Although many colleges and universities suffered shocking drops in their savings accounts in 2009, recent rebounds in the markets, cheap loans, and long-term planning seems to have dampened much of the financial pain.
Of course, there was still plenty of undampened pain. The 18.7 percent average drop in the value of college endowments for the fiscal year that ended June 30, 2009, was the worst loss since the Great Depression, according to a study by Commonfund and the National Association of College and University Business Officers.
In addition, one group that might have helped colleges recoup their losses—donors—have pulled back because of their own investment troubles. Colleges surveyed by NACUBO said donations were down more than 45 percent last year.
Some of the schools that were among the biggest losers—especially those that relied on profits from their big endowments to fund a large portion of their operations—are having to lay off employees, delay construction projects, and pare student services. Harvard University's endowment, for example, fell almost 30 percent in fiscal 2009, dropping from $36.6 billion to $25.6 billion. Because Harvard depends on investment profits to fund much of its operations, it has had to lay off employees, pause expansion plans, and eliminate student perks like hot breakfasts. Duke University, where the endowment lost $1.7 billion, or 27.5 percent, closed a student pharmacy, is setting summertime office temperatures at 76 degrees, and is doing less landscaping. Other big losers, including Dartmouth College, are continuing to suffer layoffs and budget cuts.
While most colleges have protected financial aid from cuts, a few have pared aid. Harvard's law school stopped offering a year's free tuition to law school students who planned on public-service careers. Williams College in Massachusetts, where the endowment fell by about 22 percent, or $400 million, has announced that, starting with freshmen who enter in 2011, it can no longer promise needy students that they'll get enough grants to avoid having to borrow.
But generally, the budget cuts so far have been much smaller than might be expected, considering the drops in endowments. One reason for the softened impact: colleges' long-term outlook. Yale University suffered a decline of $6.5 billion, or 28.6 percent, in the value of its endowment in the 12 months that ended June 30, 2009. But Yale spokesman Tom Conroy noted that over the past decade, including the recent loss, Yale's portfolio has returned 11.8 percent a year because of spectacular years such as 2000, when the portfolio rose 41 percent.
And Yale, like most colleges, typically spends on its operations about 5 percent of the average value of its endowment over the last several years, not just the latest value.
In addition, many colleges are taking advantage of historically low interest rates to borrow cash to fund operations while they wait for their investments to bounce back, says John Griswold, executive director of the Commonfund Institute. The debt loads of universities jumped more than 50 percent last year, NACUBO and Commonfund found.
Best of all, many investment markets have been recovering nicely in recent months. Roger Williams University in Bristol, R.I., where the drop in endowment was aggravated by a long-planned $14 million withdrawal to fund construction, said that a 12 percent gain since July 1 has replaced more than $7 million of the $26 million drop in valuation. Haverford College, which suffered one of the biggest percentage drops in value—35.5 percent—said its endowment has gained more than $80 million since the summer and has rebounded to $363 million.
Princeton University used early retirement incentives and layoffs to reduce staff by almost 200 employees after its endowment plunged by more than $3.7 billion, or 22.8 percent, last year. But late last year, Princeton reported that gains from July through September brought more than $700 million back to its coffers.
As a result of the sharp 2009 declines, Princeton, Haverford and many other schools say they have been tweaking their investment strategies to reduce the potential impact of another big plunge. Many universities achieved outsized returns during the previous decade by taking chances on volatile and hard-to-cash-in investments in timberland, commodities, hedge funds, and secretive private equity deals.
Nevertheless, it will likely take years for some of the biggest losers to return to their 2008 highs. More careful spending and investing will likely be the "new normal," Princeton President Shirley M. Tilghman has said.
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Updated on 2/3/10: An earlier version of this story was written before Skidmore College published a release indicating that it will not need to resort to layoffs.