April 2 (Bloomberg) -- Harvard University is planning to cut yearly capital spending by as much as half as it faces a 30 percent drop in its endowment.

Harvard, the world’s richest school, may slice a four-year, $4 billion spending plan to $2 billion to help it weather the recession, according to a Moody’s Investors Service report. John Longbrake, a university spokesman, confirmed the information in the Moody’s report in an e-mail.

Harvard is already cutting its budget, freezing hiring and offering early retirement to some staff, after its $36.9 billion endowment lost $8 billion in the four months ended Oct. 31. The cut, as much as $500 million a year, sets back the university’s plan, initiated 10 years ago, to expand its main campus in Cambridge, Massachusetts, across the Charles River in Boston.

The university “is not immune to the deleterious effects of the global financial crisis and recession,” Roger Goodman and Kimberly Tuby of Moody’s wrote yesterday in a report in which they affirmed Harvard’s Aaa credit rating, the highest available. Neither analyst returned calls seeking comment.

University spokesman Longbrake said Harvard President Drew Faust earlier suggested in a February letter that capital projects may be trimmed and promised a “reconsideration of the pace and scale of our physical expansion.”

Yale, Other Schools

A number of U.S. schools and colleges are suffering from deep declines in their endowments, which they use to subsidize operations. Yale University in New Haven, Connecticut on Feb. 24 postponed $2 billion in construction projects as well as reduced budgets and curtailed raises for employees after projecting a 25 percent drop in its $22.9 billion endowment for the year ending June 30.

The Moody’s report reviewed Harvard’s $5.8 billion in debt, including $2.5 billion in bonds the university sold in December and January.

The university broke ground early last year on its construction in Boston’s Allston section. The complex, on 8.5 acres, is set to house the Harvard Stem Cell Institute, the Department of Developmental and Regenerative Biology, and the Wyss Institute for Biologically Inspired Engineering, bringing together scientists from Cambridge and Harvard Medical School.

The Harvard School of Public Health is also expected to occupy part of the complex. Harvard has estimated that as many as 1,000 people would work there. The construction is part of a plan to expand over the next 50 years on about 250 acres of land the school bought in Allston.

Dormitory Upgrades

Harvard is also looking to Allston to expand its dormitories, which now include “pass-through” rooms that require students to exit through other students’ bedrooms. A university plan released yesterday called for the elimination of pass-through rooms, more common space for students to interact, and more bathrooms. No cost estimates for the renovation have been released.

Faust said in February that the pace of construction at the Allston complex would be slowed and that cost reductions would be explored.

In the meantime, the Stem Cell Institute and other departments targeted for the new location are being put in other university buildings in Cambridge and Boston. Longbrake declined to comment further on changes in construction plans.

The delay in developing Harvard’s Allston land is hurting residents and local businesses, said Harry Mattison, 35, a member of the Allston Task Force advisory group created three years ago by Boston Mayor Tom Menino.

Revitalization ‘Promised’

“When they first disclosed 10 years ago that they’d bought up land in the center of this residential neighborhood, they promised they’d bring a revitalization,” he said today in a telephone interview. “Harvard needs to make good on those promises.”

The university said it expects a 30 percent drop in the endowment, which is overseen by Harvard Management Co., through June 30. That would bring its assets to about $25.9 billion.

The school is facing other financial pressures. Undergraduate financial aid has doubled to $147 million since 2004. The Faculty of Arts and Science -- which has about $1.2 billion in debt, largely to pay for the construction of laboratory space costing about $800 million -- pays about $85 million annually in debt service, Harvard Magazine said in December.

Spending Outlook

The Moody’s report also said Harvard would increase the percentage of endowment it spends from less than 5 percent this year to more than 6 percent in 2010 “due to investment losses.”

The university’s long-term target for its so-called endowment spend rate would “remain between 5 percent and 5.5 percent, with the university further adjusting spending levels” in 2011 and 2012 “to bring spending back in line with target funding,” Moody’s said.

In February, Faust said in a letter to faculty and staff that the school’s planning included “an intensive, ongoing review of the university’s portfolio” of capital projects.

“Our task is to make sure that we avoid overextending the University’s near-term financial commitments, while assuring the vitality of our academic programs and respecting the important interests of our neighboring communities,” Faust wrote.

To contact the reporters on this story: Michael McDonald in Boston at mmcdonald10@bloomberg.net; John Lauerman in Boston at jlauerman@bloomberg.net.

Last Updated: April 2, 2009 14:57 EDT