John Y. Campbell is the Morton L. and Carole S. Olshan Professor of Economics, Jeremy C. Stein is the Moise Y. Safra Professor of Economics, and Alex A. Wu is a Doctoral Student in the Business Economics program at Harvard University. This post is based on their recent working paper.
In our paper, Economic Budgeting for Endowment-Dependent Universities, we develop a framework to analyze a university’s financial position using an intertemporal budgeting approach. The essence of our approach is to forecast university operating revenues and costs over the infinite future, to calculate the present value of those operating obligations, and then to compare the value of the obligations to the value of the university’s wealth.
It is useful to understand our approach in contrast to the traditional approach to university budgeting, which typically focuses on one or two years at a time and uses generally accepted accounting principles (GAAP). For example, the Harvard Faculty of Arts and Sciences (FAS) adds together several sources of “operating revenue,” (such as tuition fees and federal sponsored programs) then subtracts various items that are deemed “operating expenses,” (such as salaries and benefits) to arrive at a net GAAP budget surplus or deficit. According to this measure, Harvard FAS consistently generates enough revenue to cover its expenses each year.
Introduction
