<p>On the contrary, until the recent market losses Harvard was accumulating, not spending, its current income to a nearly obscene extent. In the most recent fiscal year for which I really looked at the numbers, the $1 billion Harvard’s endowment contributed toward university operations represented only about 25% if its endowment increase from investment income and gains that year (before you even start counting the 500 million of new contributions it got). It represented less than 3% of endowment value at the time – an expenditure ratio which comes pretty close to being sustainable in perpetuity. Taking into account the losses, the same $1 billion would represent 4% of current endowment value. It just so happens that 4% is the constant ratio many trust statutes permit trustees to use to allocate investment gains between principal and income. In other words, if Harvard’s trustees continued to pay $1 billion/year out of its endowment towards operations, arguably that would be prudent per se as a matter of law, and no one could question their judgment. If Harvard were a private foundation (like Gates), federal tax law would require it to distribute 5% of value per year (calculated on a three-year moving average).</p>
<p>Of course, liquidity issues and siloing of endowment accounts may make it difficult to continue to contribute $1 billion where it should go. I’m sure some cutbacks may be necessary.</p>
<p>The letter from Duke’s President outlines specific, concrete steps the University is taking to reduce its losses. It would be fiscally irresponsible to take on a major renovation project unless it were fully funded. I suspect no major university is immune to the historic economic downturn we are experiencing.</p>
<p>These issues of hiring and pay freezes, early retirement incentives, etc have been common talk since early spring (minimally). Middlebury’s interview with Fortune magazine was one of the first to “come clean” with it’s financial liabilities and limitations. However, again, what seems to be a matter of concern with regards to a school like Harvard is just how much they use their endowment for operating on a day to day basis. So… what all will they cut, eliminate, do without before going for big ticket returns like bringing financial aid back in line with other schools? I am not saying this is what they will or what they should do, but if other schools in better situations in terms of cash flow and balanced budgets are cutting 20 million dollars from their budgets and increasing enrollment to bring in more revenue. Harvard has a long road to travel if they have yet to even use the word, “cut” preferring realignment etc. You’d think they thought those who attend and work there are idiots to not know what needs to happen. Call a spade a spade and start shoveling.</p>
<p>And to “the contrary”</p>
<p>I certainly don’t have Harvard’s books in front of me. Part of the article referenced in the OP didn’t have that either, but according to it, they built buildings and acquired land on credit… a lot of it. So… much like madoff’s victims turned in their mortgages to invest the principal for higher returns, the same held true here in a way. They THOUGHT they were earning so much (and they were)… until the market collapsed. Now they have all that debt and limited cash flow to pay it. It’s not all about endowment performance. It’s about what the left hand was doing as well.</p>
<p>Michael Jackson is a good example of lots of book wealth and very little cash flow. Makes living day to day a little tough. Many assets are hard to eat and slow to turn into cash.</p>
<p>Maybe these schools could learn a thing or two from University of Michigan.</p>
<p>The campus is still continuing its major construction projects (larger stadium, new field, new dorm/hall, renovated parking structures, new law academic building, etc.).</p>
<p>Not sure how the state schools are doing as a whole, but some are in worse shape than others - this is for certain. But… their budgets are tied to the state level of funding. And they have to be a lot more accountable in their budgets as well. For better and worse, there are checks and balances here that aren’t part of a private institution like Harvard.</p>
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<p>This is my point exactly, and what I took as the main theme of the article in VF. The thing that offends me most, however, is not that the problem exists but that they seem to still have their heads in the sand regarding the future and how they are going to traverse the waters. Stalled building projects (which by the way they funded through debt without having donor support - and as their article states it’s a heck of a lot harder to fund projects already complete) are the tip of things. Overflowing garbage cans or unwashed windows is one thing, but the biggest issue that I can see is a growing lack of trust in the administration (seen as semi-lame ducks in a defensive posture) and the secrecy behind the Harvard fund. There are all huge red flags still blowing in the breeze to me. Certainly, Harvard isn’t going anywhere but the depths of their issues are fairly extreme for a school who aint really talking about it. Although they apparently have a new loan program for international students, which should make them a few bucks. But in their entire front news pages, nothing is mentioned. Nada.</p>
