Harvard: The Cost of Excellence

Dr. Paul Prusky attended Harvard Medical School on scholarship. Now he's offering his alma mater at least $15 million for financial aid awards - an amount that would make any other university swoon. Says Prusky: ''I'm trying to do for others what Harvard did for me.''

But Harvard is balking at conditions attached to the gift, torn between its traditional zeal to raise money and its reluctance to spend it. And Prusky, who left medicine for money management, is so fed up that he may give the millions to his foundation instead.

With an endowment of nearly $13 billion - which would rank it in the top quarter of Fortune 500companies - Harvard is far and away the richest university in the world. This Thursday in HarvardYard, in a commencement-day ritual as cherished as the student-delivered Latin oration, grateful reunion classes will offer up eight-figure checks to the university, adding to its lucre.

Such tribute is warranted, administrators say, because Harvard is not as financially secure as it seems.

But critics say Harvard is obsessed with fund-raising and regards its wealth not just as a means toproviding the best education for its students, but as an end in itself. By stockpiling for the future, they say, Harvard may be shortchanging the present. It spends less than 4 percent of its skyrocketing endowment - and the percentage is steadily dropping. Its frugality translates into large classes, lagging salaries for junior faculty, and inadequate financial aid, particularly for graduate students.

''I have always felt strongly that our spending is quite conservative,'' says Henry Rosovsky, theformer dean of arts and sciences. ''We should look at expenditures more as investments than ascosts. The better Harvard University is, the easier it is to attract whatever funds it needs.''

By nearly every measure, Harvard stands at a pinnacle of power and prestige. It boasts anunmatched 90 libraries, 35 Nobel Prize-winners, 12 museums, 41 varsity teams, and dozens ofthink tanks that help shape national policy and rebuild faltering economies from Latin America tothe Pacific Rim.

Harvard's growing internationalization and eagerness to function as a shadow State Department abroad can make it look too cozy with repressive regimes; its aggressive and secret land acquisition in Allston and its planned Cambridge expansion have alienated neighbors at home.The university's strict tenure process routinely discards promising faculty. And its students are sodriven to achieve that many suffer from undue stress during what should be one of the mostenjoyable times of their lives.

Parents, meanwhile, must grapple with higher-than-inflation hikes in tuition and room and board- up 3.5 percent to $31,132 next year. Despite vowing to remain competitive, Harvard has notmatched Princeton's recent well-publicized initiative to ease the burden on the middle class byboosting financial aid.

Internal fund-raising rivalries have hampered the push by Neil Rudenstine, Harvard's president,to transform a group of entrenched fiefdoms into one university. Harvard's 12 schools - arts andsciences, medicine, law, etc. - compete fiercely for donors such as dropout-turned-tycoon BillGates, who left Harvard under pressure in 1975 but gave it $15 million two years ago.

Nearing the $2.1 billion goal it set for the biggest fund-raising campaign in the history of highereducation, and aided by the stock market's spectacular climb, Harvard has increased itsendowment fivefold in 15 years and doubled it in five years. As of last June 30, Harvard led theUniversity of Texas, its nearest competitor, by $4.6 billion, and Yale by $5.6 billion.

Moreover, the endowment represents only a portion of Harvard's wealth. Not included is $1.1billion in cash and working capital, as well as facilities and land. The facilities, ranging frombuildings on campus to a villa in Italy for Renaissance scholars, are worth $4.1 billion, accordingto a 1997 Harvard financial report. And Harvard does not estimate the value of 420 acres it ownsin Boston and Cambridge.

The endowment also does not count the numerous treasures in the university's museums andlibraries - from glass flowers to a Gutenberg Bible, from Lewis and Clark's birds to EmilyDickinson's manuscripts. Harvard is prohibited from selling some of these artifacts. In any case,according to Jack Meyer, president of Harvard Management, the Boston-based subsidiary thatinvests the endowment, Harvard does not place a value on them because ''the number would betoo high.''

Harvard bans reporters from its development office on the third and fourth floors of UniversityPlace in Cambridge. But sources say that the cubicles there contain a different sort of treasure: atwo-inch-high printout, updated weekly, listing prospective donors with a coded rating based ongiving capacity.

These ratings are far more than guesswork. Harvard has long boasted the most sophisticatedfund-raising operation in higher education. In 1919, embarking on a $15.25 million campaign, itbecame the first university to hire professional fund-raisers.

