Should Harvard Borrow?

Abstract

J AM particularly interested in the question of a university's Harvard's, in particular, because I cannot speak for anybody else borrowing money. That is one reason that I picked the subject. I think that borrowing is a subject that we have had very much in our mind, and I have had a great many people suggest that Harvard ought to borrow money. I will not give all the arguments for borrowing money. We will let Professor Harris do that, if he will. The most obvious purpose for borrowing money is to acquire some sort of facilities, be they physical or faculty, that the institution doesn't now have and that it needs badly. It perhaps becomes particularly acute in this era when the colleges are all having a frightful time with the rush of students who want to get in, and growing pressure on all of us to increase the size of our institutions. I think that those are the obvious reasons why administrators or institutions are tempted to borrow money. I have listed here nine reasons why I am opposed. One of the notable pressures to borrow money is for the erection of dormitories. There are others, but taking that as an example-from Harvard's point of view, at least I would like to point out to you one of the arguments used. Harvard has a great many dormitories, in which we house a great many students, and none of those dormitories is carried as an asset on our books. As soon as a dormitory becomes an academic property, we write it down to zero. We try to run our dormitories on a break-even basis. We do not always succeed one year we will make a little surplus, and the next year we will make a little deficit. But over the years I think it is fair to say that we run them on a break-even basis. Harvard does make a maintenance charge in all of these buildings. We don't do it very well yet. We are hoping to improve that. We have for a great many years, under the administrative vice-president, asked the relevant officials to set aside funds to take care of the normal maintenance that would keep the buildings in top condition, on the theory that for a few years, we will have no expenditure, but in the third year, say, we may have a rather large one, and there ought to be a reserve for that. Beginning on July I, I959, in order to encourage the officials to accumulate such a reserve, we have decided to give the University paying rate on that reserve. Heretofore that was a dead reserve and earned no interestno return-and therefore all the administrators were naturally very reluctant to convert balances which were drawing interest into noreturn balances. We have changed that, as of July I, I959. I hope that we shall be able to go over the deferred-maintenance problem building by building in a much more scientific way, and that we can encourage the collection of a maintenance reserve that is more adequate. Now it is perfectly obvious that if you were going to put up a dormitory, using borrowed money as against our present scheme, you are adding an immediate cost that is not there if you mark the thing off to zero, with neither interest nor amortization of the debt. Therefore, if we were to put up Dormitory X on borrowed money, other things being the same, we would have to charge the students in that dormitory somewhat more than we would the students in each of the other dormitories, because in that last dormitory, they would have to pay for interest on the debt and amortization of that debt. I do not think it is fair to charge 90 per cent of our students no interest or amortization and charge io per cent of them, say, interest and amortization. When a suggestion was made that we borrow money to build a dormitory, I brought up this argument and said, What I think we ought to do in fairness is to make a charge on all the other dormitories, to be borne by the students in those buildings, equivalent to the interest and amortization factor that the students would have to pay in Building X. If we did