College endowments are taking big hit in downturn


Published: Tuesday, January 27, 2009 at 6:01 a.m.
Last Modified: Monday, January 26, 2009 at 10:34 p.m.

When the markets were booming, billionaire colleges like Harvard, MIT and Stanford tapped their swelling endowments and launched spending binges on faculty, buildings and scholarships.

Now, they're seeing firsthand the one downside to relying on a huge nest-egg: The market crash has them confronting the sharpest budget cuts in memory.

A new survey released today reports college endowments fell 3 percent in the fiscal year ending June 30. In a follow-up, a smaller group estimated declines averaging 23 percent in the first five months of fiscal 2009, which began in July.

That decline is nearly twice as big as any full-year return since endowment performance was first tracked in 1974, said Brett Hammond, chief investment strategist at TIAA-CREF, which collected the figures with NACUBO, a college business officers group, and Commonfund Institute.

The survey of 791 colleges accounts for virtually all of the endowed savings of American public and private colleges - some $522 billion last June. But the losses since then would erase nearly $120 billion. Colleges typically spend around 5 percent of their endowments annually.

The challenge for colleges with eroded endowments is that many of the faculty they hired now have tenure, all those new buildings still need heating - and financial aid demand is rising.

In recent years, Dartmouth College in New Hampshire spent $1 billion on new facilities and more than doubled its financial aid budget. But with its endowment down $700 million, staff cuts are inevitable. The college needs to slice $60 million from next year's $700 million budget.

"I don't think anybody believes there aren't going to be big consequences," said Adam Keller, who oversees Dartmouth's finance and administration.

From 2002-2007, college endowments grew 11.5 percent annually. Last June, there were 77 institutions with endowments of $1 billion or more - 30 more than in 2005. But in the seven months since, at least 30 may already have lost the distinction of being billionaire schools.

Compared to other institutions, the plight of elite universities is akin to the trust fund kid versus the guy with no savings but a steady job. You'd probably rather have the trust fund. But when the market crashes, it's the trust fund kid who notices the lower standard of living.

Last week, Stanford's faculty senate was briefed on projected endowment losses that could reach 30 percent. The university will cut $120 million over two years from an $800 million budget. Forty-nine business school employees have already been laid off, senior administrators have taken salary cuts and some employees have even been asked to turn in their university-owned Blackberries.

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