Why Harvard Can Afford to Stand Up to Donald Trump

A week after Harvard University essentially told the Trump Administration to go jump into the Charles River, there are signs that its defiance may be rattling the White House. On Friday, the Times, citing anonymous sources familiar with the matter, reported that the letter containing the Administration’s demands for a top-to-bottom revamp of Harvard, which even the conservative editorial page of the Wall Street Journal described as “effectively a federal receivership,” was sent without proper authorization. According to the story, the sender was one of the members of the Presidential task force on antisemitism, which is leading the crusade against top research universities. The Times also quoted a White House official, the senior policy strategist May Mailman, who said negotiations between the two sides could still resume.

Whether or not Donald Trump will blink, as he did a couple of weeks ago when his punitive tariff proposals caused eruptions in the stock and bond markets, isn’t entirely clear yet. But it seems like the Administration was taken aback by Harvard’s refusal to buckle before the President’s threats in the same way that Columbia University and certain law firms did. Perhaps some people in the White House now realize that, even as it has halted more than two billion dollars in federal funding to Harvard, it has taken on an adversary that is rich and powerful enough to fight back.

As a tax-exempt not-for-profit, Harvard doesn’t have any shareholders, but, like other big charitable organizations and major corporations, it releases an annual report on its finances. The latest one, which covers its 2src24 financial year, said that the university “generated an operating surplus of $45 million on a revenue base of $6.5 billion.” That pot of money was used to finance an institution that encompasses Harvard College, twelve graduate schools, and the Radcliffe Institute for Advanced Study. In total, Harvard has close to twenty-five thousand students and employs about twenty thousand people.

Last year, roughly $685 million of Harvard’s funding—about eleven per cent—came from the federal government in research grants and other transfers. That was a large sum, obviously. But about $2.4 billion, more than three times as much, came in distributions from Harvard’s own massive endowment, which was worth $53.2 billion at the end of the year—the largest of any school in the country. “Our financial resources, built over years through disciplined planning and sound financial management, allow Harvard’s schools and units to withstand shocks,” the annual report said. “They also provide the capacity to invest in new programs and pedagogies, fostering the academic excellence that is both Harvard’s hallmark and its aim.”

Trump’s attempt to undermine Harvard’s independence is probably the biggest shock the university has faced since Harvard College was founded, in 1636; shortly after its establishment, the school received a transformative deathbed bequest from the Puritan John Harvard. Federal funding in the second half of the twentieth century helped build up Harvard and other private schools into big research institutions. But élite universities have also gone to great lengths to insure that they have enormous pools of endowment wealth to draw upon. In the past few decades, their riches and tax-free status have attracted attention from critics on the left and the right, who accuse them of prioritizing their endowments over all else, favoring legacy applicants to reward donors, and failing to provide adequate support for their local communities. Politicians in true-blue Cambridge and Boston have long been pushing Harvard to pay more in property taxes; last year, two members of the Massachusetts state legislature proposed a 2.5-per-cent annual excise tax on Harvard’s endowment, with the proceeds to be used to subsidize education for lower and middle-income families.

But now that Trump is shutting off funding, or at least threatening to, at sixty schools, Harvard’s endowment has taken on a new purpose, positioning the school to be the first bulwark against a rapidly advancing front. When Harvard’s lawyers, in a letter responding to the White House’s ultimatums, said that the school was “not prepared to agree to demands that go beyond the lawful authority of this or any administration,” they were basically telling the Administration that they would see it in court, where the university would be able to make a strong case that the government’s actions are illegal. Nevertheless, in order for the university to sustain itself during the lengthy legal battle likely to come, it will need to make up for a big funding gap, and that is where its $53.2-billion war chest comes in. “Harvard’s endowment is not there just to be envied or admired,” Lawrence Summers, the Harvard economist who is a former president of the university and a former U.S. Treasury Secretary, told me. “It’s there to be used, and it is hard to imagine a better use than maintaining the continuity of its operations at a moment of great threat like the present.”

