<p>Whatever numbers are posted for the endowments I don’t think there is any reason to believe in their accuracy. A truly cynical person would say there’s reason to believe they aren’t worth much of anything given that most of these Ivies are borrowing all of the money that they would normally send over from their endowments. I’m not quite that cynical but given the lack of controls and oversight over the endowment managers until that drastically changes whatever number they report doesn’t mean much.</p>
<p>“Otherwise, the financial outlook for higher education is pretty bleak.” </p>
<p>That’s a given with the forces of endowment, employment, lack of family assets for funding full-pay and the economy. And state budgets for publics.</p>
<p>Barrons article referenced above is excellent and leads to/references other earlier articles for those interested in detail.</p>
<p>I’ve referenced the timberland problem in previous posts. Its a bomb, a big illiquid, generating no income but sucking up management fees and taxes type of bomb. </p>
<p>To avoid selling distressed private equity, commodity, real estate or timber land, these school have recently issued huge bonds (with huge interest) to already heavy debt load. Added: Harvard $1.5 B; Princeton $1B, Yale $800M. Talk about the beginnings of a downward spiral!</p>
<p>Could someone explain here to a non-financial expert like me what the impact of all this will be to my kid if she ends up attending one of the more hard-hit colleges? She will be entering college in 2010. Should she not apply to Harvard/Yale/Princeton, or, if admitted, should she not attend? This is not a rhetorical question for me- it is a practical one and a sincere question. I will appreciate sincere answers. We are not expecting any financial aid.</p>
<p>7/9/09 - above
“Some institutions allowed themselves to become bloated and content on payouts from seemingly ever-growing endowment payouts” </p>
<p>…how quickly things change. It wasn’t very long ago it seems that colleges were being excoriated for not spending enough of their endowments and any protests they made along the lines that they needed to save for a rainy were dismissed out of hand.</p>
<p>2/28/08 - Boston Globe</p>
<p>"Under growing pressure from Congress, the country’s wealthiest colleges and universities are sharply resisting calls to spend more of their soaring endowments … The wave of new financial aid packages announced by top-tier colleges over the past three months is widely seen as an effort by the schools to head off action in Congress. … But lawmakers … warn that colleges may have to spend more of their endowments … </p>
<p>The schools try to limit endowment spending to maintain a buffer to weather financial downturns and to ensure long-term stability.</p>
<p>They have spent proportionately less of their endowment for each of the past four years, … They now spend an average of 4.6 percent each year, a figure that colleges say is carefully calculated to maintain the principal. … said Lynne Munson, … who testified before Congress on endowments last fall. “Hoarding isn’t a public good…”</p>
<p>College officials, who bristle at the prospect of government regulation, …“That kind of intrusion wouldn’t be healthy,” said Robert Berdahl, president of the Association of American Universities and former chancellor of the University of California at Berkeley.</p>
<p>“Endowments have to be dealt with conservatively, because the whole point of an endowment is to conserve.”…Endowments have shown handsome returns. But that could quickly change, …"</p>
<ol>
<li><p>When I was an undergraduate in the mid-70s, Yale’s endowment was about $600M ($2B in 2009 dollars). They kept the lights on just fine. It was an amazing university.</p></li>
<li><p>Last time I looked, a couple years ago, the total endowments of all the colleges at Oxford were about $800M in the aggregate.</p></li>
<li><p>Private equity funds are not racing to close investments right now, and they are not making capital calls on their investors. Harvard has been a very, very, very important investor in the private equity world. I don’t see the people whose careers have been built on their ability to raise money from Harvard putting Harvard in a position where it becomes insolvent due to their capital calls.</p></li>
</ol>
<p>The same thing happened after the tech bubble burst in 2000. Lots of internet and tech paper zillionaires had undertaken significant private equity commitments, only to see the value of their tradable stock and options plummet. The funds stretched out their investment periods, and released a meaningful chunk of people’s commitments.</p>
<p>dear vicariousparent</p>
<p>Impact on specific students - minimum, particularly to full pay students.</p>
<p>These school were handing out huge FA to lots of students. Now your child will not be the only one on the block who is full pay. </p>
<p>Arcane classes will only be offered every year or two, not every semester (Brown). And if the colleges follow the trend I’m seeing at the Preps, professors will actually need to teach classes (gasp!) if they want to stay in good graces, although tenure make that hard to boot them if they don’t. More likely, the staff and non-tenure instructors will be culled. Plush will be less plush, but beyond that an Ivy education will still be wonderful and well worth the money.</p>
