The School’s total operating expenses for fiscal 2013 increased by $38 million, or 7 percent, from fiscal 2012 to $542 million—within $2 million of the amount budgeted for the year. About 50 percent of this increase reflected higher costs at HBP and Executive Education.
Although HBS characterizes these publishing and executive program costs as “expenses,” they would in large part 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.
HBP and Executive Education both sustained solid gross margins and delivered healthy operating leverage on sales growth in fiscal 2013. As a result, despite incurring higher expenses and making substantial investments in future growth, each group provided important income contributions to the School’s operations for the year.
Another key feature of the School’s economic model is that faculty research expenses at HBS cut across several line items in the Statement of Activity & Cash Flows. The cost of faculty research includes a portion of faculty salary and benefits expense, as well as direct costs for research support staff and travel. Also included are allocated expenses for the School’s network of global research centers, as well as library resources, campus facilities, technology, and administration.
Employee compensation is the School’s largest expense, comprising nearly 50 percent of total operating costs. Salaries and benefits expense increased 6 percent in fiscal 2013 to $255 million, from $241 million in the prior year. This marked slower year-over-year growth than in fiscal 2012, primarily reflecting a decline in the size of the faculty.
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. Net of retirements and departures, the size of the faculty decreased by 5 FTEs to 227 in fiscal 2013, from 232 FTEs a year earlier.
In preparation for a third year executing on the School’s strategic initiatives, the fiscal 2013 financial plan included continued growth in administrative staff. Nearly half of these new positions were added by HBP, which is expanding its presence outside the United States in an effort to drive revenue growth globally. This year’s staff growth at HBP also reflected the insourcing of positions that were formerly filled by contractors.
Staff FTEs were also added to support the School’s capital campaign and FIELD, and to improve business performance in Executive Education, among other initiatives. As a result, the School’s total administrative staff budget grew to 1,335 FTEs in fiscal 2013, from 1,198 in the prior year.
HBS categorizes fellowships, or financial aid, as an expense line item on the Statement of Activity & Cash Flows. The prospect of entering or returning to the workforce with high levels of education debt can both deter strong MBA candidates from applying to HBS and restrict their career choices upon graduation. This is particularly true for women, as well as students who reside outside the United States, who recently graduated from college, or who have not reduced their undergraduate debt because of their early career paths.
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 2013, including assistance for Doctoral candidates and a limited number of Executive Education participants, as well as for MBA students, increased by $3 million from fiscal 2012 to $40 million. Funding for fellowships comes primarily from restricted endowment and current use giving by HBS alumni and friends.
Publishing and printing expense includes a small amount of cost related to the School’s printed materials and publications as well as HBP’s production costs. 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. Reflecting this investment, along with HBP’s larger operational scale, the School’s total publishing and printing expenses for fiscal 2013 increased by $8 million from fiscal 2012 to $67 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. The School’s total space and occupancy expenses for fiscal 2013 grew by $1 million from the prior year to $48 million.
Professional services expense for fiscal 2013 increased by $5 million from the prior year to $40 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. In addition to growth-focused projects at HBP, these included, among others, the Executive Education group’s implementation of an enhanced CRM platform; development of the School’s next-generation Alumni website and related capital campaign infrastructure; and Learning Hub management system upgrades for the MBA and Doctoral programs.
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Spending in the Other Expenses category, which includes items such as travel and catering, increased by $7 million in fiscal 2013 to $59 million. The majority of this increase was driven by FIELD-related international travel costs, research database acquisitions, I.T. projects, and preparations for the School’s capital campaign. Supplies and Equipment expense decreased by $1 million from the prior year to $9 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 percentage of the School’s total expenses. As expected, the School’s expense in fiscal 2013 for these assessments increased by $1 million from the prior year to $18 million.
HBS finances major capital projects with a mix of four sources of funding. The most important sources are gifts, current-year 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 2013. HBS increased its capital investments during the year to $78 million, from $51 million in the prior year. As in fiscal 2012, this growth was primarily funded by internally generated cash, and there were no new borrowings. HBS paid down $8 million in building debt in fiscal 2013, compared to $4 million a year earlier. As a result, the School’s year-end fiscal 2013 building debt-to-asset ratio decreased to 2.5 percent, from 3.0 percent in the prior year. Other University debt—mainly consisting of repayment obligations to the University for mortgage loans made by HBS as a junior faculty recruiting incentive—was flat with fiscal 2012 at $23 million.
The School’s debt service expense consists of interest payments to the University and is covered by using cash from operations. Debt service expense for fiscal 2013 was flat with the prior year at $6 million. As in fiscal 2012, 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 2013.
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The School’s cash from operations increased in fiscal 2013 by $3 million from the prior year to $45 million. As in fiscal 2012, 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 $22 million to the School’s cash flow in fiscal 2013, compared to $24 million in fiscal 2012. The net result was a $1 million increase in cash before capital activities to $67 million, from $66 million in fiscal 2012.
As noted above, the School’s fiscal 2013 capital expenses, net of gifts used for capital projects, increased by $27 million from the prior year to $78 million. This growth was primarily attributable to the ongoing construction of Tata Hall, as spending related to that project more than doubled year-over-year to $52 million.
The other major campus expansion projects in fiscal 2013 were the ongoing construction of tunnels to connect the new Executive Education buildings to the tunnel system and initial development work for the Chao Center. Capital investments in these two projects totaled nearly $10 million. In addition, HBS continued to invest in numerous projects focused on the renewal and maintenance of buildings, infrastructure, and I.T. systems across the campus.
The increase in net capital expenses for fiscal 2013 also reflected $26 million in advance payments for capital projects planned for fiscal 2014, described in the Statement of Activity & Cash Flows as Funding Capital Projects for Future Year.
Because gifts, internally generated cash, and unrestricted reserves have been available and sufficient to finance capital activities, fiscal 2013 marked the School’s fifth consecutive year with no new borrowings. Debt principal payments increased to $8 million, from $4 million in fiscal 2012.
Other non-reserve activity in fiscal 2013 was negative $2 million, compared with positive $11 million in the prior year. Together with the School’s fiscal 2013 debt principal payments, the negative $2 million in fiscal 2013 other non-reserve activity resulted in a decrease of $10 million in Net Debt & Other for the year.
This compares to an increase of $7 million in Net Debt & Other in fiscal 2012, which was largely a result of accounting adjustments related to the consolidation of HBP’s financial results with those of the School, and to capital construction projects under way during the year.
Together with a mix of internally generated cash, gifts, and debt, HBS relies on unrestricted reserves to finance major campus expansion projects and capitalize on unforeseen strategic opportunities. Nearly 56 percent of the School’s revenues come from Executive Education and HBP&mdashlbusiness 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 sufficient liquidity to fulfill its educational and research mission on a long-term basis. Reflecting the School’s continued healthy cash from operations, fiscal 2013 was a successful year in this regard. HBS sustained its operations while investing in the campus and in strategic innovation, while still concluding the year with a strong unrestricted reserves balance of $83 million.