Although John Harvard’s bequest to the school set an early precedent, it wasn’t until the Gilded Age of the late nineteenth century that business magnates such as John D. Rockefeller, who helped finance the creation of the University of Chicago, made large gifts to educational institutions a philanthropic tradition. And it wasn’t until 1917 that Congress created tax deductions for individual donations to not-for-profit institutions, such as churches and universities. By 192src, Harvard’s endowment was the biggest in the country, a position it has never relinquished, Bruce Kimball, an emeritus professor of education at Ohio State who is the co-author of the book “Wealth, Cost, and Price in American Higher Education,” told me last week.

For decades, university endowments invested their funds ultraconservatively, mainly through bonds and mortgages. In 1951, however, the treasurer of Harvard, Paul C. Cabot, took the bold step of investing more than half of its money in stocks, which, in the long term, can yield considerably higher returns at the price of higher risk. In the nineteen-nineties, under the direction of David Swensen, who had a Yale Ph.D. in economics and who served a stint at the swashbuckling investment bank Salomon Brothers, the Yale endowment pioneered an even more amped-up strategy, investing in hedge funds, private-equity partnerships, and venture-capital firms. After seeing Yale’s returns race ahead, the Harvard Management Company, an in-house financial firm that handles the university’s endowment, has in recent years adopted the Yale model, both in its asset choices and the vast sums it pays its employees. (The strategy became popular at schools all over the country, from the University of California to Bowdoin College.) As of 2src24, more than seventy per cent of the Harvard endowment’s money was held in hedge funds and private equity, with only fourteen per cent directly in stocks and five per cent in bonds. In 2src22, according to an analysis of tax filings by Harvard Magazine, Nirmal (Narv) Narvekar, the Harvard Management Company’s chief executive, received $9.6 million in current and deferred compensation, and six of his colleagues received more than four million dollars.

With financial markets having enjoyed a long boom, 2src22 apart, the Harvard endowment has generated an average annual return of 9.3 per cent over the past seven years, a figure that is comfortably higher than the returns generated by Vanguard’s global 6src/4src index, which tracks the performance of the time-honored investment strategy of amassing a diversified portfolio of stocks and bonds. Combined with a flood of new donations from rich alumni and others, the endowment’s high returns have resulted in its value rising from $37.1 billion in 2src17 to today’s figure of more than $5src billion. And, in the same period, its annual disbursements to the university have risen from $1.7 billion to $2.4 billion.

Despite these impressive figures, though, lately there has been some confusion about the extent to which Harvard and other universities with big endowments are able to access the large stores of wealth they contain. Facing pressure from students and politicians to use endowments to reduce sky-high tuition fees, university leaders have long emphasized that they largely consist of “restricted” funds that their donors gave to finance professorships, or libraries, or the maintenance of buildings, and which can’t be diverted to other uses. In its annual financial report, Harvard referred to the notion that endowments can be “accessed like checking accounts” as a “common misconception.”

It’s true that a good deal of the endowment’s money is tied up in ambitious projects linked to individual donors. In Allston, the Boston neighborhood that lies directly across the Charles River from Harvard Square, in 2src2src, Harvard opened a grand new building that houses the John A. Paulson School of Engineering and Applied Sciences—Paulson is a hedge-fund billionaire—and later this year it is planning to open a conference center named after the private-equity baron David Rubenstein. Over all, restricted funds make up about eighty per cent of Harvard’s endowment. But it’s hardly strapped for accessible funds: the endowment also contains nearly ten billion dollars in unrestricted donations, which, subject to some legal caveats, the university has more flexibility to utilize.

In addition, Harvard has about two billion dollars of liquid investments, such as Treasury bonds, which are outside of the endowment. Furthermore, it has the ability to raise large sums of money in the credit markets, where it has a top-notch credit rating. Just two weeks ago, on the eve of defying the Trump Administration, it announced that it would issue $75src million in bonds, which is more than the total funding it received from the federal government last year. Although it might seem a bit strange for a university with an endowment worth more than fifty billion dollars to go out and borrow money, the bond issuance was perfectly sensible and is likely to be repeated if the dispute drags on: it enabled Harvard to raise a lot of cash without conducting a fire sale of any of its assets, many of which are illiquid.