Endowment Rebound Reduces Need for College Layoffs

Endowments’ 12.6% jump brings colleges back to 2005 levels.

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The pressure on many private colleges to cut budgets and lay off staff will likely ease now that college endowments have regained much of the money they lost in the investment bubbles, says John Walda, president of the National Association of College and University Business Officers. 

The typical college endowment rebounded by 12.6 percent in the year ending June 30, according to a survey of a sample of 80 colleges released Nov. 3 by NACUBO and Commonfund, a nonprofit that manages many colleges' investments. "For institutions that are endowment-dependent this is a very stabilizing report. It causes one to be hopeful that they can continue to fund student financial aid and the other important academic enterprises," Walda says. 

[Read about how scholarships and tax breaks are making it easier to pay for college in 2010.] 

But colleges that rely on the profits of their investments to fund their operations can't return to building booms or hiring binges anytime soon, Walda warns. The typical college still has less money saved up today than it did three years ago, and is only slightly ahead of its bankroll level of 2005. 

What's more, colleges reported a drastic drop in donations last year. Since colleges typically draw down between 4 percent and 5 percent of their endowments each year to help fund their operations, schools have been spending more than their endowments have been accumulating over the last several years, Walda notes. "That is not a sustainable practice," he adds. 

[Find out which colleges had the worst-performing endowments in 2009.] 

Even wealthy private colleges responded to the pressure on their endowments by cutting their budgets, laying off employees, and reducing perks for students and staff. Harvard University laid off hundreds of employees, eliminated hot breakfasts at some dining halls, and stopped construction on a new section of campus. The president of Barnard College gave up her school-provided vehicle. Smith College laid off several chaplains. Some schools, such as Tufts University, have also replaced some of their risky alternative investments in hedge funds and derivatives with assets they hope will be safer and less volatile, such as bonds. 

And some colleges have ratcheted up fundraising campaigns. At at least one institution, the fundraising pressure may have gone overboard. Some Dartmouth College students trying to get seniors to donate last spring publicly ridiculed the one senior who did not donate to the class drive. Dartmouth officials said they regretted the violation of privacy and would take steps to ensure that such "inappropriate behavior" would not be repeated. 

While heartening, the good endowment news isn't a panacea. It improves the outlook only for the few hundred colleges, mostly private schools, that use dividends from their investments to fund significant portions of their budgets. More than 1,600 of the nation's approximately 4,000 colleges are public, which generally fund their operations with taxpayer subsidies and tuition payments by students. Many states are still cutting back their financial support of state colleges. 

[Find out about the budget cut outlook for public colleges in 2011.] 

Fewer than 700 colleges in total—public or private—have endowments larger than $25 million. Since colleges typically spend about 4.5 percent of their endowments that means the vast majority of colleges get less than $1 million a year from their investments.

While private colleges without big endowments didn't have to slash their budgets when the investment markets declined, many of them are nevertheless struggling with a demographic decline in the number of teenagers and many families' growing preference for more affordable colleges, says John Nelson, who heads the education rating teams at Moody's Investors Service. 

Nelson especially worries about the hundreds of small private colleges with fewer than 1,000 students and unimpressive reputations, saying "A lot of them are under stress." 

And even the big, elite, and well-endowed colleges are adjusting to a new reality in which their endowments aren't enjoying the dizzying gains of the mid 2000's, Nelson says. That means many colleges will likely ratchet down the amount they take from their endowments, which will constrain future budgets, he predicts.