Economic Budgeting for Endowment-Dependent Universities
To understand their financial position, universities need to understand the long-term implications of their operating revenues and costs in relation to the financial assets they have available. Standard budgeting procedures that focus on one or two years at a time and use generally accepted accounting principles (GAAP) do not do this. We present an alternative framework that discounts cash flow forecasts over the infinite future and compares the present value of operating obligations to the value of the university’s endowment net of any debt it has issued. We illustrate the potential of this framework using recent data from Harvard’s Faculty of Arts and Sciences (FAS).
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