The School's total operating expenses for fiscal 2012 increased by $48 million, or 11 percent, from fiscal 2011 to $504 million—within 1 percent of the amount budgeted for the year. There were three key reasons for this increase.
The first reason, in order of size, was growth in spending at HBP and Executive Education in areas that would be considered "cost of goods sold" in a profit-seeking enterprise. Expenses charged to HBP and Executive Education include direct costs for staff compensation, specialized outside professional services in functional areas such as I.T. and marketing, and residence expenses for Executive Education participants.
Both of these groups were able to sustain strong gross margins and deliver healthy operating leverage on sales growth in fiscal 2012. As a result, despite incurring higher expenses in these areas, their margin contributions to the School's operations increased from the prior year.
MBA program innovation was the School's second key expense growth driver in fiscal 2012. HBS spent an incremental $8 million during the year to support the implementation of the new required first-year course, FIELD. This reflected higher student and faculty travel expenses associated with field-based learning, compensation for additional support staff, operating costs for the MBA classroom space at Batten Hall, and I.T. costs related to new FIELD simulations and course delivery tools.
The School's increased investments in faculty research were the third key reason for the growth in fiscal 2012 operating expenses. As with HBP, Executive Education, and MBA program innovation, faculty research investments at HBS cut across several line items in the School's Statement of Activity and Cash Flows. They include a portion of faculty salary and benefits expense, 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. Fiscal 2012 was a year of ambitious research activity at HBS. Driven by support costs for individual faculty projects and growth in the size of the faculty, as well as for the U.S. Competitiveness Project and other multidisciplinary faculty initiatives, the School's research investments increased to $109 million in fiscal 2012, from $97 million in the prior year.
As in all service businesses, employee compensation is the School's largest expense, comprising nearly 50 percent of total operating costs. Salaries and benefits expense increased 10 percent in fiscal 2012 to $241 million, from $219 million in the prior year. In addition to modest increases in salary rates and an uptick in benefits costs, spending grew as a result of growth in the size of the faculty and administrative staff.
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. Fiscal 2011 was a successful year for faculty recruiting at the School, as 14 outstanding candidates accepted positions as assistant professor. Net of retirements and departures, in fiscal 2012 the size of the faculty grew by 15 FTEs to 232, from 217 FTEs a year earlier.
Anticipating a year of strategic change, the School's fiscal 2012 financial plan included substantial growth in administrative staff. HBS was successful in hiring for the majority of these positions, which focused on supporting FIELD and improving business performance at HBP and Executive Education, among other initiatives. As a result, the School's total administrative staff budget grew to 1,198 FTEs in fiscal 2012, from 1,138 in the prior year.
HBS categorizes fellowships, or financial aid, as an expense line item on the Statement of Activity and Cash Flows. The prospect of joining the workforce with high levels of education debt can deter strong MBA candidates from applying to HBS and restrict their career choices upon graduation. This is particularly true for younger students, those from outside the United States, and students whose early career paths have not enabled them to reduce their undergraduate loans.
Consequently, one of the School's longstanding goals is to assist students in minimizing their debt at graduation by ensuring that fellowship support at least keeps pace with tuition and fees. Total fellowship expense for fiscal 2012, including assistance for Doctoral program candidates and a limited number of Executive Education participants, as well as for MBA students, increased by $1 million from fiscal 2011 to $37 million. Funding for fellowships comes primarily from restricted endowment and current use giving by HBS alumni and friends.
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. HBP's continuing growth in a fast-changing and highly competitive publishing environment reflects, in part, the success of the group's long-term program of strategic investment in digital infrastructure and content. Driven by these investments and by the larger scale of HBP's operations, the School's total publishing and printing expenses for fiscal 2012 increased by $4 million from fiscal 2011 to $59 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 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 offices. In addition, residence expenses for Executive Education participants are reported under this category. Driven in part by the new programming at Batten Hall, total space and occupancy expenses for fiscal 2012 grew by $3 million from the prior year to $47 million.
Professional services expense increased by $4 million from fiscal 2011 to $35 million. This increase was primarily driven by spending for external resources related to I.T. upgrades in several of the School's programs and functions. These included, among others, development of an online platform, resources, and tools to support FIELD, as well as completion of a multiyear project to develop a new faculty research platform and website. The increase in professional services expense also reflected new initiatives to drive strategic growth in HBP and Executive Education.
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Fiscal 2012 spending in the Other Expenses category, which includes items such as travel and catering, increased by $13 million, to $52 million. This majority of this increase was driven by international travel costs for students in FIELD and for faculty involved in global research, as well as the growing range of Executive Education programs offered outside the United States. Supplies and Equipment expense was flat with the prior year at $10 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 2012 for these assessments increased by $2 million from the prior year to $17 million.
