Modest recoveries in the stock market were not enough for local colleges to offset the damage done to endowments throughout the fiscal year that ended in June.
Most local endowments lost roughly 20 percent of their value from the previous fiscal year, and even though all have made gains in the last few months, they are still taking measures to control spending. Overall, more than $500 million in endowment value was lost from June 2008 to June 2009.
The endowment of the University of Rochester, largest among those of local colleges, lost 19.8 percent of its value from the previous year. UR’s endowment and similar funds fell to $1.37 billion from $1.7 billion. Douglas Phillips, senior vice president of institutional resources, noted that this number includes the endowment along with trust money and other funds.
The funds did recover over the next three months to finish August at $1.44 billion.
Recoveries looked similar at other schools. After reaching a peak of $41 million in value last year, St. John Fisher College’s endowment sank to $29 million at the nadir. It rose again to $33.9 million at the end of the fiscal year-which is May 31 at St. John Fisher, one month earlier than at other local schools. The growth continued over the next three months, and the total at the end of August was $36.9 million.
At Rochester Institute of Technology, the endowment fell from $671 million at the end of the previous fiscal year to $521 million for the year ending June 30. As stock indexes have picked up ground in recent months, RIT’s endowment has as well, now standing at close to $545 million.
James Watters, senior vice president of finance and administration at RIT, said gains in the endowment have been a natural result of the post-recession stock market rise. He noted that in six of the last seven recessions, the Standard & Poor’s 500-stock index had a median return of 34 percent in the months after the lowest point.
Margaret Cass Ferber tries to keep these numbers in perspective. Even with the gains, endowments still have a significant climb to regain their value at the high point in 2007, said Nazareth College of Rochester’s vice president of finance and treasurer.
"As the market recovers, you have to remember that if it drops 50 percent, then gains 50 percent, it’s not back where it started," Ferber said. "That’s a key concept, and when you hear that an endowment is up 15 percent, we’re still climbing out of a hole."
She gives Nazareth’s endowment as an example. In the fiscal year ending in June 2007, it had an 18.9 percent return on investment, followed by a 2.9 percent decline the following year. For the year ending in June 2009, it fell 20.9 percent to a market value of $45.3 million.
Roberts Wesleyan College had a similar decline. After reaching $17.2 million in June 2008, its endowment fell 30.7 percent to $11.9 million over the following year.
Kenneth Redd, director of research and policy analysis for the National Association of College and University Business Officers, said that over the last year higher education institutions nationally lost close to $95 billion in endowment value. The rebound in the stock market since March has been welcome but has not been enough to offset the losses, he said.
The association, which is based in Washington, D.C., is still tracking responses to its annual survey of endowments, but Redd predicted that most schools will report a 20 percent to 25 percent decline.
Feeling the effects
There are positive signs amid the red numbers. Watters said early signs indicate that RIT outperformed peers of similar size. The college’s endowment dropped 19.1 percent, but a change in the investment allocation strategy that began a few years ago helped it avoid percentage drops in the mid-20s, which other schools with large endowments experienced.
"In our case, the reason we are performing much better than the average large school is the fact that our trustees, working with our administrators and endowment advisers, began to be more defensive in investment policy and allocation a few years ago," Watters said.
That strategy involved decreasing investment in public equity markets and shifting to a variety of alternatives, chiefly hedge funds. While hedge funds also recorded one of their worst years on record, Watters said, RIT performed much better in its choices and managed a 9.5 percent decrease in value for those investments.
UR also changed its investments, lowering its allocation to hedge funds to approximately 22 percent from 28 percent and raising fixed income to have a larger pool of capital.
Thomas O’Neil, vice president of finance and business at St. John Fisher, said the college’s conservative investment strategy helped it achieve a better-than-average 14.8 percent decline from the previous year.
"We have a pretty vanilla endowment," O’Neil said. "We’re largely in investment stocks, not in alternative investments or foreign investments. If you look at Harvard and Yale, they were heavily in hedge funds and alternative investments.
"When you have a smaller endowment, you’re much more covetous of returns and how much you use, and you have to think more strategically than schools with large endowments that they draw a lot from."
Schools are protected from dramatic drops in endowment spending by using a rolling average of quarters to determine spending. But even this is not enough to completely insulate them from last year’s returns. UR, which uses a five-year average of returns to determine spending, still will see a decline in the amount drawn from the endowment because of last year’s performance.
"The problem we have is that a period of double-digit returns is coming off that average and being replaced by the minus 19.8 percent from last year," Phillips said. "We’ll need several good years to get spending back, increasing as it was in the ’80s and ’90s."
Nationwide, most colleges use endowment funds to make up 10 percent to 15 percent of the operating budget, mostly for things such as scholarships, Redd noted. Some schools with larger endowments, such as Harvard University and Yale University, have relied on endowments for as much as 40 percent of total revenue, and these have taken larger hits. Harvard’s endowment fell 27 percent to $26 billion, while Yale’s dropped 25 percent to $16 billion.
Nazareth’s budget draws some 5 percent of its total from the endowment, and that has insulated it from some of the more drastic cost-cutting at these larger schools. Still, the endowment’s decline has hurt Nazareth in other areas, Ferber said.
"The good news and the bad news is that we have a smaller endowment," Ferber said. "While it is a significant part of the budget, it’s not as large and has a less dramatic impact. Where it does affect us more is in our debt capacity. As we look out to the future and major new projects, we see the environment for philanthropy is challenging and our ability to borrow is constrained."
Schools that rely less on endowments and more on tuition and fees are still feeling the effects of the economy, Redd noted.
"While larger institutions like Harvard and Yale have seen more losses in endowments, smaller institutions have seen losses in more traditional revenue like tuition, as there are fewer families able to pay," Redd said. "No institution has been spared in this economy."
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