''When I cease to be president of Harvard College, I shall join one of the mendicant orders, so asto have less begging to do,'' lamented A. Lawrence Lowell, president at the time.

Last year, Harvard spent $35 million on fund-raising - and raised $427 million. The developmentoffice has 250 employees, aided by 4,000 alumni volunteers.

Identifying prospects is the first step. Some alumni draw Harvard's attention by reporting highincomes on the five-year reunion surveys, or boasting of lavish lifestyles in their class reports.Other alumni are ''rated'' by classmates.

''If I see a proxy statement or a prospectus involving a Harvard graduate, I send it to thedevelopment office,'' says Ernest Monrad, an alumnus and Boston money manager who hasendowed two Harvard chairs. ''If a fellow just got a $5 million bonus and he says he can't afford a$10,000 gift, you can say, `Come on!'''

Harvard's researchers double-check the ratings, using public and commercial databases oneverything from real estate holdings to yacht ownership. The office's fourth-floor library holds10,000 volumes, including Harvard class reports dating back to 1880. Social registers dating to1960 are stored at another location.

Most donors are alumni, but fund-raising researchers also look for prospects with any Harvardconnection. Katherine Loker, who endowed the new freshman dining commons and recentlygave $17 million to renovate the libraries, is the widow of an alumnus.

Harvard produces three times as many chief executives of leading businesses as any otheruniversity. Through these contacts, Harvard solicits corporations. In return for their gifts, thecompanies often expect an edge in recruiting students and gaining access to research.

According to a 1995 Harvard report, its largest corporate donors - and major prospects for thecurrent campaign - include Dupont ($15 million from 1978-'94), IBM ($8.5 million), ExxonCorp. ($7.5 million) and Merck & Co. ($4.14 million).

Given abundant data, Harvard fund-raisers - both alumni volunteers and professionals whohandle all gifts above $250,000 - know how hard to squeeze the ''pale, frail, white males,'' as oneinsider describes typical donors.

''A guy sits there and has palpitations,'' says Thomas Reardon, vice president for alumni affairsand development. ''He's saying, `Give me a break, I've got to pay 12 tuitions.'''

The university expects to raise about two-thirds of the current campaign's $2.1 billion target inchunks of $1 million or more. That includes gifts of at least $10 million, which are expected toaccount for $760 million. Rudenstine personally negotiates with major benefactors over dinner atthe president's house on Elmwood Avenue in Cambridge, or jets off to see them.

Harvard steps up pressure on alumni during reunion years. One alumnus, who requestedanonymity, pledged a substantial gift in advance of his 25th reunion. But during the festivities, heenjoyed seeing old friends and haunts so much that he decided to double his donation.

Just then, he was approached by a classmate who had volunteered as a fund-raiser. ''I'mincreasing my gift,'' the donor told him, and named the amount.

The fund-raiser then reached into his pocket for a slip of paper. Written on it were the donor'sname and the exact amount he had just offered to give. ''I'm glad I didn't have to ask you for it,''the fund-raiser said.

Why do people keep giving so much money to a university that is already the country's richest?

Not everyone does. Some alumni prefer to support needier charities. Only half of HarvardCollege graduates donate each year, a participation rate lower than Princeton's and Dartmouth's.

Major donors express a variety of motives. Some want to thank the university where they chosecareers, met spouses, or received financial aid. Still others believe that, as Harvard goes, so goesAmerica.

''There's an enormous ripple effect,'' Monrad says. ''You're dealing with the young, you're dealingwith the future. You can give to a homeless shelter, but those people are not the future.''

To get, Harvard often has to give. In return for a $20 million pledge from Chelsea-bornentrepreneur Warren Alpert in 1993, Harvard Medical School not only named a building afterAlpert and hung his portrait in the lobby, it agreed to keep the painting lighted 24 hours a day.

Other donors' names are attached to professorships, scholarships, even the athletics staff; headfootball coach Tim Murphy is the Thomas Stephenson Family Coach for Harvard Football. Andif children of donors are denied admission, university officials will break the news gently andhelp find another college.

Major donors are often nominated by the Harvard Alumni Association for election to the30-member board of overseers. Or they sit on visiting committees that monitor Harvard'sdepartments and report to the overseers. (The overseers are less powerful than the othergoverning board, the seven-member corporation.)

