A Recession Is Looming. Even Harvard Is Uncertain About What That Means for Higher Ed.

Harvard is an outlier when it comes to most issues in higher education, with its $40-billion endowment, buffer from state budget politics, and end-of-year operating surplus nearing $300 million. But in preparing for a brewing economic recession, the university is no exception: It faces a lot of uncertainty.

That’s partly because so much has changed since the Great Recession. The university has new revenue streams. Officials are in the process of restructuring the endowment-management company. And an American culture of greater skepticism toward higher education means that universities may bear the brunt of any downturn on many fronts.

“Some economists have suggested that student debt could be a precipitating factor in the next recession, which would place higher education in the awkward position of being vulnerable to and potentially blamed for the financial crisis,” reads one document of several posted to Harvard’s website on the university’s financial planning. The university’s office of financial strategy and planning wrote that higher education may face greater regulatory control and additional tax obligations because of the changed sentiment. (The university did not make members of that office available for comment.)

“We’re 123 months into the longest expansion maybe in U.S. history, and we see indications that we’re toward the end of the cycle,” said Thomas J. Hollister, chief financial officer, in a Harvard publication. “All of our schools and units are doing scenario planning, thinking through what they can or should be doing now to prepare for a variety of economic pressures.”

Part of the uncertainty is due to the fact that institutions across the country changed many things about their revenue streams and operations in the decade after the Great Recession.

Harvard now brings in significant revenue from nondegree programs, and research funding from nonfederal sources. The university’s office of financial strategy and planning said in one report that it’s unclear how those sources, which have grown significantly since 2008, might respond to a future recession, predicted widely by economists.

Nearly half of Harvard’s $1.2-billion net tuition revenue comes from continuing and executive education, according to one document reviewed by The Chronicle, and officials said that stream next year may grow to be larger than net revenue from undergraduate- and graduate-degree tuition. Nine of Harvard’s 12 schools have executive-education programs for individuals and organizations.

Research funding from nonfederal sources like foundations and corporations brought in hundreds of millions of dollars, and that money is growing at a faster rate than federal research dollars are. (Federal research grants still bring in about twice the revenue of nonfederal sources, however, at $631 million last year.)

“Because many of these programs are relatively new, it may be difficult to predict how they will respond in an economic downturn,” the university’s financial-strategy office wrote this fall in one document on financial resilience.

Though they acknowledged the unknowns, analysts at Moody’s Investors Service praised the diversification of those revenue sources, saying it put Harvard in a more stable financial position. Employers may be less willing to pay for their staff’s enrollment in continuing-education programs during a recession, but self-funded enrollment may rise, said Susan Fitzgerald, associate managing director at Moody’s.

Harvard attributed some of the broad scrutiny of higher education to outrage over tuition costs and free-speech issues, in addition to skepticism over the value of a degree. It has already experienced new regulations in the form of an endowment tax, which cost the college about $49.8 million in the 2019 fiscal year.

“Social risks are high to the higher-education sector,” Fitzgerald said. “The scrutiny of higher education and affordability of higher education is a constraining factor around tuition revenue growth. We’re not anticipating that that’s going to change.”

American chief financial officers surveyed by Duke University and the CFO Global Business Outlook last year overwhelmingly — at 82 percent — predicted a recession to begin by the end of 2020.

Colleges nationwide are examining their budgets as they anticipate a future recession, said Sarah Pingel, a senior policy analyst at the Education Commission of the States. They are considering deferring purchases and maintenance, relying more on part-time contingent faculty members, and freezing hiring and travel.

Some campuses have already leaned on those strategies and are close to a limit after which they would be compromising student success, she said.

“All institutions need to be doing the planning, regardless of whether they’re a small community college or a four-year private like Harvard,” she said, adding that some states require colleges to plan for financial slowdowns. “Other institutions know that we’re pretty far into this economic expansion, and there’s probably a recession looming.”

Moody’s in February cited Harvard’s “effective” risk-management strategies as allowing the university to adjust to bad market conditions, and Jeffrey Kaufmann, lead Harvard analyst at Moody’s, said that the university has “reputational power” that positions it well in an uncertain environment. Still, Harvard has urged departments to pay down debt and build their cash reserves. In donor management, employees are encouraged to “review restricted gift terms for opportunities for more expansive use of funds.”

Schools and units regularly submit rolling five-year financial plans, and this year they must include additional “downside” plans and identify activities “where there may be opportunities to limit or reduce scale or scope,” according to the university’s financial report for the 2019 fiscal year.

And administrators warn expansionists that nothing is guaranteed to last forever. One document on financial resilience says future capital plans should be designed “with a phased or modular approach so they can be stopped if necessary.”

Lindsay Ellis is a staff reporter. Follow her on Twitter @lindsayaellis, or email her at lindsay.ellis@chronicle.com.