Now, an impossible financial picture looms for even Harvard University, the wealthiest university in the United States. Political tensions created by the Trump administration are further complicating the picture. Harvard certainly has the endowment to afford it—over $52 billion. In its financial plan—called an enterprise model—the university generally spends about 5% of this endowment each year. This distinct financial programming model is now being put to the test. The university is currently facing serious issues that would dramatically impact its annual operating budget and future viability.
The Internal Revenue Service (IRS) began investigating Harvard prior to President Donald Trump’s suggestion that the university should be taxed as a “political entity.” The impact of this proposal would be to inject a higher degree of uncertainty and complexity into Harvard’s financial planning. Founded in 1636, the university is the oldest institution of all kinds in the United States. Through the decades, it has assembled a remarkable collection of multijurisdictional project assets. Pressures from the federal government are forcing Harvard to reconsider its spending priorities à la budget.
About 39% of Harvard’s endowment goes toward private equity, and 32% into hedge funds. In so doing, these investment strategies have delivered robust returns over time. During the most recent fiscal year, which ended June 30, the university’s endowment returned a strong 9.6%. Behind the scenes, the administration’s recent actions have effectively frozen $2.2 billion in federal grants to Harvard. Beyond that, this move massively oversimplifies the university’s financial situation.
Beyond these operational funding hurdles, Harvard has entered into $750 million in taxable bonds with a maturity due date of September 2035 +0.02%. This move is part of a broader strategy to manage its financial resources amidst the uncertainty created by federal scrutiny and potential tax reforms targeting educational institutions.
Harvard’s endowment is the engine for over 14,600 separate funds. Nearly 80 percent of these monies are restricted, going to such things as financial aid and endowed professorships. As a result, the university’s hands are pretty tied when it comes to re-purposing these dollars. Perhaps that is where the $9.6 billion in endowed funds with donor restrictions (not an emergency provision) can help. Without liquidating these assets, cash flow is affected, and concerns about Harvard’s long-term financial health are triggered.
The federal government has for generations met this responsibility by exempting universities from taxes to further their educational mission, said Harvard spokesperson. This exemption has historically allowed institutions like Harvard to invest in educational and research initiatives without the burden of taxation.
To add insult to injury, the Department of Homeland Security has threatened to block international students from Harvard from enrolling. This possible limitation would directly affect the university’s diverse and multicultural student population. It endangers the revenue streams that are associated with international tuition.
“Such an extreme measure would jeopardize our capacity to fulfill our mission in education,” the spokesperson continued. It would mean less student financial aid, abandonment of vital medical research programs, and missed opportunities for new students to innovate. The unlawful use of this instrument more broadly would have grave consequences for the future of higher education in America.”
Harvard’s struggle is just a canary-in-the-coalmine for the dynamic that is sweeping across higher education institutions nationwide. Scott Bok, former chairman of University of Pennsylvania, once said something brilliant. That, he stated, “is because most of that money was already deposited in there with a designated use.” This trend underscored a core dilemma that universities encounter when trying to rework their business models in the wake of external forces calling for change.
As Harvard reconsiders its working budget, the institution will need to weigh short-term financial imperatives with the long game. Kimball noted that “universities that didn’t want to assume the risk fell behind,” suggesting that institutions must be willing to adapt and innovate in response to changing circumstances.
The ongoing story of what’s happening at Harvard is just one example of the volatile and often hypocritical intersection of education and politics in America today. With increasing federal scrutiny, universities have little option but to travel down a hazardous and unpredictable path. This conflict will determine the future of Harvard for decades. Its effects could easily ripple throughout the higher education landscape.