<p>I don’t begrudge MA and the US gov’t for insisting that the richest colleges spend more of their endowments on their core “mission” or lose their tax-exempt status. They only wanted them to spend 5%. The colleges didn’t lose 25 - 30% of their endowment because they spent too much money educating kids. They lost that much money because they invested in illiquid holdings, and because the market as a whole tanked. The amount they could and should have been spending on the actual education of actual students at their schools was chump change compared to what they had been earning on their endowments for years, and compared to what they lost in an attempt to maximize their profits.</p>
<p>Many, many, many schools do a great job educating kids with a tenth of the money Harvard has. Harvard needs to decide what its role is and focus on that. It can’t be the best at EVERYTHING (law, medicine, business, landowner, etc). </p>
<p>vicariousparent, Harvard still has way more money than 99% of the other colleges/universities in the world, and one of the most generous financial aid policies. If your kid is admitted, I wouldn’t worry about sending them there.</p>
<p>
</p>
<p>dstark, agreed that it is all a guess. And, all of the investments they will make with the capital calls will be illiquid. </p>
<p>Not a big issue, but, once they get past the crisis state, the universities rely on interest/dividends/cap gains for operating budgets. So, I’m not sure it makes sense to not count as an asset illiquid investments when we are calculating endowment per student as we should have the expectation that these assets will produce something later on. They’re comparable to investments in stocks in industries in which the investments are made, although likely with a significantly higher beta. [My assumption all along was that a many hedge funds were just levered bets on the S&P but that the best private equity funds are adding more value than just leverage (largely focusing on cash management, reducing fat from public companies, and clear incentives for management lower in the ranks that are not just options on the upside, as is the case for public company management).] </p>
<p>It is my presumption (on which I’ve bet) that the best private equity funds are a good thing to be in right now, though the best opportunities now involve fixed income investments that are being ignored as a matter of PR by lots of firms. I think that when the credit markets return, the lower price level of equities will offer significant potential for good private equity transactions.</p>
<p>I have a different take on the impact. Yes Harvard is still rich with assets(most aquired in the last 10 years) but those assets cost a heckava lot to maintain, and can’t be maintained without endowment money. At a minimum there will be a much more severe cutback in personnel. The impact will be felt from that and I think probably more significantly the constant turmoil on campus over the cutbacks. You already have problems with 275 people being cut-its going to get real interesting when they really start cutting.</p>
<p>
</p>
<p>Correction: Harvard still has way more money than all of the other colleges/universities in the world. Except for the Catholic Church and now the Gates Foundation, Harvard remains the richest private nonprofit institution in the history of the world. If you valued its real estate and physical plant at market, it may be richer than the Gates Foundation.</p>
<p>It’s hilarious to worry about the impact of Harvard’s financial losses on students.</p>
<p>vicarious,
The potential changes at the Ivies that will impact undergrad students could include some of the following:</p>
<ol>
<li> Less frequent offering of some unique, non-core classes</li>
<li> Slower construction of new facilities that undergrads would otherwise have enjoyed now or in the near future</li>
<li> Maybe less generous offering of financial aid</li>
<li> Maybe larger class sizes as faculty hiring will be limited and all will have to make do with existing resources</li>
<li> Staff will be reduced which will lead to delays/friction in administrative dealings</li>
</ol>
<p>I think that any worries you have should be small as these institutions all had huge endowments with high per capita numbers. Now they will have less money, but still much more than the vast majority of colleges across America. </p>
<p>The challenge to the Ivies and other top privates is how to reallocate their assets and cash flows. The good news…and this is still the most important point… is that the Ivy colleges still retain considerable wealth and they have historically used that to help undergrads. For example, in practical terms and in how it relates to undergrads, consider the current financial aid policies for undergraduate students. Following are some top colleges and how they compare of their financial aid for undergraduate students. This is very important for a lot of families and one wonders how the endowment declines might affect this list. </p>
<p>PRIVATE UNIVERSITIES</p>
<p>% of Cost of Attendance that is covered by the Average FA package , Avg FA Package , Cost of Attendance , Net COA , % of Need Met , College , % Receiving FA</p>
<p>71% , $35,831 , $50,250 , $14,419 , 100% , Harvard , 54%
71% , $34,744 , $49,000 , $14,256 , 100% , Yale , 46%
69% , $36,257 , $52,303 , $16,046 , 100% , Vanderbilt , 47%
68% , $34,600 , $50,992 , $16,392 , 100% , Stanford , 44%
68% , $34,195 , $50,434 , $16,239 , 100% , Cornell , 42%
66% , $33,289 , $50,547 , $17,258 , 100% , Dartmouth , 50%
66% , $32,866 , $50,100 , $17,234 , 100% , MIT , 69%