Some donors tailor their gifts to Harvard's needs, but others take a hard line. One insisted onendowing an arts and sciences professorship in law and psychiatry, even though those subjectsare usually taught by the law and medical schools. The chair stayed vacant for five years until itwas taken by an English professor, who fulfills the terms of the gift by applying legal andpsychiatric analysis to literature.

Harvard seeks as much latitude over gifts as possible without alienating donors. In one majorbequest from the estate of a childless California couple, Harvard interpreted the terms of their willvery broadly. In return, it yielded to their trustee an unusual say over spending.

Edward Lefler, a direct-mail pioneer who died in 1994 from Alzheimer's disease, and his wife,who died before him, left $7.8 million for a ''home or other facility'' for ''treatment and care'' ofAlzheimer's and similar diseases. Their will suggested four Alzheimer's organizations as potentialrecipients.

But Harvard courted the Leflers' accountant and trustee, Daniel Bernstein. It offered to spend themoney on an ''intellectual center'' that would sponsor research not just on Alzheimer's, but on allaspects of brain-cell degeneration.

Bernstein signed on, after extracting one key concession. Despite a university policy that donors''ordinarily'' cannot ''in any way'' direct the use of their funds, he now sits on a three-membercommittee overseeing the expenditures.

If Harvard is zealous about raising money, it is equally cautious about spending it.

Even though the university has nearly completed its fund-raising drive, and its investments haveearned an annual rate of 18.9 percent over the past five years, relatively little of that windfall isbeing applied to urgent academic problems.

Many Harvard officials - especially Rudenstine - worry about having enough money in the futureto continue to attract top-flight faculty, build modern labs and dorms, and make sure that everyapplicant it accepts can afford to attend.

''You dare not spend too much because you have to get through the rough years,'' Rudenstine saidfrom his modest, colonial-style office. ''You need that cushion.''

Every fall, the Harvard Corporation establishes the endowment's budget contribution for the nextacademic year. Although those contributions have increased an average of 9 percent per year overthe past decade, they have not kept pace with the endowment's skyrocketing growth.

This year, Harvard will spend 3.72 percent of its endowment - down from nearly 5 percent in1993, and less than the national average of 4.2 percent among private colleges. At the otherextreme, Stanford spends up to 6 percent.

In a boom era, Harvard has continued to economize. For example, 12 positions funded by thecurrent campaign were the first new slots authorized for the arts and sciences faculty in the lastsix years. Harvard has a higher student-to-faculty ratio than many other elite private universities,including Yale and Princeton.

This frugality makes many people around Harvard wonder: How large an endowment is enough?

Some educators urge Harvard to send a national signal by holding the line on tuition. Rudenstinecounters that next year's 3.5 percent increase is necessary because only the richest one-fourth ofHarvard students pay full freight, and their tuition subsidizes financial aid for the rest.

''The higher the total endowment gets, the better the central fund-raisers look,'' says HaleChampion, Harvard's former financial vice president. ''Harvard has allowed those financialaspirations to hold that payout down. If I were a dean at Harvard now, I'd stand on the rooftopand shout about that.''

Rudenstine acknowledged that financial aid for graduate students is in ''terrible shape,'' and facultysalaries should be increased. On the other hand, he said, Harvard needs reserves as a hedgeagainst inflation or a stock market crash. As recently as 1991, when Rudenstine took over, theendowment earned only 1.1 percent on its investments and Harvard ran a $42 million deficit in itsoperating budget. Even today, Harvard ranks only fifth nationwide in the ratio of endowmentdollars to students.

Rudenstine also argued that Harvard cannot easily remedy its weaknesses because restricted giftsdominate its endowment. And the university's flexibility is hampered by its administrativestructure, known to Harvard managers since 1817 as ''every tub on its own bottom.''

Every Harvard school sets its own tuition, balances its own budget, and has a separateendowment. If a school borrows from the central administration, which acts as sort of auniversity bank, it has to pay interest. Little has changed since 1970, when a university reportdescribed Harvard as ''financially... a confederation of semi-independent baronies.''

Tubs even compete for faculty. Both the John F. Kennedy School of Government and the Facultyof Arts and Sciences - comprising Harvard College and graduate programs in those fields -recently tried to hire the same Princeton economist.

