Dec. 3 (Bloomberg) -- Harvard University’s endowment decreased 22 percent, or $8 billion, in the first four months of fiscal 2009, putting the fund on course to have its worst performance in at least four decades.

The decline came in the four months through October, according to a letter dated yesterday by President Drew Faust and Executive Vice President Edward Forst. The endowment, the biggest U.S. education fund, had totaled $36.9 billion on June 30 after gaining 8.6 percent in fiscal 2008. The worst annual return that Harvard, in Cambridge, Massachusetts, has recorded in at least 40 years was a loss of 12.2 percent in 1974.

The 22 percent decline, excluding adjustments for real estate and private equity, outperformed the Standard & Poor’s 500 Index of stocks, which fell 24 percent during the same period with dividends included. Faust said the school is making budget plans based on a possible 30 percent investment loss for the year ending June 30. Valuations for the fund’s real estate and private equity holdings have yet to be updated.

“The severe turmoil in the world’s financial markets has affected all major asset classes in which the endowment is invested,” Faust and Forst wrote in the letter. The university also plans to issue “a substantial amount” of taxable fixed- rate debt to help support research and financial aid “as we work to absorb the impact of anticipated losses in revenue,” according to the letter.

Colleges and universities across the U.S. are struggling. The University of Virginia at Charlottesville’s endowment declined about 20 percent, to $4.2 billion, in the four months through October.

Princeton Cuts

State university systems in Georgia, California, and New York are firing employees, postponing maintenance and cutting library subscriptions. Among private schools, Princeton University in New Jersey has said it will reduce its 10-year, $3.9 billion construction budget by $300 million.

The performance of Harvard’s endowment from July 1 through Oct. 31 falls “within the range” of the returns for similar institutions during the same period, said Dennis Gephardt, an analyst at Moody’s Investors Services in New York, in an interview. Most endowments are reporting investment losses of 20 percent to 30 percent, he said.

Harvard’s endowment provides funds for more than a third of the university’s operating expenses. That portion was $1.6 billion in fiscal 2008, according to Harvard Management Co., the school’s investment arm, based in Boston. Harvard’s Faculty of Arts and Sciences, which relies on the endowment to cover more than half its expenses, announced a freeze last week on most staff hiring.

‘Major Implications’

“The prospect of significant endowment losses therefore has major implications for our budgets and planning, especially since our other principal revenue streams also stand to be challenged by the economic crisis,” Faust and Forst said in the letter. “The implications will differ in degree from school to school and department to department.”

Harvard also plans to convert existing short-term tax- exempt debt into bonds with longer maturities to reduce exposure to swings in credit markets and provide greater predictability, Faust and Forst said.

Harvard is reconsidering “the scale and pace” of planned projects, such as the expansion of the Allston campus in Boston, and university officials are “taking a hard look at hiring, staffing levels and compensation to consider ways to cut spending,” Faust and Forst said.

Harvard has also had preliminary talks to sell about $1.5 billion of limited-partnership holdings and leveraged-buyout funds, including one run by Boston-based Bain Capital LLC, according to a report on Dec. 1 that cited a person briefed on the situation.

To contact the reporter on this story: Julie Ziegler in Boston at jziegler@bloomberg.net

Last Updated: December 3, 2008 15:50 EST