued to focus on protecting the long-term value of the physical plant through the renewal and maintenance of buildings, campus infrastructure, and I.T. systems.
In addition to gifts and internally generated cash, as well as unrestricted reserves, the School finances major capital projects with debt financed through the University, using leverage strategically as a means of optimizing its capital structure. HBS borrows only on qualified capital projects, carefully considering the interest rate environment, expectations for the performance of the Harvard endowment, and the availability of University debt.
The School’s new borrowings, which have generally declined for the past several years as capital spending has decreased, dropped to zero in fiscal 2010. At the same time, debt principal payments increased to $7 million, from $5 million in fiscal 2009. Other non-reserve activity increased significantly in fiscal 2010, primarily due to the transfer of $50 million to the School’s endowment reserve in the summer of 2009.
This reserve was established several years ago with the goal of realizing long-term investment returns. As a result of this transfer, plus investment returns for the year, HBS concluded fiscal 2010 with an endowment reserve balance of $149 million, up from $85 million a year earlier. Together with the School’s debt principal payments in fiscal 2010, the transfer to the endowment reserve resulted in a $51 million decline in the Net Debt & Other category for the year.
HBS relies on unrestricted reserves to finance major campus expansion projects and capitalize on unforeseen strategic opportunities, along with a mix of internally generated cash, gifts, and debt. Because more than 50 percent of revenues come from business units that are highly sensitive to the economy, maintaining a strong unrestricted reserves balance is integral to financial planning at HBS and to the School’s ability to execute its mission over the long term. Fueled primarily by strong cash from operations in fiscal 2010, which more than offset funds transferred to the endowment reserve, the School’s year-end reserves balance grew by $3 million to $99 million.