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How economy is hitting endowments
By William Carroll | Columnist
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Published: 4/6/2009 12:07 AM

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On the road to our current recession, we have heard many stories on the economy's impact on just about everyone. Large businesses are laying off people, small businesses are closing their doors, homeowners are losing their homes and retirees are losing their retirement.

In short, the recession seems to be hitting every aspect of our lives.

America's universities and colleges are no exception. State funding for our nation's public education system is flat at best. Public and private institutions are raising tuition to meet shortfalls in income. Fundraising has fallen on hard times because many of the individuals so fervent in their donating are themselves finding it difficult to make ends meet.

One aspect of the recession that has gotten some play in the media is the loss of endowments at not-for-profit institutions.

For example, when you take your family to visit a gallery or museum in Chicago, you may encounter a significant increase in ticket prices. Galleries and museums that in the past offset the cost of admission through earnings on their endowments must now increase the ticket price because those earnings have disappeared. In fact, much of the endowments themselves may have disappeared.

The same endowment phenomenon is occurring at our private colleges and universities.

Traditionally, boards of trustees develop a "spending policy" for disbursement of endowment funds. Some funds have been allocated by their donors for specific purposes, and others have been simply designated for use by the institution.

Trustees may mandate that 5 percent of the endowments earnings may be used for expenditures during a given year. In the past few years, endowments may have been earning in excess of 5 percent and those earnings could be "banked" for a year in which these saved earnings could be used when the earnings did not achieve 5 percent.

The current recession and loss in the market, however, have changed everything. Institutions that once enjoyed a "plentiful" endowment have lost 40 percent to 60 percent of their value.

Brand names like "Harvard" are not immune from this phenomenon. In fact, Harvard's endowment troubles have recently been described in Forbes magazine.

If standard bearers for endowment management such as Harvard are having significant difficulty, what about institutions throughout the higher education industry?

The simple answer? None of us are immune from the decline in endowment value. However, the impact on each campus varies.

In addition to scholarship support, many institutions use their endowments to support operations. A certain amount of funds from the endowment may be regularly set aside to offset the budget.

Again, the amount of funds dedicated for this purpose depends on the institution. Some, like Benedictine University, budget no monies from the endowment for annual operations, while others budget millions of dollars for operations.

In today's recession, the more an institution has relied on its endowment for operations the more trouble it may be facing.

Many institutions that rely heavily on endowments for operations are being forced to reduce salaries of faculty and staff. Some have laid off or are considering laying off employees. Many have been forced to raise tuition in an already expensive market.

Endowments, once viewed as a guarantee of fiscal stability, have in some cases now become a source of fiscal instability.

What happened?

Those of us who have had the privilege of being candidates for a college or university presidency are united by a single question posed to us in the interview process: "What will you do to raise the endowment?" Presidencies have risen and fallen on a person's ability to raise the institution's endowment.

The endowment has been traditionally viewed as a major indicator as to the fiscal strength and longevity of the institution. Various rubrics have been developed by accreditors, lending agencies, etc., that use the endowment as the measure of an institution's viability. The current recession may be forcing a paradigm shift as to how the role of endowments will be viewed in the future.

This past week, I had some prominent fund managers in my office to talk about endowments and strategies in these uncertain times. I was struck by their answer when I asked, "What happened?"

"We never saw this coming," they said. This happened so quickly and so completely it caught the industry off-guard.

This was not supposed to happen. Endowments have always been viewed as safe harbors (or rafts) in difficult economic times. The loss of endowments in such a cataclysmic way was unanticipated and has caused immediate fiscal concern for many current operating budgets. Hence, the layoffs, etc.

Fortunately (and I use this word cautiously), most institutions are tuition-driven. The more an institution uses its endowment, the less tuition-driven it would seem to be.

Interestingly, in all my years in higher education, I have never met a president who said her or his institution was endowment driven - and some of these presidents had huge endowments.

Endowments supported the success of institutions by providing needed funds for scholarships and operating budgets. However, they were always secondary to the income produced by tuition and auxiliary services.

On paper at least, when tuition revenues were difficult to garner, the endowment would always be there to make up the difference. Until the current recession, that is.

While the studies on today's economic crisis are yet to be done, I suspect that higher education may be encountering a paradigm shift. Whereas in the past a totally tuition-driven institution was dismissed as fiscally unstable because of a small or nonexistent endowment, the future may be bright with respectability for these very same tuition-driven institutions.

"Tuition-driven" will no longer be viewed as a bad thing, but as a fiscally prudent strategy in the face of uncertain economic times.

I am not ruling out the role of endowments in the future. I view enrollment like the legs of a table - the more legs available to support the table, the sturdier and steadier is the table. If an institution has a single source of students such as traditional undergraduates, it is relying on a single leg for the table.

What happens when a demographic downturn reduces the number of traditional students available? Enrollments may drop suddenly.

However, by adding adult students, online programs, international partnerships, new sites, etc., an institution is strengthening its table and thus its economic stability.

Endowments have a wonderful role to play in our colleges and universities. However, they must no longer be viewed as the "be-all and end-all" to fiscal stability. Supported by a robust enrollment strategy, endowments can be the icing on the cake. They can never be the cake.

• William Carroll is president of Benedictine University in Lisle. His column appears monthly in Neighbor.