Deep structural deficit in the FAS forces longer-game reset

With July now well underway, the books are closing on a fiscal year in which the annual operating budget for the Harvard Faculty of Arts and Sciences appears roughly in balance, as it does most years. But it’s been anything but an ordinary twelve months, after a series of temporary belt-tightening measures were introduced to give the FAS flexibility to respond to financial turmoil from Washington, while the FAS administration prepares to make longer-term changes to address a significant structural deficit.

That projected long-term cash deficit comes in part from the 8 percent endowment tax on large private universities imposed under the One Big Beautiful Bill Act signed by President Trump in 2025, which will reduce future FAS spending capacity by as much as $100 million each year, as the University works to absorb this new cost.

The endowment tax, coupled with White House pressure and uncertainty over grant funding, has upended a partnership between the federal government and academic research institutions that has flourished since World War II.

The making of a structural deficit

But the looming deficit has been building for years, in a dynamic that doesn’t readily appear in the FAS’ annual operating results.

Standard accounting practices fail to register the expense of maintaining buildings older than the typical 20-to-40-year timeline for depreciation — yet the average age of FAS buildings is 85 years. The conventional annual view of the operating budget does not include either the FAS’ actual capital expenses or the considerable amount of new borrowing each year to cover the spending required to make up for maintenance that has been deferred for decades. That growing debt burden and mounting interest payments in turn pose two problems, putting pressure on the FAS’ available unrestricted resources — now and in the years ahead — and limiting its future borrowing capacity. While the standard accounting view of the annual budget may show shrinking margins but revenues and expenses more or less in balance, the longer-term structural view reveals a significant and growing mismatch between needs and the resources available to meet them.

Responding now and for the future

Amid the upheaval and uncertainty in federal grant funding during the last 18 months, Hopi Hoekstra, the Edgerley Family Dean of the FAS, laid out a series of short-term actions to free up temporary funds to preserve research, including pausing nonessential capital projects, freezing hiring, holding compensation flat for non-union staff and faculty, and reducing Ph.D. admissions for two years.

That set the table for more strategic restructuring over time, including a reimagining of the FAS’ physical footprint and the creation of a Task Force on Workforce Planning to redesign the administrative model, meant to make the institution more efficient and resilient to external shocks while beginning to tackle the long-term structural deficit and fortify the core mission.

“The scale of the problem requires decisive, long-term action to ensure the continued health and vitality of the FAS,” Hoekstra wrote in a message to the community last fall. She said the work would prioritize two connected goals: “to reduce our structural deficit through lasting, mission-aligned change,” and “to create the financial flexibility we need to make new investments that sustain and strengthen our excellence in teaching and research.”

In a new interview, FAS Dean of Administration and Finance Warren Petrofsky said the FAS is not alone in grappling with a structural deficit while trying to protect those core commitments. Petrofsky, who joined Harvard in April after a quarter-century in varied administrative roles at the University of Pennsylvania and Cornell University, speaks regularly with a peer group of FAS-equivalent finance and operations officers; they’re all working with consultants and making hard choices.

“With the way we’ve done things over many decades, it means that we’re really exposed when the external environment becomes more dynamic,” Petrofsky said. “We don’t have the capacity to absorb that kind of volatility” — not with five-to-seven-year commitments to graduate students on the books and 40-, 50-, and even 60-year commitments to tenured faculty, and a large, historic campus to maintain.

“We can’t and wouldn’t unwind those long-term commitments, so we’re less able to respond quickly to major changes,” he said, before paraphrasing Ritu Kalra, the University’s Chief Financial Officer and Vice President for Finance: “Our expenses are pretty fixed, and our revenues, it turns out, are much less fixed than we expected.”

Petrofsky underscored that all the FAS’ efforts — whether revamping procurement processes, reimagining the use of space, or redesigning the administrative model to better coordinate the workforce — are meant to serve fundamental teaching and research goals.

“All of this is tightly driven by, and committed to, the mission of the work. This isn’t because someone says, ‘Oh, this is the year we have to save $4 million.’ It’s because we are trying to build a structure that is sustainable, to support teaching and research and serve our faculty and staff and students in the long run,” he said. “We are spending more money than we have, and we can’t do that forever.”

He said they are approaching workforce planning with particular care, understanding that staff play a critical role in supporting the work of teaching and research. “No part of our mission is achievable without the expertise and dedication of the FAS staff,” he said, emphasizing that they would not move employees, consolidate roles, or eliminate certain positions lightly, understanding the real impacts on individuals.

‘Boundless’ mission, bounded resources

For nearly a century, institutions like Harvard have relied heavily on a mix of federal grants and private philanthropy in pursuit of “a boundless academic good. There’s no end point where you say, ‘Mission accomplished, we’ve reached academic excellence,’ or ‘We’ve solved the challenge of discovering new knowledge,’ and yet no matter how expansive that mission is, we have bounded resources,” Petrofsky said.

