College Endowments See Values Drop

University endowments are like shiny, golden nest eggs, trophies to be polished and put on display as much as they are crucial sources of funding. At least that's what it has felt like for the past several years. The 2000s were shaping up to be the best decade ever for endowments, an era of unprecedented growth where 6, 7, and 8 percent rates of return climbed into double digits and kept going. In a few short years, multimillion-dollar endowments ballooned into billion-dollar ones. Things were going so well, U.S. senators started wondering what in the world universities were doing with all those billions anyway. Iowa Sen. Chuck Grassley threatened legislation to force some of the best-endowed schools to pay out more of their golden nest eggs as financial aid and scholarships instead of just watching them grow.

Like the rest of the economy, though, the endowment boom peaked in 2007, when the national average rate of return was 17 percent. The 30 biggest endowments, all more than $2 billion, increased by an average of 22 percent that year, with Duke, the University of North Carolina, and Notre Dame leading the way, all with returns exceeding 30 percent. In 2007 alone, the Fighting Irish added a cool $1.5 billion to what was already a more than $4 billion endowment. University investment officers like David Swenson at Yale became stars on par with hedge-fund wizards. And then the bottom dropped out. By the time the 2008 fiscal year ended in June, things had turned negative for most (and merely flattened for some). By November 2008, endowments across the board were down 23 percent on average, just like the stock market. The bleeding slowed in 2009, but endowments still hemorrhaged money for the first part of the year. Most schools are living with losses of 25 to 30 percent. "It's stunning," says John Walda, president of the National Association of College and University Budget Officers (NACUBO). "It's completely unprecedented. No one saw it coming, and no one was immune."

That may be, but in terms of sheer dollars lost, the elite private schools have been the hardest hit. Private schools rely more heavily on their endowments to fund annual budget operations than public universities do. According to the Department of Education, an average of 13 percent of private-institution budgets come from their endowments, compared with just 2 percent of public-university budgets. That has left many of the country's most prestigious and well-endowed schools facing a fiscal catastrophe. Desperate for cash, they've had to issue billions in bonds just to make ends meet. Compounding the problem is a dip in annual giving as big donors, themselves squeezed by the recession, are less inclined to cut those big checks. Along with endowment payouts and annual giving, tuition accounts for a big source of private-school revenue. But with families feeling the crunch too, schools have been loath to raise tuition too much, and many are implementing the lowest tuition increases since the 1960s.

The four largest endowments—Harvard, Yale, Stanford, and Princeton—worth a combined $93 billion in June 2008, are all down more than 25 percent. At Harvard, nearly 40 percent of the annual budget comes from its endowment. At Princeton, it's been more like 50 percent of late. In April 2009, Princeton president Shirley Tilghman sent out a letter revising the endowment's projected loss from 25 to 30 percent. As a result, the university is slashing $170 million out of its budget through the 2010–11 fiscal year. Departments have been told to expect a 5 percent reduction in staff, and faculty making more than $75,000 a year will have their pay capped. "The steady growth in both faculty and staff that we have enjoyed over the last 10 years will end, and the university will have to contract in size," Tilghman concluded starkly.

Harvard, having lost $11 billion of its world-leading $36 billion endowment since June 2008, has halted construction on a $1 billion science complex, leaving a five-acre hole in the ground. Harvard's Faculty of Arts and Sciences, which includes most undergraduate professors, will slash $220 million from its $1.15 billion budget through the 2010–11 fiscal year. The size of the entering class of doctoral students has been cut, and as of May 2009, 534 of some 1,600 eligible staff members had accepted voluntary early retirement. Undergraduate faculty members have been "downshifted" to a more affordable analog phone system. Hot breakfast has been taken off the weekday menu at campus cafeterias, and the school's student bus service has been curtailed, ending now at 1:30 a.m. Sunday through Wednesday as opposed to 3:50 a.m., raising safety concerns. "Students are upset because they feel that they have been affected by a disproportionate number of the cuts so far," says Maxwell Child, class of 2010 and president of The Harvard Crimson.

On the other side of the country, Stanford has put $1.1 billion of construction projects on hold. It also announced a 12 percent staff reduction. Its $17 billion endowment, projected to lose 30 percent in 2009, is no longer its biggest source of revenue. Now, thanks to the stimulus package, federally funded research will account for the largest share of Stanford's revenue.

One obvious way to ease the pain is to raise cash, and lots of it. With so much of their endowments locked into illiquid investments with private-equity groups and hedge funds, Harvard, Princeton, and Stanford have all had to sell more than $1 billion of bonds each to get their hands on much-needed cash. Stanford is now holding $800 million in safe, low-return money-market accounts, a move that would have been unheard-of in 2007. "We've created a rainy-day fund," says Stanford CFO Randy Livingston.

But some schools have had to resort to more drastic measures. Brandeis University, whose $690 million endowment lost 20 percent of its value, made waves in early 2009 when it announced it would close its venerated Rose Art Museum and consider selling its $350 million collection, which includes works by Andy Warhol and Jasper Johns. "Like most every other college and university, the current economic conditions have presented Brandeis with serious fiscal challenges," CFO Peter French wrote in an e-mail. Brandeis has since convened a committee to study the proposal.

On the public side, many large state colleges are facing a double whammy of reduced endowments and huge cuts in state funding. In Florida, where the projected state budget deficit is $5.7 billion, Florida State University is undergoing a massive reorganization as it deals with $82 million of state funding cuts since 2007. FSU is proposing to cut 21 degree programs ranging from apparel design to molecular biophysics, and is also considering shuttering campuses and laying off faculty. In January, the University of California Board of Regents voted to cap freshman enrollment because of a lack of state funding. "The public universities are really hurting," says NACUBO's Walda. After years of increasingly risky investments netted them unprecedented returns, the crash has endowment investment officers dialing back on risk. "They're nervous," says Walda. "They're mostly looking for safe liquidity." Which means that even if the bull market of the past decade does return, the days of university endowments making 20 or 30 percent a year are history.