Expenses

The School’s total operating expenses for fiscal 2017 were $731 million, up by $27 million, or nearly 4 percent, from $704 million for the prior year. The largest drivers were upward pressure on compensation costs; spending aimed at positioning HBP, HBX, and Executive Education for future growth; and investments in I.T. systems and platforms across the School.

Although HBS characterizes its publishing, digital learning, and executive program costs as operating expenses, they would in large part be considered as cost of goods sold in a profit-seeking enterprise. Expenses charged to HBP, HBX, and Executive Education include direct costs for staff compensation, specialized outside professional services in I.T. and other functional areas, and marketing and residence expenses for executive program participants.

HBP and Executive Education continued to deliver solid operating leverage on sales growth in fiscal 2017. As a result, despite incurring higher expenses and making significant growth-focused investments, each group provided important income contributions to the School’s operations for the year.

Faculty research expenses at HBS—nearly 19 percent of the operating budget—cut across several line items in the Statement of Activity and Cash Flows. The cost of faculty research includes a portion of faculty salary and benefits expense. It also includes direct costs for research support staff and travel, and for the School’s network of global research centers. In addition, HBS allocates a portion of the costs associated with library resources, campus facilities, technology, and administration to faculty research. The School’s total spending for faculty research support in fiscal 2017 increased by $5 million, or nearly 4 percent, from the prior year to $136 million.

Salaries & Benefits

Employee compensation is the School’s largest expense, comprising approximately 45 percent of total operating costs in fiscal 2017. Salaries and benefits expense increased nearly 6 percent year over year to $327 million, from $309 million in fiscal 2016, driven primarily by salary increases and a modest number of administrative staff positions added during the year.

The total number of faculty at the School, as measured in full-time equivalents (FTEs), can rise or fall in any given year reflecting retirements, departures, and recruiting activity. Net of retirements and departures, the size of the HBS faculty was unchanged at 233 FTEs in fiscal 2017.

At the same time, the School’s administrative staff grew to a budgeted 1,680 FTEs, from 1,631 in fiscal 2016—the smallest increase in three years, primarily driven by scaled-back hiring at HBP in response to slower revenue growth. The majority of the approximately 50 staff positions added across the School in fiscal 2017 were focused on supporting the MBA Program, assisting faculty research and I.T. projects, and capitalizing on income growth opportunities in HBP, HBX, and Executive Education.

Fellowships

The School categorizes fellowships, or financial aid, as an expense line item on the Statement of Activity and Cash Flows. Making education at HBS affordable to a broad cross section of applicants, regardless of their country of origin or their financial resources, is a longstanding goal of the School.

The prospect of entering or returning to 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, women, those from outside the United States, and students whose early career paths have not enabled them to reduce their undergraduate loans.

Consequently, the School strives to assist students in minimizing their debt at graduation by ensuring that fellowship support keeps pace with tuition and fees. Extending a long record of annual increases in financial aid, total fellowship expense for fiscal 2017, including assistance for MBA and Doctoral students and a limited number of Executive Education participants, increased by $1 million, or 2 percent, from fiscal 2016 to $48 million.

Approximately half of the School’s MBA students currently receive fellowships, which cover an average of more than 50 percent of their total tuition. Average fellowship support per student increased 5 percent in fiscal 2017 to $37,312 from $35,571 in the prior year. Over the past five fiscal years, the School’s average two-year MBA fellowship award has grown from $60,620 for the Class of 2013 to $75,000 for the Class of 2018.

Funding for fellowships comes from restricted endowment and current use giving by HBS alumni and friends. These funds are supplemented by unrestricted funds as necessary, which totaled $4 million in fiscal 2017.

Publishing & Printing

Publishing and printing expense includes HBP’s production costs plus a small amount of spending related to the School’s 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 strategic investment in digital infrastructure and content.

While continuing to make growth-focused investments in fiscal 2017, HBP responded to a slowdown in revenue growth by taking aggressive steps to limit its operating costs. The publishing group used fewer contract resources than planned, while postponing certain capital projects and vendor agreements. As a result, the School’s total publishing and printing expenses for fiscal 2017 were $70 million—unchanged from the prior year.

Space & Occupancy

The HBS campus includes 36 buildings encompassing more than 1.8 million square feet of occupied space. Space and occupancy expense includes costs related to maintaining and operating the School’s buildings and campus infrastructure. Additionally, facilities improvement and renovation costs that do not qualify as capital expenses are generally categorized as space and occupancy.

Also included under this category are expenses related to dining facilities and other campus services, and costs associated with leased space that houses operations at HBP and HBX, as well as the School’s global research offices. In addition, residence costs for executive program participants are reported as space and occupancy expenses.

The School’s space and occupancy expenses for fiscal 2017 increased by $6 million, or nearly 10 percent, from the prior year to $68 million. The increase reflected operating costs at the newly opened Chao Center, Life Lab, and HBP headquarters facilities, as well as higher-than-expected one-time costs for site remediation associated with Klarman Hall construction.

These new space-related expenses were partially offset by the School’s underlying trend toward slower growth in building operating costs and utility bills, thanks to recent investments in facilities upgrades, renewal, and modernization.

Professional Services

A large portion of the School’s professional services expense is related to spending that a for-profit business would categorize as cost of goods sold—including growth- focused investments at HBP and HBX, and compensation for faculty who teach Executive Education programs. Reflecting a slower pace of investment at HBP and HBX, partially offset by higher spending at Executive Education, the School’s professional services expenses for fiscal 2017 were down by $2 million from the prior year to $63 million.