<p>Let’s talk about reality. The need for cash is getting worse by the day. They created the current policy in very different times and it’s no longer realistic. If this were a public company, the roll back would have already happened. </p>
<p>Harvard is in this mess because they were not running it like the business it is. I think they’ve learned a lesson and some folks realistic about what’s necessary will gain power.</p>
<p>The question in my mind is whether there will be an announcement or just a quiet change within admissions.</p>
<p>To take the Michael Jackson analogy one step further, we know what some of his major assets are -Neverland, Sony Catalogue. Point is those do have a value and can be sold. This whole notion of assets being illiquid I don’t buy. Every asset Harvard’s endowment has is liquid, has a market, and can be sold. The problem is they aren’t worth much of anything because there isn’t any positive cash flow that those assets spin off. Actually I might argue that MJ was a better investor than HMC because the Sony Catalogue spins off a ton of cash flow and is worth a ton of money.</p>
<p>"Maybe these schools could learn a thing or two from University of Michigan.</p>
<p>The campus is still continuing its major construction projects (larger stadium, new field, new dorm/hall, renovated parking structures, new law academic building, etc.).</p>
<p>Yes, U-M is a public university."</p>
<p>In my view UM is taking a huge gamble undertaking all these projects. Most of them are being financed by UM issued bonds which will have to be repaid with interest out of UM cash flow. The state is not helping significanlty with most of these projects. Going on a massive spending spree might be fun but they are also betting on better days ahead. UM’s endowment has been as negatively impacted as Harvard and the rest and donations are down significantly. </p>
<p>How true. The University of Michigan, for example, appears to be in quite good shape. The Regents recently approved a FY 2010 budget that incorporates a 4% reduction in legislative appropriations, which currently represent a very modest 7% of the University’s overall budget. So the “hit” from reductions in state aid amounts to a whopping 28/100ths of 1% of the University’s total budget. But that amount is easily made up by a $9 million (5%) increase in “indirect cost recovery” (the amount the university’s general fund takes out of externally-funded research grants), a 6% tuition increase, a projected $8 million operating surplus generated by the Athletic Department (transferred to the General Fund), a $33 million operating surplus generated by the university’s hospital and health systems, and the loss of 55 (non-faculty) staff positions to attrition. Academic unit expenditures will increase by $23 million (2.5%), and financial aid will increase by about 10%. The University calculates that the increased financial aid, coupled with the new $2500 federal tax credit for which most families are eligible, will more than offset the tuition increase for most students.</p>
<p>The university notes that larger reductions in state aid may be forthcoming in 2011. But further reductions in state aid would probably necessitate further increases in in-state tuition. One way to look at it: the university currently discounts in-state tuition to the tune of $22,000/year from the rate it charges OOS students. That $22K/student/year subsidy is worth $374 million per year—substantially more than the $316 million the university receives from the state. In short, the university is heavily subsidizing Michigan residents—not vice versa, as the taxpayer contribution represents only a fraction of the tuition discount enjoyed by Michigan residents. If the state continues to cut its subsidy, the only sensible response on the university’s part would be to further increase the percentage of OOS students, or to continue to raise in-state tuition to erase the gap between the tuition discount and the level of state funding, or both. This has led some people in the legislature to begin to examine the feasibility of fully privatizing the university—a move that, if done in stages, might actually benefit the university in the long run. It might not be in the state’s interest, because right now the state is getting a heck of a bargain. But because the university is now subsidizing the state—reversing the usual order of things—privatization might be attractive from the university’s point of view.</p>