65% , $32,160 , $49,190 , $17,030 , 100% , Princeton , 55%
62% , $30,285 , $48,525 , $18,240 , 100% , Notre Dame , 47%
62% , $29,143 , $46,908 , $17,765 , 100% , Emory , 38%
62% , $31,820 , $51,300 , $19,480 , 100% , U Penn , 39%
62% , $33,064 , $53,406 , $20,342 , 100% , Columbia , 52%
61% , $32,239 , $52,450 , $20,211 , 100% , U Chicago , 48%
61% , $31,014 , $50,474 , $19,460 , 100% , Duke , 42%
60% , $29,533 , $48,990 , $19,457 , 100% , Caltech , 58%
56% , $23,529 , $42,096 , $18,567 , 100% , Rice , 39%
56% , $28,765 , $51,478 , $22,713 , 93% , J Hopkins , 45%
55% , $28,725 , $52,074 , $23,349 , 100% , Wash U , 40%
54% , $27,936 , $51,720 , $23,784 , 100% , Northwestern , 43%</p>
<p>STATE UNVERSITIES (OOS students only-we all know that the IS students for any of these colleges have a very attractive financial incentive to stay home)</p>
<p>% of Cost of Attendance that is covered by the Average OOS FA package , Avg OOS FA Package , OOS Cost of Attendance , Net COA , % of Need Met for OOS , College , % Receiving FA</p>
<p>57% , $18,568 , $32,662 , $14,094 , 100% , U North Carolina OOS , 35%
54% , $21,935 , $40,709 , $18,774 , 100% , U Virginia OOS , 25%
51% , $21,607 , $42,008 , $20,401 , 80% , UCLA OOS , 26%
48% , $20,971 , $43,693 , $22,722 , 62% , U Michigan OOS , 39%
47% , $21,868 , $46,598 , $24,730 , 85% , UC Berkeley OOS , 33%</p>
<p>The greater worry might be on resource allocation, ie, will these Ivy colleges (and other elites) spend money to support their undergraduates or will money go to the grad student-dominated programs which have a larger research responsibility? I have seen some estimates that many graduate programs, eg, those in the technical fields like engineering and sciences, are very expensive and cost 5 to 15 times more than undergrad programs. Research grants likely cover part of this, but the degree to which this occurs varies by institution and by project and it is even less clear how undergraduate students benefit in their everyday lives from these research grants.</p>
<p>Re the matter of how to value these endowments, I think we will have to wait a while and hope for more disclosure. There is just too much that is unknown, but the assets certainly have some inherent value that will produce income and capital gains that can accrue and be paid out to the benefit of current and future students. Furthermore, the capital calls that these funds will receive will be spaced out over many years. The colleges might be a bit cash-flow stressed at the moment, but IMO these issues can be managed over a multi-year workout period (2-5 years?), including via sales of their interests in (and ongoing obligation to) these PE funds.</p>
<p>If you look at a school like Tulane back when Hurrican Katrina destroyed its central city, part of their solution was to cut majors all together. Certainly, I don’t think this is the same whatsoever, but only to point out that cutting programs seems to bring back the most money into the general pot.</p>
<p>I will say, however, that from reading the actual article in VF what I take away most from it is not the amount of solvency the place has, but that they have increased their operating budget by HUGE numbers, did not increase enrollment and in fact, are bringing in LESS due to the aggressive financial aid policy - which in effect was somewhat a response to the massive “obscene” incomes of their fund managers. </p>
<p>
</p>
<p>Add this to the fact that there are a lot of people who are no longer in the position to fulfill their gifts to the school AND too, a lot of the endowment gifts are pegged only for certain expenditures as set up by the donor. Correct me if I am wrong, but at that rate of currrent spending, they are eating their body to save the arm. It doesn’t matter so much that they have more money than anyone else, it’s a question of sustainability at the rate of their spending. Most other schools, who aren’t as wealthy or who do not have extensive aid practices, have looked to their endowments to cover about 5%. It’s the difference between living on your true income and living on credit. Harvard is no different than the rest of wealthy Americans who lived well beyond their current income to define themselves as so much better and smarter than everyone else. And then got bit in the arse. Sure, other schools have big budgets to cut as well, but from what I understand they will have smaller deficits. And to whom much is given (as in the case of Harvard) much will be taken away making it a very different place than it has been in the last decade, even in what you eat for breakfast!!</p>
<p>Of course, this is just general opinion from someone who barely understands what it all means. I know people will not exactly feel sorry for the place, but those who it hurts most are the current students. And if what is said above is accurate about research funding etc, the undergrads will take the hardest hit in terms of actual opportunity of learning. On the other hand, it won’t make much of a difference in hiring later on since a degree from Harvard will always be a good thing. Still, for those looking to be truly well educated, it’s a plus for a lot of top LAC’s who end up sending their students to the research universities for graduate school (where ostensibly they’ll, again, get the priority dollars).</p>
<p>
</p>
<p>Inaccurate. Some dorm renovations may be postponed, but it won’t make matters worse for current or future students. It just will not make their accommodations more luxurious.
