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In anticipation of declining revenues, the School’s expense budget for fiscal 2010 was $18 million lower than actual spending for fiscal 2009, and $40 million lower than initially budgeted for that year. Driven by the aggressive efforts of HBS faculty and staff to cut costs wherever possible, the School’s actual spending came in $5 million under budget in fiscal 2010. Total operating expenses for fiscal 2010 decreased by $23 million, or 5 percent, to $415 million, from $438 million in fiscal 2009.
HBS designed the fiscal 2010 expense budget to align the School’s cost structure with an environment of revenue constraints, while protecting key priorities—academic programs, faculty research, and strategic initiatives—to the greatest extent possible. For the purpose of managing the School’s expenses, the functional areas that support these priorities cut across several line items in the School’s Statement of Activity and Cash Flows.
Faculty research expense includes a significant portion of faculty salaries and benefits, as well as direct costs for research support staff and travel. Also included in the cost of faculty research are allocated expenses for the School’s network of global research centers, as well as library resources, campus facilities, technology, and administration. When viewed in this way, the School’s total investment in faculty research for fiscal 2010 was $92 million, compared with $97 million in fiscal 2009, driven in part by the 4 percent reduction in the size of the faculty.
As another example, expenses charged to HBP and Executive Education include direct costs for staff compensation, specialized outside professional services in areas such as I.T. and marketing, and residence expenses for executive program participants. The School’s calculation of margin contributions to operations from these revenue-generating business units reflects these expenses.
The largest item in the School’s expense budget, salaries and benefits expense, fell by $9 million in fiscal 2010, or 4 percent, to $203 million, from $212 million in fiscal 2009. The key reason for the decline was a year-over-year reduction in the number of faculty and staff positions across the School, which offset growth in benefits expense and costs related to faculty retirements. The total number of faculty, as measured in full-time equivalents (FTEs), can rise or fall in any given year as a result of retirements, departures, and fluctuations in recruiting activity. As one of the cost-reduction measures initiated in fiscal 2009, the School cut back on the number of one-year appointments for fiscal 2010. Recruiting fewer visiting faculty and senior lecturers, combined with normal faculty retirements and departures, reduced the size of the faculty by 10 FTEs from fiscal 2009 to 218.
The School’s restructuring initiatives also resulted in a significant year-over-year decline in total administrative FTEs. In addition to eliminating a large number of contract staff positions, through a combination of normal attrition, voluntary early retirements, and layoffs effective at the beginning of fiscal 2010, HBS reduced the size of its administrative FTE budget by 100 positions, or 8 percent, to 1,087, from 1,187 in fiscal 2009.
The prospect of entering the workforce with high levels of debt can deter strong MBA candidates from applying to HBS and restrict their career choices upon graduation. Consequently, one of the School’s key strategic priorities is to assist students in reducing their debt at graduation by ensuring that fellowship support, or financial aid, keeps pace with MBA tuition and fees. Over the past five fiscal years, the average two-year MBA fellowship award has grown from $27,700 for the HBS Class of 2006 to $45,700 for the Class of 2011.
Funding for fellowships comes primarily from restricted endowment giving by HBS alumni and friends. Although endowment distribution revenue declined from the prior year in fiscal 2010, the School identified MBA and doctoral financial aid as the only expense item that would not be affected by budget cuts. The School relied on other sources of funding to offset the decline in restricted endowment funding and support continued growth in fellowship spending during the year.
The School is also committed to expanding its investment in doctoral education. The number of doctoral candidates grew to 130 in fiscal 2010, from 120 in the prior fiscal year. Spending for doctoral fellowships, stipends, and research support increased commensurately. HBS also provides financial aid to a limited number of Executive Education participants to support the School’s social mission. Funds for these fellowships are drawn from Executive Education operating revenues as well as gifts for this purpose. Financial aid for participants in the new focused program, Managing Healthcare Delivery, resulted in a year-over-year increase in Executive Education fellowship spending in fiscal 2010.
HBS treats spending for fellowships as an expense line item on the School’s Statement of Activity and Cash Flows. The School’s total financial aid spending for fiscal 2010, including fellowships for doctoral candidates and Executive Education participants, as well as MBA students, increased by $2 million, or 6 percent, from fiscal 2009, to $35 million.
Publishing and printing expense includes HBP production costs as well as a small amount of spending to produce the School’s other printed materials and publications. Although HBP continued its program of strategic investment in digital infrastructure and content in fiscal 2010, the unit’s cost-cutting initiatives drove overall spending down for the second consecutive fiscal year. As a result, the School’s total publishing and printing expenses declined by $1 million from fiscal 2009 to $51 million.
The HBS campus includes 33 buildings encompassing more than 1.5 million square feet of occupied space. Space and occupancy expense includes costs related to maintaining and operating the School’s buildings and associated campus infrastructure. In addition, facilities improvement and renovation costs that do not qualify as capital expenses are generally categorized as space and occupancy.
Also included in space and occupancy are expenses related to dining facilities and other campus services, as well as costs associated with leased space that houses HBP’s operations. In addition, residence expenses for executive program participants—equivalent to cost of goods sold in Executive Education—are reported under this category. The School’s fiscal 2010 expense reduction initiatives included cuts in campus-wide dining costs and the postponement of numerous small facilities projects. As a result, the School’s total space and occupancy expenses decreased by $1 million from fiscal 2009 to $41 million.
The School’s fiscal 2010 restructuring and cost-cutting initiatives significantly reduced spending from fiscal 2009 in several other areas of the budget. Driven primarily by the elimination of contractor positions, professional services expenses declined by $9 million, or 29 percent, to $22 million. Expenses related to supplies and equipment fell by $3 million, or 25 percent, and spending in the Other Expenses category decreased by $5 million, or 14 percent, to $32 million.
University assessments cover essential services provided to HBS by the University, including payroll and benefits administration, processing of accounts receivable and payable, and legal services. In fiscal 2010, the School’s expenses in this area rose by $2 million, or 15 percent, from the prior fiscal year to $15 million. This marked the second consecutive year of increased University assessments, reflecting the decline in endowment income available to support the University’s central administrative functions. Because University assessments are primarily calculated as a percent of the School’s total expenses on a two-year lagged basis and total spending has declined during this period, expense for these assessments is budgeted to remain flat in fiscal 2011.
HBS has long been cautious in using debt, and with a building debt-to-asset ratio of 4.0 percent, the School’s balance sheet remained modestly leveraged at year-end fiscal 2010. The University functions as a banker for HBS, as well as the other Harvard schools, allowing the School to borrow on a triple-A-rated tax-exempt basis. The School’s building debt decreased by $7 million to $112 million in fiscal 2010, as there were no new borrowings and $7 million of principal repayments. Other university debt—mainly consisting of repayment obligations to the University for mortgage loans made by the School as a faculty recruiting incentive—was flat with fiscal 2009 at $26 million.
The School’s debt service expense, which consists of interest payments to the University on this debt, increased in fiscal 2010 by $1 million, or 17 percent, to $7 million. As in fiscal 2009, debt service expenses were mainly associated with borrowings to finance campus expansion earlier in this decade. The interest portion of the School’s debt service amounted to less than 2 percent of total operating expenses in fiscal 2010.