The School’s professional services expenses also include costs for third-party I.T. resources. Fiscal 2017 was an active period for I.T. investment at HBS. The School launched a new common platform for the HBS global alumni club network, while continuing the campus wireless upgrade project—this year focusing on campus residence buildings.

Nonetheless, the School spent less for external I.T. support than in fiscal 2016. Fiscal 2017 marked the conclusion of several strategically important I.T. projects, chief among them new customer relationship and learning management platforms in Executive Education and the MBA Program, respectively. Spending for third-party resources to support these projects began diminishing during the year, setting the stage for future success in controlling professional services expenses at the School.

Supplies & Equipment and Other Expenses

These expenses for fiscal 2017 decreased by $2 million from the prior year to $12 million. The year-earlier amount was unusually high because of a one-time, $5 million recategorization from space and occupancy. Fiscal 2017 spending in the other expenses category, which includes items such as travel and catering, increased by $2 million from the prior year to $75 million, reflecting planned expansion in these activities across the School.

Debt Service

HBS finances major capital projects with a mix of three sources of funding. The most important sources are gifts and unrestricted reserves of internally generated cash. 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 an AAA-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 HBS balance sheet historically has been only modestly leveraged, and debt leverage remained low in fiscal 2017. The School’s total capital expenses decreased to $78 million, from $113 million in the prior year. As in fiscal 2016, these investments were primarily funded by internally generated cash, and there were no new borrowings. HBS paid down $8 million in building debt in fiscal 2017, compared with $7 million a year earlier.

As a result, the School’s year-end fiscal 2017 building debt-to-asset ratio decreased to 1.4 percent, from 1.7 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—increased by $2 million from fiscal 2016 to $26 million.

The School’s debt service expense consists of interest payments to the University and is covered by using cash from operations. Fiscal 2017 debt service expense was unchanged from the prior year at $4 million. As in fiscal 2016, this expense was mainly associated with borrowings to finance prior years’ campus expansion. Consistent with the three prior years, the interest portion of the School’s debt service amounted to less than 1 percent of total operating expenses in fiscal 2017.

University Assessments

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 2017 for these assessments increased by $2 million from the prior year to $24 million.

Depreciation

The School computes depreciation using the straight-line method over the estimated useful lives of the assets. Depreciation expense for fiscal 2017 increased by $2 million, or 5 percent, from the prior year to $40 million. This increase primarily reflected the School’s larger asset base following the opening of the Chao Center and Life Lab in the fourth quarters of fiscal 2016 and 2017, respectively.

Cash Before Capital Activities

The School’s cash from operations increased in fiscal 2017 by $12 million from the prior year to $69 million. As in fiscal 2016, this cash was largely generated by margin contributions from Executive Education and HBP, as well as generous giving to the School by alumni and friends. In addition, depreciation is a non-cash item that added back $40 million to the School’s operating cash flow in fiscal 2017, compared with $38 million in the prior year.

Net Capital Expenses

The School’s total capital investment decreased to $78 million in fiscal 2017 from $113 million in fiscal 2016, which marked the conclusion of a multi-year period of intensive Executive Education facilities construction. Construction of Klarman Hall, which is scheduled to open in fiscal 2019, was the largest capital project during the year.

Fiscal 2017 capital activity also included completion of the Life Lab. At the same time, the School modestly reduced its investments in facilities and I.T. upgrades, and renewal and maintenance projects across the campus, as well as energy efficiency measures to meet the University’s greenhouse gas reduction goals.

The School’s net capital expenses for fiscal 2017 were down substantially to $8 million, from $105 million for the prior year. Together with the $35 million decrease in capital expenses, there was a $31 million increase in the use of gifts for capital projects. In addition, a year-over-year reduction in capital project pre-funding represented a $19 million source of cash in fiscal 2017, versus a $12 million use of cash in the prior year.

Changes in Debt & Other

The School’s debt and other cash activities decreased by $60 million in fiscal 2017, compared with a decrease of $12 million in the prior year. This was primarily driven by a cash transfer of $50 million to the HBS endowment.

Because gifts, internally generated cash, and unrestricted reserves have been available and sufficient to finance capital activities, fiscal 2017 marked the School’s ninth consecutive year with no new borrowings. Reflecting slightly higher interest rates, debt principal payments increased by $1 million from the prior year to $8 million.

Capitalization of endowment income—or cash used to purchase endowment units—was a $4 million use of cash in fiscal 2017, compared with $3 million in the prior year. In compliance with federal and state legal requirements, the School’s objective is to spend as much of the endowment distribution as possible in any given year, according to the terms of each gift. Funds unspent as a result of gift restrictions are generally reinvested in the endowment.

In compliance with the law, HBS accesses the investment appreciation within existing endowment accounts when the terms of the gift require funds to be withdrawn at a rate higher than the University’s payout rate in any given year. Decapitalization of endowment income—or cash drawn from endowment appreciation—was a $3 million source of cash in fiscal 2017, compared with $5 million in the prior year.

Ending Balance, Unrestricted Reserves

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. 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 of the endowment is crucial in providing HBS with sufficient liquidity to fulfill its educational and research mission on a long-term basis. Driven by the School’s continued healthy cash from operations, fiscal 2017 was a successful year in this regard. HBS sustained its operations, executed on mission-driven initiatives, and increased its investment in the campus, while still concluding the year with a strong unrestricted reserves balance of $145 million.

* In pursuit of greater comparability across the Harvard schools, the University has asked all the schools to report their net results in accordance with generally accepted accounting principles (GAAP) in the United States. In addition to results for fiscal 2017, the School’s results for fiscal years 2013, 2014, 2015, and 2016 are presented in accordance with GAAP within the Statement of Activity and Cash Flows.