The Universities in Trouble

Fulfilling the Commitment: Recommendations for Reforming Federal Student Aid in Brief

by Sandy Baum, Michael McPherson, and others
Spencer Foundation/College Board/Lumina Foundation for Education, September 2008, available at www.collegeboard.org

Trends in College Spending: Where Does the Money Come From? Where Does It Go?

by Jane V. Wellman and others
Delta Cost Project/ Lumina Foundation for Education, January 2009, available at www.deltacostproject.org
delbanco_1-051409.jpg
Rick Friedman/Corbis
Drew Gilpin Faust during her swearing-in as president of Harvard University, Cambridge, Massachusetts, October 2007. She is holding College Book I, a compilation of official Harvard records from 1639 to 1795.

1.

Since the financial meltdown began to accelerate last summer, the world has changed utterly for colleges and universities just as it has for everyone who had not been stashing cash under the mattress. Along with failing banks, auto manufacturers, and insurance companies, universities have been making headlines—especially those whose gigantic endowments (Harvard’s was approaching $40 billion before the crash) have sharply declined. Last year, politicians and pundits were complaining about the unseemly wealth of such institutions. This year, alumni are getting e-mails from beleaguered presidents assuring them that Alma Mater will somehow ride out the storm.

The headlines tend to focus on the collapse of institutional investments, which, indeed, has been spectacular. No one quite knows how much has been lost. Led by the example of Yale’s chief investment officer, David Swensen, whose Pioneering Portfolio Management is described by the chair of the Yale investment committee as “the best book ever written on managing institutional investment portfolios,” endowment managers had been shifting large sums toward illiquid assets such as private equity partnerships, which typically require periodic infusions of fresh capital, and whose current market value is virtually impossible to assess. This and other versions of “an unconventional approach to institutional investment” (the subtitle of Swensen’s book, first published in 2000 and recently reissued in revised form) worked very well during the boom years, bringing home double-digit returns.

Today, leading universities are reporting endowment losses of 20 percent or more, but some informed observers think that the true figure, at least in some cases, may be closer to 50 percent. Actions that would never have been contemplated a year ago, such as selling severely depreciated assets in order to meet cash obligations or issuing bonds at punitive interest rates, are no longer unheard of. And in the current market, would-be sellers and borrowers are finding few buyers or lenders.1

What does the financial turmoil really mean for America’s colleges and universities? It depends on whom you ask and which institution you are asking about. Trustees generally limit spending from the endowment to under 5 percent of its value, calculated as a three-year trailing average, which means that at colleges where endowment income is an important source of operating revenue, the decline in asset valuation will suppress available funds for several years even if markets recover sooner than expected. Harvard, for instance, covers more than a third of its $3.5 billion annual operating budget from its endowment, and is therefore facing deficits in the hundreds of millions of dollars.

Since most American colleges have an endowment less than 1 percent the size of Harvard’s, most do not have Harvard’s problem. But they have other problems.…


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