To paraphrase George Orwell, all tubs are equal, but some are more equal than others. Thebusiness school boasts a $729 million endowment, but earns so much from publications andexecutive programs that it barely dips into its nest egg. But the Divinity School, with Harvard'slowest tuition and few wealthy alumni, depends on the annual payout from its $205 millionendowment for 40 percent of its operating budget.

The tub system has served Harvard well. It encourages grass-roots initiative, efficiency, andaccountability. But it also strengthens individual deans at the expense of the president, hinderingRudenstine's ability to reallocate resources. Like a weak baseball commissioner, he is forced tobeg powerful barons to share their wealth for the good of the game.

According to Elizabeth C. Huidekoper, vice president for finance, Rudenstine only controls $4million in discretionary funds - far less than the small schools need.

''The deans of the smaller tubs are lining up at his door,'' Huidekoper says. ''You can imaginehow much demand there is.''

With its elegant chandeliers and handpainted Chinese wallpaper, the dean's mansion on thecampus of Harvard Business School is an unlikely setting for a revolution. But there, at aSaturday brunch for 15 guests in 1990, then-dean John McArthur launched a startling challengeto the tub system.

McArthur had invited the deans of Harvard's small schools - education, divinity, public health,design - and wealthy business school alumni who took an interest in those subjects. Playingmatchmaker, he encouraged the alumni to put aside their loyalty to the business school in theupcoming campaign, and devote their money and energy to its poor relations.

''We have to collectively accept responsibility to see that sufficient resources are brought to bearfor all schools,'' says McArthur, now a professor at the business school.

Although the prosperous business school could afford the gesture, such altruism violatedHarvard practice. By tradition, each school holds a death-grip on its own alumni and researchesits own prospects, although the small tubs sometimes consult the central office's ratings.

John Hobbs, MBA '65, became cochair of the education school's campaign with his wife,Elisabeth, a 1961 education school graduate. Together they have given more than $4 million. AndVincent L. Gregory Jr., MBA '49, retired chairman of a chemical company that had been linkedin lawsuits to deaths of 50 employees from cancer, raised $10 million for a cancer-preventioncenter at the School of Public Health. Overall, business school alumni have contributed $45million to other tubs.

After taking over, Rudenstine promoted more cooperation, including five inter-faculty initiativeson such topics as the environment, and the relationship between the mind, the brain, andbehavior. Environment quickly became one of Harvard's most popular majors.

Liberated from tub constraints, major donors thought big. Rita and Gustave Hauser, who hadpreviously given a building to the law school, their alma mater, now underwrote auniversity-wide center for the study of nonprofit institutions.

Many split their gifts. John L. Loeb, the late New York investment banker, divided his $70.5million donation in 1995 between Harvard College, the schools of design and public health, theLoeb drama center, and Memorial Church in Harvard Yard. ''There's a tremendous amount ofcross-fertilization,'' Rudenstine says.

But as the effort wore on, the altruism waned. Reverting to form, the tubs put their own needsfirst, and the central office capitulated. Harvard hosted a fund-raising weekend for theenvironment program that reaped $2 million, but similar weekends for the other four interfacultyinitiatives were quashed. As a result, Harvard has only garnered $34 million of its $75 milliongoal for the university-wide programs.

Similarly, the development office terminated an experimental program that raised money forsmall schools from non-alumni. Reardon says that the ''Partners Program'' was bringing in fewerdollars than had been hoped, but the schools say it made a difference. ''It was very important tous,'' says Ronald Theimann, dean of the Divinity School. ''We miss it.''

Much of the resistance came from Harvard's largest school, arts and sciences, which was worriedabout meeting its $965 million goal and saw its alumni giving $130 million to other schools. Asof April 1, it had raised $821 million, or 85 percent of its goal.

Under campaign policy, only one school can contact each prospect. Since each school has dibs onts own graduates, the central administration is supposed to mediate tugs of war for alumni withtwo Harvard degrees, and for non-alumni.

But the small tubs complained that arts and sciences was given preferential treatment. And thesetensions came to a head over the biggest prospect of all, Bill Gates.

Gates could only spare 10 minutes. So his hosts hustled him upstairs in Memorial Hall, where ascale model of the campus lay on a table.

Harry Lewis, dean of Harvard College, did the honors. With a flourish, he removed the AikenComputation Laboratory from the model and substituted a proposed building to be funded byGates and a fellow Microsoft executive.