The traditional approach of annual “break-even” budgets that many leading institutions have employed year after year mostly worked out, even as it meant certain things got put off along the way — maintenance on older buildings, for one. It also meant weathering the occasional cyclical shock, such as an economic recession, with temporary measures like hiring freezes or by borrowing money instead of trying to make structural changes. But the challenges now are of a greater magnitude.

Economists sound the alarm

Even before the federal relationship frayed, two economics professors have been calling attention to the looming deficit — and the need to address it with policy decisions and strategic planning — for FAS since 2020–21. That year, Jeremy Stein and John Campbell served on a 13-member advisory body known as the FAS Study Group, convened by then-dean of the FAS Claudine Gay amid the upending nature of the pandemic to evaluate the institution’s financial health and sustainability.

The FAS Study Group’s report traced the modern history of the structural deficit in part to substantial investments that have helped make the FAS what it is today:  an increase in the number of ladder faculty in the first decade of the 2000s, from 592 to 722; a commitment to increasing financial assistance to undergraduates from lower- and middle-income backgrounds; and over that same 10-year period, construction that added 1.2 million square feet of new space, much of it for the sciences.

That expansion in spending, heavily reliant on borrowing related to physical square footage expansion, helped drive the FAS’ debt load higher, with the figure rising from about $600 million to $1.4 billion between fiscal years 2017 and 2025.

What GAAP misses

GAAP (generally accepted accounting principles) is the standard practice for reporting the revenues and expenses of publicly traded corporations and large nonprofits, providing a consistent and transparent framework for ratings agencies, donors, regulators, and the public. But it presents a one-year accounting view, and this myopic focus on operating revenues and expenses alone misses capital and misses new borrowing used to balance cash flows that would otherwise be negative.

“So even while we were showing roughly balanced budgets in an accounting sense, we were not balanced in a cash-flow sense,” said Stein, Moise Y. Safra Professor of Economics, who is also chair of a five-member Faculty Resources Committee that Hoekstra reconvened last year to advise her on financial matters. “We’ve been putting it on the FAS’ credit card.”

GAAP also accounts for building maintenance in the form of depreciation — a theoretical figure of what a business or institution should be spending to keep up with wear and tear on new buildings. Depreciation doesn’t measure actual needs or reflect actual spending on upkeep, neglecting those buildings that have aged out of the depreciation window but may be most in need of work.

The scale of the maintenance challenge

The FAS’ 220 buildings and 10 million gross square feet of space require $350 million to $400 million in maintenance every year “just to stay running in place,” Petrofsky said. (The figure approaches $450 million for 11 million gross square feet when including SEAS — the Harvard John A. Paulson School of Engineering and Applied Sciences — as well.)

But that doesn’t include a $900 million backlog in deferred maintenance that the FAS has put off while trying to make ends meet annually, a problem shared by many peer institutions.

The math behind the structural deficit includes the need to spend $90 million a year to begin catching up on that deferred maintenance, so targeted projects don’t snowball into even larger problems and expenses, a priority for Hoekstra. Maintenance can sound abstract, but it speaks to the core academic mission, said Zak Gingo, Chief of Campus Operations, who leads oversight of FAS buildings. This spring alone, four different aging FAS buildings suffered flooding.

The maintenance catch-up list includes MCZ Labs — the five-story laboratory built onto the Museum of Comparative Zoology in 1972 — where the single-pane windows leak, the plumbing and piping is rotting from the inside out, the ductwork is deteriorating, and the backup power system is unreliable. That could leave sensitive research materials and data at risk should the primary power grid fluctuate or fail.

As part of the FAS Study Group, Stein and Campbell led an effort to develop a budgeting framework — not just for the FAS, but for all similar institutions — that would go beyond the standard one-year “balanced budget” view afforded by GAAP, with a goal “to think about university finances like economists rather than accountants.” The resulting framework evaluates an institution’s total endowment, the restrictions on those funds (specified under the terms of myriad gifts), the institution’s debt burden, and its long-term expenses and commitments, which they laid out in a working paper co-published in 2024, “Economic Budgeting for Endowment-Dependent Universities.”

Campbell said he sometimes feels like the estate lawyer who reads the will in the movies, when the wealthy family gathers to learn their patriarch died penniless. “The endowment is not even big enough to support the activities that we see all around us and the current plans that we have for the future,” he said.

Buying time and using it wisely

The good news is that the FAS endowment, coupled with borrowing, is big enough to buy the institution some time and flexibility to solve these problems, amid a widely acknowledged time of crisis for higher education in general. “Plenty of institutions in this country don’t have that luxury,” Campbell said. “But taking our time doesn’t mean doing nothing; it just means we have to do something — in a strategic and gradual fashion.”

That’s not cutting for cutting’s sake, but the prudent decision-making Hoekstra emphasized at the outset. “This work is hard because every decision has real consequences for the people who make this community extraordinary,” she said this week. “Our responsibility is to make decisions thoughtfully, with humility and care, always asking what will best enable this Faculty to fulfill its mission — not only for those who are here today, but for those who will teach, learn, and discover here long after us.”