The School’s operating expenses for fiscal 2011 totaled $456 millionup by $41 million, or 10 percent, from fiscal 2010 and within 1 percent of the amount budgeted for the year. Categories of spending at HBP and Executive Education that would be considered “cost of goods sold” in the for-profit world accounted for a significant portion of the increase. Despite incurring higher costs, however, both of these competitive businesses continued to demonstrate strong leverage to incremental sales, generating increased margin contributions to operations as revenues grew. Another key driver of expense growth in fiscal 2011 was the School’s increased investment in supporting the faculty’s research around the world, which increased to $97 million, from $92 million in fiscal 2010.
The functional areas related to these expenses cut across several line items in the School’s Statement of Activity and Cash Flows. 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. 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.
Salaries and benefitsthe largest line item in the School’s expense budgetincreased by 8 percent in fiscal 2011 to $219 million, from $203 million in the prior year. The increase reflected higher salary rates and rising benefits expense, as well as administrative staff positions added to support MBA program innovation and growth initiatives in the School’s Publishing business.
The total number of faculty at HBS, 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. The size of the faculty remained essentially level in fiscal 2011 at 217 FTEs. The School’s total administrative staff budget grew to 1,138 FTEs in fiscal 2011, from 1,087 in the prior year. The majority of the added staff positions related to sales and content creation activity at HBP and MBA program innovations.
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 minimizing their debt at graduation by ensuring that fellowship support, or financial aid, keeps pace with MBA tuition and fees. HBS reports fellowships as an expense line item on the Statement of Activity and Cash Flows.
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 2011, the School was able to use unrestricted funds and current use gifts to support continued growth in financial aid spending. Total fellowship expense for fiscal 2011, including assistance for doctoral candidates and a limited number of Executive Education participants, as well as for MBA students, increased by $1 million from fiscal 2010 to $36 million.
Publishing and printing expense includes HBP production costs as well as a smaller amount of spending to produce the School’s other printed materials and publications. Reflecting HBP’s ongoing strategic investments in digital infrastructure and content, the School’s total publishing and printing expenses increased by $4 million from fiscal 2010 to $55 million.
The HBS campus includes 34 buildings encompassing nearly 1.7 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 and the School’s global research centers. In addition, residence expenses for executive program participants are reported under this category. Largely driven by higher underlying operating costsespecially those related to the School’s global research centersas well as business growth at HBP, total space and occupancy expenses for fiscal 2011 grew by $3 million from the prior year to $44 million.
Spending in several other areas of the budget returned to prerecession levels in fiscal 2011. Professional services expense rose by $9 million from fiscal 2010 to $31 million. This increase primarily reflected spending on external resources to support strategic growth in Publishing and Executive Education, and I.T. platform development for the new field-based MBA FIELD course. Driven by higher levels of activity across the School, expenses for supplies and equipment increased by $1 million to $10 million. Spending in the Other Expenses category, which includes items such as travel and catering, increased by $7 million, to $39 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. The amount charged to HBS in any given year is primarily calculated as a percent of the School’s total expenses on a two-year lagged basis. As expected, the School’s expense in fiscal 2011 for these assessments remained level with the prior year at $15 million.
In addition to gifts and internally generated cash, as well as unrestricted reserves, HBS finances major capital projects with debt financed through the University, using leverage strategically as a means of optimizing its capital structure. Relying on the University as its banker provides HBS, as well as the other Harvard schools, with access to debt on a triple-A-rated tax-exempt basis. The School borrows only to finance qualified capital projects, carefully considering the interest rate environment, expectations for the performance of the Harvard endowment, and the availability of University debt.
Reflecting this cautious use of debt, the School’s balance sheet historically has been only modestly leveraged, and it remained so in fiscal 2011. The increased capital activity during the year was primarily funded by cash from operations; there were no new borrowings, and HBS paid down $9 million in building debt. As a result, the School’s year-end fiscal 2011 building debt-to-asset ratio declined to 3.1 percent from 4.0 percent a year earlier. Other university debtmainly consisting of repayment obligations to the University for mortgage loans made by HBS as a faculty recruiting incentiveincreased by $2 million from fiscal 2010 to $28 million.
The School’s debt service expense, which consists of interest payments to the University and is primarily covered by using cash from operations, remained flat with the prior year in fiscal 2011 at $7 million. As in fiscal 2010, debt service expenses were mainly associated with borrowings to finance prior years’ campus expansion. The interest portion of the School’s debt ser-vice amounted to less than 2 percent of total operating expenses in fiscal 2011.