The Harvard contingent around the table that May afternoon in 1996 relished the moment. Twopresidents, several deans, and an overseer had wooed - and fought over - the Microsoft mogul fora decade. Now they were close to landing a major gift, and they had no qualms about getting itfrom the dropout who had been virtually chased out of Harvard two decades earlier.

Gates has said that he withdrew from Harvard to pursue his career. However, according tointerviews, he left after a dispute over alleged rules violations at the Aiken lab, including using itscomputers for private business.

''There was a flap, no question about it,'' says his father, William Gates Sr., who now runs hisson's charitable foundation. ''My son felt a little put upon by the Harvard administration'sattitude.''

Gates lived in Currier House at Radcliffe, but the Aiken lab was his true Harvard home, where heoften worked through the night. His troubles began when a lab administrator discovered thatGates was using the Aiken computer to write computer code for a New Mexico company.Because the federal government was funding the computer time, the administrator felt that Gateswas misusing not just a Harvard facility but also public funds.

Moreover, Gates was sharing his computer access with a high school friend: Paul Allen, thefuture cofounder of Microsoft.

Gates's student file is protected by privacy rules, but university officials, friends, and family sayhe was not expelled. According to sources and a 1993 unauthorized biography by Stephen Manesand Paul Andrews, Gates avoided expulsion by agreeing to put the code in the public domain. Hewas, however, reprimanded.

Gates's parents were devastated. His mother was ''very, very apprehensive'' about his future, sayshis father.

Those worries had eased by the late 1980s, when Gates had made his fortune and Harvard begancourting the computer wunderkind. Gates's father recalls that then-president Derek Bok made thefirst overture - a dinner in Seattle with Gates and other Harvard-affiliated Microsoft executives.The hopes of Harvard fund-raisers rose in 1991 when Gates's dorm mate, Steven Ballmer, a1977 alumnus and executive vice president at Microsoft, was elected to tphe board of overseers.

The pursuit quickened. After Gates's mother, Mary Maxwell Gates, died in June 1994,Rudenstine sent a sympathy note. According to sources, Gates responded that his mother'sgreatest disappointment was that he had not graduated from Harvard.

Gates seemed ripe for a proposal. But from which tub? Since he had attended Harvard College,arts and sciences staked its claim to him. But as a dropout, Gates was technically up for grabs. Inlate 1994, sources say, the Kennedy School invited Gates to a conference.

Because most of its alumni enter public-service careers, the Kennedy School must poach tosurvive. Of the $136 million it has raised in the current campaign, its graduates contributed only 5percent, while other Harvard alumni accounted for 36 percent. (The rest came from non-Harvarddonors.)

Although Gates declined the Kennedy School invitation, it alarmed arts and sciences fund-raisers.At their behest, the central office said that from then on, small schools would need its approvalbefore considering any prospects who were not their own alumni.

The courtship of Gates took a high-tech turn in April 1996, over a videophone linking thebusiness school and Microsoft. Lewis, Reardon, and Rudenstine made their pitch to Gates andhis father. Lewis, a former computer science professor who had spotted Gates's potential twodecades earlier, emphasized that Harvard could ill afford to fall behind in a field so crucial to itsfuture. Gates bargained, pointing out that Stanford had named a building after him for $6 million,considerably less than Harvard was asking.

After Gates committed $15 million and Ballmer $10 million, Harvard wasted no time. TheMaxwell-Dworkin laboratory, memorializing their mothers' maiden names, will open nextsummer.

But while Harvard moved quickly to stay abreast in computer technology and satisfy Gates andBallmer, it has dragged its feet on Paul Prusky's less-glamorous offer to relieve six-figure debtsfor medical students.

Tomorrow, Prusky is scheduled to meet with two members of the Harvard corporation todiscuss the terms of his $15 million-plus gift. He wants Harvard to spend two-thirds of earningsgenerated by the money. If the gift grows 15 percent a year, the medical school would givestudents 10 percent.

But that would exceed Harvard's endowment spending rate of less than 4 percent, and theuniversity is loathe to make an exception. How the Prusky negotiations play out will be closelywatched as a case study of Harvard's priorities and educational values.

Says Treasurer D. Ronald Daniel: ''It's an unfinished story. We're flexible, but not unreasonably so.''