HBS finances major capital projects with a mix of four sources of funding. The most important sources are gifts, internally generated cash, and unrestricted reserves. The School also makes strategic use of debt financed through the University 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 approach, the School's balance sheet historically has been only modestly leveraged, and debt leverage remained low in fiscal 2012. The School increased its capital investments during the year to $51 million, from $34 million in the prior year. As in fiscal 2011, this growth was primarily funded by cash from operations, and there were no new borrowings. HBS paid down $4 million in building debt in fiscal 2012, compared with $9 million a year earlier. As a result, the School's year-end fiscal 2012 building debt-to-asset ratio remained essentially level at 3.0 percent, compared with 3.1 percent in the prior year. Other University debt—mainly consisting of repayment obligations to the University for mortgage loans made by HBS as a faculty recruiting incentive—decreased by $5 million from fiscal 2011 to $23 million.
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The School's debt service expense consists of interest payments to the University and is primarily covered by using cash from operations. For fiscal 2012, debt service expense decreased by $1 million from the prior year to $6 million. As in fiscal 2011, this expense was mainly associated with borrowings to finance prior years' campus expansion. The interest portion of the School's debt service amounted to slightly more than 1 percent of total operating expenses in fiscal 2012.
The School's cash from operations decreased in fiscal 2012 by $11 million from the prior year to $42 million. As in fiscal 2011, this cash was largely generated by margin contributions from Executive Education and HBP, as well as the HBS community's generous giving to the School. In addition, use of restricted current use gifts, as well as cash from prior years' endowment gifts or appreciation, contributed $24 million to the School's cash flow in fiscal 2012, compared with $18 million in fiscal 2011. The net result was a decrease in cash before capital activities of $5 million, or 7 percent, to $66 million, from $71 million in fiscal 2011.
In accordance with the School's long-term campus plan, the most recent phase of significant capital investment at HBS concluded several years ago. As noted above, the School's fiscal 2012 capital expenses increased by $17 million from the prior year to $51 million. This growth was attributable to the initial construction of Tata Hall and completion of the renovations at Batten Hall, which houses the Harvard i-lab and provides HBS with classroom space for the FIELD course. The School's fiscal 2012 capital investments in these projects totaled $25 million and $9 million, respectively. In addition, HBS continued to invest in opportunistic projects focused on the renewal and maintenance of buildings, infrastructure, and I.T. systems across the campus.
Because gifts, internally generated cash, and unrestricted reserves have been available and sufficient to finance capital activities, fiscal 2012 marked the School's fourth consecutive year with no new borrowings. Debt principal payments decreased to $6 million, from $9 million in fiscal 2011.
Other non-reserve activity in fiscal 2012 was positive $12 million, compared to negative $51 million in the prior year. This year's amount reflected accounting adjustments related to the consolidation of HBP's financial statements with those of the School, and to capital construction projects under way during the year. Together with the School's fiscal 2012 debt principal payments, the $12 million in other non-reserve activity resulted in an increase of $8 million in Net Debt and Other for the year.
This compares to a decrease of $60 million in Net Debt & Other in fiscal 2011, which was largely driven by the second of two consecutive annual transfers of $50 million to the School's endowment reserve. HBS accesses this reserve selectively when necessary in order to finance capital investments.
In contrast to fiscal years 2011 and 2010 when construction spending was relatively low, the School did not transfer funds to the endowment reserve in fiscal 2012. This decision was made in light of the increased campus construction activity planned for the next several years, as well as the uncertainties surrounding the capital markets. The balance of the School's endowment reserve at the end of fiscal 2012 was $218 million, down from $228 million a year earlier.
Together with a mix of internally generated cash, gifts, and debt, HBS relies on unrestricted reserves to finance major campus expansion projects and to capitalize on unforeseen strategic opportunities. More than 50 percent of the School's revenues come from Executive Education and HBP—business units that are highly sensitive to the economy. Consequently, maintaining an ample balance of unrestricted reserves outside the endowment is crucial in providing HBS with the liquidity necessary to ensure the consistent execution of its mission through economic cycles over the long term.
Reflecting the School's continued healthy cash from operations, fiscal 2012 was a successful year in this regard. Driven by the School's operating surplus, together with decapitalization of certain endowment gifts and use of restricted current use gifts, unrestricted reserves increased by $40 million from fiscal 2011, and HBS concluded fiscal 2012 with a strong year-end unrestricted reserves balance of $119 million.