Harvard University lost $1.8 billion from its operating budget, largely from high-risk investments, it stated in a financial report released Oct. 16.
The news darkened the university's financial outlook, already marred by an $11 billion drop in the school's endowment value during the last fiscal year.
The practice of putting operating funds in high-risk portfolios — which led to the loss of money used to pay for expenses like employee salaries — is uncommon.
In an interview published by Harvard's news office after the release of the university's financial report for the 2009 fiscal year, a top Harvard official pointed to the context of the larger financial crisis, which he said took the biggest toll on the institution's finances.
"All of these losses were a function of last year's extraordinary market conditions," Jim Rothenberg, the university's treasurer, said in the interview.
A Harvard spokesperson declined to comment for this article.
Harvard Chief Financial Officer Dan Shore also participated in the Harvard news interview. He said Harvard is now committed to being more careful with future operating-budget investments.
"We are now more conscious than ever of that balance," Shore said in the interview. "But circumstances of the last year left virtually no one immune."
The $1.8 million loss resulted from investments with Harvard Management Company (HMC), which oversees a portion of the university's operating budget as well as its endowment. The endowment funds saw an average loss of 27.3 percent in value during the fiscal year ending on June 30.
The university has not disclosed the exact amount of operating funds that it had invested in risky assets.
Operating expenses include items like employee salaries and wages; employee benefits, supplies and equipment; and student scholarships, according to the recently released report. Employee salaries and wages make up the largest portion, or almost half, of the operating expenses.
Harvard President Drew Faust explained in a message in the financial report that the university had laid off 275 employees during fiscal year 2009 and held salaries flat for faculty and some staff. The university has made major budget cuts in other areas as well, most notably slowing construction on its expansion in Allston.
At Tufts, where the operating budget, $2.3 million as of June 30, was a far cry from Harvard's, operating funds always sit in very secure assets, according to Tom McGurty, Tufts' treasurer and vice president for finance.
"We have always held our operating cash in highly liquid and relatively safe investment vehicles," McGurty said in an e-mail to the Daily, adding that Tufts makes very limited exceptions.
In addition to the $1.8 billion loss, Harvard's financial report mentioned a previously reported $500 million loss that occurred when the university had to terminate some of its complex interest rate exchange programs.
Institutions like Harvard use these agreements to manage their debts by reducing their exposure to high interest rates, leading to more predictable payments. But when interest rates plunged last year, Harvard was forced to pay cash in order to end the agreements.
Rothenberg pointed out in the Harvard interview that despite this year's losses, the average annual return on HMC's investments for the last 10 years was still a strong 8.9 percent. He explained that placing the funds in less risky "plain vanilla" portfolios would have only generated a return of around 1.5 percent, although he backed away from explicitly defending risky investing.
Tufts economics Professor George Norman explained that those who decided to invest Harvard's cash in riskier portfolios were professionals who had seen the strategies and financial instruments they were using pan out well for a long time.
"Everyone was being misinformed of the true riskiness of the derivatives they were using," he said. "I wouldn't say it was careless … they just got caught like everybody else."
Norman said he was positive that Harvard's financial situation will soon improve, despite the university's massive losses.
"Harvard's got a huge endowment, and there's no question they'll come back," he said.
