Endowment Losses From Harvard to Yale Leave Universities Poorer /
By Gillian Wee
July 22 (Bloomberg) -- Harvard University and Yale University are preparing for an extended period of austerity as U.S. colleges are forced to cut spending next year and beyond to offset the biggest investment losses since 1974.
A payout formula based on prior years of endowment returns means Yale will have to do with less money even as markets rebound, President Richard Levin said in an interview last week. Schools including Harvard, Dartmouth College and the California Institute of Technology will be saddled by payments on debt they sold after getting caught short of cash.
Efforts to shrink budgets are being complicated by the unending competition for the best students, which is pushing colleges to boost financial aid and limit tuition hikes. After seven years of virtually uninterrupted growth following the dot- com bust, they have little choice except to further cut jobs, freeze salaries, scale back dormitory and laboratory projects, and jam more students into fewer classes.
“We can’t discount the fact that the universities are now poor,” said Robert Merton, a professor at Harvard Business School in Boston who won the Nobel prize for economics in 1997 with Myron Scholes for their work on pricing options. “If they’re going to be poor, they are going to make changes as a result.”
Administrators didn’t adequately understand the impact that endowment losses would have on school finances and overlooked the risk managers were taking, said Merton, who wrote a paper titled “Optimal Investment Strategies for University Endowment Funds.”
Yale’s Zero Growth
While the Standard & Poor’s 500 Index has increased 41 percent from its low in March, endowments have been weighed down by holdings of private equity, real estate and commodities, which haven’t recovered as fast. These assets are also harder to sell, making it more difficult for schools to raise cash.
Yale, the second-richest school in the U.S., and Princeton University in New Jersey, which ranks fourth, project no endowment growth in the fiscal year that started July 1. Stanford University of Palo Alto, California, estimates its fund may take more than 15 years to return to its $17.2 billion peak of August.
Yale, in New Haven, Connecticut, postponed $2 billion in construction and trimmed 600 jobs through voluntary resignations and firings as endowment investments lost 25 percent in the year ended June 30. It plans to cut an additional $100 million to $150 million in spending to close future deficits, Levin said.
No Quick Recovery
“There isn’t going to be a quick recovery, I think it’s clear, and we are going to have to make adjustments over the course of the next year,” Levin, 62, said. “The second round will probably be harder to get by attrition.”
Levin, who has led Yale for 16 years, remains confident the school’s growth will resume.
“We’re here for the long run,” he said. “There’s a temporary pause in the university’s ambitions.”
Remaining cuts include “centralization of back office operations,” where the school will introduce new software for processing transactions, he said. In addition to postponing a new science building designed by Cesar Pelli, the school is delaying the construction of undergraduate residences designed by Robert A.M. Stern, dean of Yale’s architecture school, which would allow the school to expand by 800 undergraduates.
Decade to Recover
Endowment earnings support 44 percent of the school’s spending. It will take more than 10 years for the fund, managed by David Swensen, to climb back to its value of $22.9 billion on June 30, 2008, according to Levin. Yale estimates the fund was $16 billion at the end of this June.
U.S. endowments fell 24 percent in the last six months of 2008, according to Commonfund Institute in Wilton, Connecticut. The loss for the fiscal year ended June 30 probably will be the biggest in 35 years, said the researcher, which is affiliated with Commonfund, a manager of about $24 billion for nonprofit institutions.
What a school spends from its endowment is usually based on a three-year average of its value. That means last year’s losses will affect payouts in the future even if financial markets recover.
“Schools will be discussing what they can sustain and where monies can be reallocated to new priorities,” said Scott Malpass, chief investment officer of the University of Notre Dame in South Bend, Indiana, whose endowment was $7.1 billion as of June 30, 2008. “They will not want to cut research activities or financial aid but are going to have to make tough choices in a difficult economic environment where revenues will remain under pressure due to market impact.”
Harvard Bonds
Harvard, in Cambridge, Massachusetts, estimates its endowment lost 30 percent to $25.8 billion in the past year. It remains the wealthiest school in the country. Harvard sold $2.5 billion of bonds in December, in part to improve access to cash.
The debt may raise the school’s interest costs by as much as $550 million over three decades. The school depended on the endowment for about 35 percent of its revenue during the fiscal year ended June 30.
Harvard has cut staff and athletic programs, and slowed construction of a science center across the river in the Allston neighborhood of Boston.
Harvard will “have to reshape and reset to being more like a $24 billion university than a $36 billion university,” President Drew Faust said in May.
The school will seek to combine capital planning and other spending decisions across its schools to cut costs, Faust, 61, said in a June interview. She wants to consolidate some of the school’s spending on libraries and technology, such as telephone systems and computer software. Budget decisions now are scattered among Harvard’s 10 main academic units.
Public Colleges
Dartmouth in Hanover, New Hampshire, which issued $415 million in bonds to finance construction and bolster cash reserves, was downgraded by both Standard & Poor’s and Moody’s Investors Service. CalTech, in Pasadena, was downgraded in June by Moody’s because of endowment losses and increased debt that is likely to total $469 million.
Public colleges, though not as dependent on endowment income as their private counterparts, are being hurt by cuts in state funding.
The University of California issued “a declaration of extreme financial emergency,” with the state school system facing “a financial crisis unprecedented in at least the past quarter century,” according to plans submitted by President Mark Yudof to its board of regents. The system faces a gap of $813 million in state money, which translates into a 20 percent decline in funds for the academic year.
108,000 Furloughs
The school system, which has already cut the freshman enrollment class by 2,300 students, is projecting “fewer and narrower course offerings, larger class sizes and longer time- to-degree for students unable to enroll in courses needed for graduation.” The system will place more than 108,000 employees on furlough starting in September for 11 to 26 days, to slash salaries by 4 percent to 10 percent, according to the plan endorsed July 16 by the board of regents.
Schools competed for students by spending to expand campuses and facilities, and to hire top professors. They financed their growth with investment profits and gifts that swelled almost uninterrupted over the past decade. The stock- market crash that followed the bankruptcy of Lehman Brothers Holdings Inc. in September has changed everything.
Duke’s New Campus
Duke University, which is looking at cutting its $2 billion budget by $125 million over the next three years, isn’t increasing salaries for employees making more than $50,000, and has offered early-retirement incentives and introduced additional master’s programs, said Michael Schoenfeld, a school spokesman.
The Durham, North Carolina, school, in “making a transition to what will be a smaller institution,” is also postponing the $500 million construction of a project featuring residence halls, arts departments and classrooms, named “New Campus,” he said.
“Ideally, we would’ve had a name by now,” Schoenfeld said. “We would’ve had a donor to put a name on it.”
To contact the reporter on this story: Gillian Wee in New York at gwee3@bloomberg.net;
Last Updated: July 22, 2009 00:01 EDT |
