December 21, 2008 in City

Market slide hurting colleges

Endowments may take years to bounce back
By The Spokesman-Review
 
Colin Mulvany photo

EWU applied technology student Bill Schneemann works with a computerized robot to perfect a solar panel assembly line Dec. 4.
(Full-size photo)

Incredible shrinking funds

•Eastern Washington University Foundation – Endowment was $13.3 million on June 30. It fell to $9.4 million by Oct. 31.

•Gonzaga University – Endowment has dropped an estimated 25 percent from a high of $154 million earlier this year.

•University of Idaho Foundation – Endowment dropped 8 percent during the fiscal year, for a balance of $176 million on June 30. Performance since then is unknown because foundation officials will not release figures during the fiscal year.

•University of Washington Foundation – Endowment stood at $2.2 billion on June 30, but fell 11.8 percent by the end of September to $1.9 billion. More recent data is unavailable.

•Washington State University Foundation – As of Oct. 31, the endowment had dropped 20.2 percent in a year.

•Whitman College – Endowment of $388 million remained steady during the fiscal year ending June 30, then dropped about 10 percent in September. College officials expect total losses between 25 and 30 percent before the year ends.

•Whitworth University – Endowment was $92.8 million on June 30. It has since dropped significantly, although exact figures aren’t yet available.

It’s not just Joe Average who’s watching hard-won investments shrink.

Joe College is having trouble, too.

American colleges and universities are seeing dramatic declines in the value of endowment funds filled with money from donors. And while the downturn won’t be felt immediately, it eventually will mean less money for scholarships, endowed faculty positions, privately funded building projects and other needs.

As with individuals’ 401(k) investments, college endowments have taken their biggest hit in the past two months. So it’s too soon in many instances to get solid figures about the extent of the losses.

But Moody’s Investment Services has predicted higher-education endowments nationwide will drop 30 percent this year, and local colleges and universities are making similar predictions about their own funds.

Students may not notice much difference at schools like Eastern Washington University, where relatively recent efforts have built an endowment that hit $13.3 million before falling to $9.4 million at the end of October. Income from EWU’s endowment provides hundreds of thousands of dollars a year for scholarships and other purposes.

The potential for impact is much greater at schools where endowments comprise a significant share of the revenue. And in the Northwest, no institution relies more on its endowment than Whitman College, which has an enrollment of just 1,400 students but an endowment that was worth $388 million at the end of June.

Whitman relies on that endowment to cover 30 percent of operating costs, said Peter Harvey, treasurer and chief financial officer for the elite college in Walla Walla. He’s predicting losses of 25 percent to 30 percent.

“It’s throwing darts, but I would suspect it’s going to take quite a few years” for college endowments to rebound, Harvey said.

The bigger they are …

Not every donation to a college goes into an endowment. For instance, when billionaire Paul Allen gives millions to the University of Washington or Washington State University, it normally goes toward a specific building or project.

But universities like to get donations that can be invested to provide perpetual income. College endowments nationwide totaled $340 billion in 2006, with 62 institutions reporting more than $1 billion, according to Inside Higher Ed, an online journal.

Private schools have been aggressively building endowments for generations. Public institutions, particularly those in the West, have ramped up their efforts in recent years. Among Washington’s public schools, the University of Washington Foundation has been the most aggressive, naming Bill Gates Sr. chairman of its giving campaign.

The UW endowment grew $575 million in 10 years, standing at $2.2 billion on June 30. The foundation gave out $94 million from the endowment in the most recent fiscal year, with about a quarter of the money going toward scholarships and fellowships, according to its annual report. That compares to a 10-year average of $56.3 million.

By the end of September, the UW endowment lost 11.8 percent in three months, said Ann Sarna, the foundation’s associate treasurer. The next round of figures won’t be available until later this month, Sarna said, but she expects declines similar to those experienced nationwide.

The news is no better in Pullman, where the endowment managed by the Washington State University Foundation lost about 20 percent in the four months ending Halloween.

“November wasn’t that poor a month, but October sure was,” said Kevin Harvey, associate vice president for finance.

In fact, October was the stock market’s worst month in 21 years. And in the world of higher education, no one has felt the economic crisis harder than those at the nation’s oldest and richest university.

Harvard University administrators announced Dec. 2 that “severe turmoil in the world’s financial markets” cost its endowment $8 billion in four months. That amounts to 22 percent of an endowment that topped out at $36.9 billion.

Harvard officials, who expect more losses this year, say they’ve never seen anything like it.

“To put a loss of that size in historical context, over the last at least 40 years, Harvard’s worst single-year endowment return was a negative 12.2 percent in 1974,” according to a letter from university administrators, posted on Harvard’s Web site.

Harvard’s endowment provides 35 percent of the university’s operating budget. And the size of its bankroll allows the university to waive tuition for families making less than $60,000 a year, and offer reductions for those making up to $200,000.

The university hasn’t announced any changes in its tuition policy, but is reconsidering campus expansion plans and making other cuts.

“Until September, we coveted those big endowments,” said Brian Benzel, vice president of finance and administration at Whitworth University in Spokane. “Because we’re not heavily reliant on an endowment for general operating purposes … it isn’t as devastating as it is in a more heavily endowed institution.”

Whitworth, which has 2,600 students, has an endowment that was $92.8 million on June 30. The university’s goal is to hit $100 million by 2010.

Benzel can’t say exactly where the endowment stands now, because he’s waiting for reports for some investments that are managed by outside trusts. But the portion managed directly by Whitworth dropped 15 percent in three months.

“I think it will turn out to be worse than that,” he said.

Whitworth is spending $2.3 million from its endowment fund this school year. Benzel is tentatively recommending cutting back by hundreds of thousands of dollars next year. He said the school won’t renege on any scholarships it already has promised.

Limiting the damage

Every year, most universities or foundations spend between 4 percent and 5 percent of an endowment’s value, based on a three-year average. So a short recession with a quick recovery would be relatively painless to most colleges, other than delaying their goals for endowment growth. A deep recession with a prolonged recovery – the kind many economists are now predicting – will have lasting ramifications.

“I’m concerned about it, without question. But there’s little that we can control,” said Mike Westfall, vice president of university advancement at EWU. “We concentrate on those things that we can control.”

Most universities try to limit losses by establishing investment portfolios that are diverse and “much more conservative than how I would invest my own money,” Westfall said.

Nor have universities stopped asking for money. At Eastern, they’re telling potential donors that now is a great time to give, because stock prices are low. An investment buck goes a lot further now than it did last year.

The results have been mixed. Westfall said some donors who planned to make major gifts this year are postponing those donations, hoping to see their own investments recover first. Yet the college is getting more small donations, he said, and more donations from estates.

What’s it all mean for students? At schools like UW, WSU, Whitworth and Gonzaga University, it could take months or years to sort it all out.

There are so many sources of scholarship money, for instance, that a decline in one source can be weathered. But with state governments struggling to balance budgets, government assistance may not be readily available. And there’s no telling whether corporations and individuals will cut back on private scholarships as a result of the economic downturn.

At the same time, tuition at public schools is likely to increase, perhaps more than the current 7 percent annual limit in Washington.

At Whitman, where money from the endowment accounts for a big share of revenue, “we don’t have to make any significant changes in our operations yet,” said Harvey, the CFO. As he looks ahead to next year, Harvey is planning for several scenarios, from a quick recovery to a prolonged recession. For each of those models, he tries to determine how much the college would need to increase tuition and cut costs.

Harvey said the goal is “to maintain our core academic mission and protect current employees as best we can during these difficult times.”

Dan Hansen can be reached at (509) 459-3938 or danh@spokesman.com.


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