Research funding: A lot of the funding is dedicated and cannot be used for general purposes. For example, David Rockefeller gave something like $10 millions for undergrads to study/travel abroad. Central Admin cannot use that money for other purposes.
Tenured profs cannot be laid off, though if they move away or retire they are not going to be replaced as long as there is a hiring freeze. However, because of the financial crisis, some who might have considered retiring are postponing their retirement.
The one thing I read about the effect of the crunch on undergraduates is that sections will be allowed to lift the cap from 18 to perhaps 20 or so (at a lot of other universities, recitation sections have 25 students).</p>
<p>Back in the 1970s, Yale went through a crisis. I remember reading about windows going unwashed, lawns going unmown and so on. I think Harvard will do the same.</p>
<p>I see that Cerberus-which is one of the largest private equity/hedge fund companies-just announced that they are not permitting withdrawals from their largest hedge fund. I think people are putting their heads in the sands if they don’t see that the very large committments these U’s have made to private investments is a much bigger problem than the U’s have admitted to so far.</p>
<p>
</p>
<p>It’s true that the federal stimulus is a one-time shot in the arm, but the regular (non-stimulus) research budgets at NIH, NAS, and DOE are all up substantially. The Obama administration and the President personally appear committed to the view that research and innovation are key drivers for the economy of the future, and a huge comparative advantage for the U.S. Invest, or stagnate and fall behind in global competition. And as long as that’s the prevailing view in Washington, I think research universities are going to do OK.</p>
<p>Havard is not the only school hit by losses. Duke University was planning an update of its Central Campus to link its East (freshman only) Campus with its West (main) Campus:</p>
<p>[Duke</a> University | Central Campus Planning](<a href=“http://www.duke.edu/web/centralcampus/]Duke”>http://www.duke.edu/web/centralcampus/)</p>
<p>The plans are currently on hold.</p>
<p>Profs at Harvard have had their salaries frozen. Profs in the UCs are taking a cut of 8% of their salary. A big difference.</p>
<p>Anyone making over $50,000 at Duke had their salaries frozen. Duke’s endowment fell 20%:</p>
<p>[In</a> Letter to Staff, President Brodhead Outlines Duke’s Response to Economic Downturn](<a href=“http://news.duke.edu/2009/03/rhbletter.html]In”>http://news.duke.edu/2009/03/rhbletter.html)</p>
<p>The letter says the endowment has declined 20 percent, that faculty and staff making over $50,000 will get no raise in the coming fiscal year (and those below will get a $1,000 increase) and that the university must reduce its operating budget in the coming years by $125 million.</p>
<p>No smoked salmon or Sunday brunch at Duke to cut, fauve!</p>
<p>
</p>
<p>Agree. It will be a tough several years in terms of student and employee morale. I think the issue for top students will be if life will be more comfortable/happier/less stressful at another top school. Harvard would certainly give me pause right now.</p>
<p>And this:</p>
<p>
</p>
<p>Summers’ incredibly generous plan to subsidize the upper middle class could not have come at a worse time. It’s impossible to see how Harvard can continue to do this.</p>