College Endowments Hit the Skids

Posted by: Louis Lavelle on January 26, 2009

By Brian Burnsed

The Commonfund Benchmarks Study, which examines the state of school endowments on an annual basis, was released today. While the study’s findings are likely a shock to no one, they undoubtedly further illustrate the far reaching effects of the economic downturn. As BusinessWeek reported last week, community colleges are being hit particularly hard by the slumping economy, but the Commonfund Study goes even further, showing that endowments at a myriad of schools are evaporating as well.

While the study, which collects data from 628 educational institutions across the country, found that only minimal losses were sustained for fiscal year 2008, the real problem lies ahead. FY 2008 saw a 2.7 percent drop; hardly a jaw-dropping loss. However, a follow up study used to gauge FY 2009’s progress stumbled upon significantly more alarming figures. Endowments at these schools have tumbled an astounding estimated 22.5 percent in the first half of FY 2009, and there is no indication that this trend will come to a halt in the near future.

“While fiscal 2008 was difficult for educational endowments, the negative 2.7 percent return was manageable. It was in the period after the close of the fiscal year on June 30 that very serious erosion of endowment values took place,” John S. Griswold, Executive Director of Commonfund Institute, says in the report.

Like 401(k)s, endowments too have been burdened by the crumbling markets. The biggest problem that is leading to the erosion of endowments is their reliance upon domestic and foreign equities, which have been hit hard as markets worldwide have struggled. FY 2008 saw a 10.2 percent drop in returns from domestic equities and a 7.6 percent slide in returns from foreign equities.

School administrators will have to carefully plan their investment strategies as the markets continue to tread upon shaky ground, however the study notes that the average number of full time staff that schools employ to handle investments is on the decline. Sixty-six percent of schools have hired outside consultants to handle investments in an effort to cut costs.

Poor returns on investments weren’t the only factors that contributed to a weak FY 2008. Thirty-three percent of schools polled in the study reported a decline in gifts and donations, a figure which is likely to grow rapidly in 2009 as individual donors start to reign in their expenditures as they watch their 401(k)s and bank accounts dwindle. When money is tight on the home front, donations are among the first expenditures to go by the wayside, an unfortunate symptom of a recession that higher education must deal with.

These problems aren’t likely to vanish in the coming months, or even years, so many colleges will be forced to create new investment strategies and cut spending. Administrators are well aware that difficult decisions will have to be made.

“The handwriting’s on the wall, it’s going to be a very difficult period,” says Mike Kettner, Dean of the School of Business at the University of Wisconsin-Madison.

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