<p>Yes, and no. There is very little market for stakes in private equity funds the size of Harvard’s holdings. Basically, the market is other endowment and pension funds and the potential buyers all have their own burdens to bear.</p>
<p>Harvard’s need for cash late last year was so extreme that they were forced to sell off some very good positions, simply because the good stuff was the only thing that could be turned into cash. Swarthmore’s financial update had this cryptic little comment:</p>
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<p>The head of Swarthmore’s investment committee, Samuel L. Hayes III, is the long-time guru (now emeritus) of investment banking at the Harvard Business School. I’m sure that he is very well connected to the Harvard investment corporation and I suspect that Swarthmore (which has solid liquidity and available cash) was a quiet buyer of some firesale Harvard assets.</p>
<p>One of the real issues to consider here is the degree to which colleges are short of cash to cover their cash call commitments to private equity funds. This is forcing some very well-heeled schools to issue taxable bond debt to raise cash for operating expenses, including Harvard, Yale, Princeton, Columbia, Duke, Stanford and, in the LAC word, Amherst. Investment managers and university Presidents really should be getting fired for such comprehensive mismanagement of liquidity needs. It is unconsionable for schools with those kinds of per student endowments to be borrowing operating cash to meet payroll.</p>
<p>I don’t see Swat immune to the crisis at all. </p>
<p>I really doubt they were a big buyer of anything. The school is more liquid than most, that’s true. But the school is buried and it’s investment assumptions are way off the mark.</p>
<p>“Investment managers and university Presidents really should be getting fired for such comprehensive mismanagement of liquidity needs. It is unconsionable for schools with those kinds of per student endowments to be borrowing operating cash to meet payroll.”</p>
<p>I agree with this.</p>
<p>I don’t think things are great at Michigan either.</p>
<p>I would add the Board of Trustees to the list of firees. If nothing else they are the financial trustees of the University. My guess is none of them have a clue what is inside these private investments. </p>
<p>I find it interesting that Swartmore does have more conservative guidelines than the Ivies yet it is still down 30%.</p>
<p>You probably don’t follow it as closely as I do. Swarthmore was as well positioned as any school I’ve seen. They saw the credit freeze coming and converted their only remaining variable rate bond to fixed rate last spring. They also began moving pretty aggressively into t-bills and bonds. So, when the market crashed, they had no variable rate debt, a relatively manageable $180 million in long-term fixed rate bond debt, 16% of the endowment in cash and bonds, 63% of the endowment in immediately liquid stocks and bonds, only 18% in private equity, only 4% in real estate, and under 2% in natural resources. They had $235 million in future cash call commitments, easily covered by the $900 million in liquid endowment assets at the start of the year, compared to $500 million in cash call commitments at Amherst – more than the liquid investments in Amherst’s endowment. Plus, Swarthmore had completed all the building projects currently planned, had no defered maintenance, had fully implemented and staffed the new Arabic program (three years of instruction), had fully topped off reserve accounts, and was running historically low endowment spending levels, just 3.7% and 4.1% in the prior two years.</p>
<p>The 30% loss figure they were using for financial planning in December already included projected write-downs of their private equity holdings. They have pared next year’s operating budget by $7 million compared to this year with a salary freeze, increasing enrollment by 16 students (they have excess dorm space with the completion of two new dorms last year), and some minor cuts. The bulk of the savings comes from deferred maintenance for the next several years and spending down of some cash reserve accounts that were filled to the brim during the flush times. Loan-free financial aid continues, unchanged. They hired new professors in several departments. The only faculty cut was not filling an open tenure-track position in the German department where they had an excess with the recent massive shift in language studies to Chinese and Arabic. New tenure track positions were filled in several departments, including religion (jewish studies) and history (contemporary middle eastern studies).</p>
<p>The current budget calls for a reduction in endowment spending from $57 million in 2008 to $47 million next year. Knock on wood, this will be a spending rate of under 5% of the endowment, which would be very impressive indeed. A lot of comparable schools have been looking at spending rates in the 6% to 7% range, which is totally unsustainable.</p>
<p>The budget document, including $12 million in cuts and revenue increases relative to the planning model for next year is here:</p>
<p>I’m not saying Michigan’s endowment is in great shape—though my sense is they’re a pretty conservative institution and didn’t go as far out on a limb in their investment strategies as Harvard and some others, but I don’t know that for certain. Crucially, however, they’re simply far less dependent on endowment payout than many of the private schools. Payout from endowment contributes, I believe, something like 7% of their overall operating budget. They’re also less vulnerable to big swings in asset values because they use a very conservative 7-year trailing average to calculate payout from endowment. That really flattened out the short-term budget impact of the big run-up in endowment values they saw in the 2005-08 period (due partly to high returns on investments, and partly to major fund-raising in that period). By the same token, it now flattens out the negative budget impact of the recent sharp drop in endowment value. It also gives them considerably more time for markets to recover before they’ll start to feel any kind of real pinch in endowment payout. </p>
<p>So near-term, at least, their budget seems to be in pretty good shape, anchored by nearly $1 billion/yr in outside research grants, nearly $1 billion/yr in tuition revenue, and a $1.7 billion/yr health and hospitals system. In that context, the loss of $13 million in state aid and a 20% or 25% reduction in endowment value that will probably translate to little or no net change in endowment payout in 2009-2010 (because the recent down year essentially just replaces a year from before the big run-up in endowment asset values for purposes of calculating the 7-year average) seem like pretty small potatoes.</p>
<p>The difference is that when Swarthmore started talking about the 30% figure last December, they were already factoring in the anticipated write-downs in the value of their private equity and other non-liquid assets. This was confirmed by the VP of Finance in comments she made in published articles. Now, whether they were factoring sufficient write-downs, who knows? But, many colleges have simply been throwing around estimates that included no write-downs for the private equity. That’s why I don’t even bother to look at the endowment estimates schools have been throwing around unless they specificy the parameters of the estimates.</p>
<p>As it turns out, they’ve all been bailed out by the market recovery and have been able to back off the really dire worst-case scenario modelling. </p>
<p>The big questions are: what are the true endowment levels at June 30th? What level of financial aid did it take to enroll a student body for next year? Early signs are the financial aid increases, at least at Swarthmore, were not as large as expected. They only saw a 5% increase in the number of accepted (not enrolled) freshmen requesting financial aid. I think they were braced for worse news. Similarly, there doesn’t appear to be a massive increase in aid applications from returning students.</p>
<p>re post 45- reducing financial aid
I wouldn’t be the slightest bit shocked if they do. The economic reality is they can’t afford to continue to subsidize students to the extent that they thought they could. If you read the whole VF article, one startling fact is the amount they are paying in interest each year on the they bonds they were forced to sell last Dec.</p>
<p>“In December, the university sold $2.5 billion worth of bonds, increasing its total debt to just over $6 billion. Servicing that debt alone will cost Harvard an average of $517 million a year through 2038, according to Standard & Poor’s.”
Unreal! a half a billion dollars EACH YEAR for the next 30 years! That’s going to come out of someone’s budget.</p>
<p>While I think Research funding will be solid, I think the margins on hospitals will under great pressure with lower public reimbursement rates and inurance companies really turning up the heat. The UM hospitals will at best be basically churning cash with little net profit to show. Just pray it does not become a drag and start losing $$$. With the Michigan economy there will not be much patient growth or growth in the actual payments for services. Many uiniversity hospitals have been spunoff into separate non-profit companies for that reason.</p>
<p>Interesteddad, I don’t follow Swat as close as you do :), but from reading your posts I was shocked Swat’s endowment was down over 30% at one time and the school lost $400 million.
The school’s endowment is back to where it was in 2004.</p>
<p>It’s true that the school is in better shape than Amherst. Amherst has a lot of its endowment tied up in illiquid assets.</p>
<p>But Swat does get 50% of its operating expenses from its endowment.</p>
<p>Bclintonk, I believe that Michigan also lost 30% of its endowment. I’m glad to see that Michigan only uses its endowment for a small sliver of its operating expenses, because the school lost $1.5 to $2 billion.</p>