Penn State endowment to hold line on material risk

Donations might fall short term due to the sex-abuse scandal

Pennsylvania State University's $1.83 billion endowment is likely to weather the school's coaching scandal with no permanent scarring, endowment experts believe.

On Nov. 21, Moody's Investors Service warned of “material risks” for the school, including a chill on admissions and reduced state and federal funding to support the $4.5 billion operations budget.

There is no question that Penn State as a whole will experience what Moody's experts call “reputational damage and elevated financial risk ... stemming from allegations of sexual abuse by an assistant football coach,” but the ratings agency's report also noted that the endowment enjoyed $235 million in total private giving this year, “among the highest of all US public universities.”

When asked how such a scandal could affect an endowment, John Griswold, executive director of Commonfund, Wilton, Conn., said: “There might be a temporary lull (in giving), but it tends to come back.

“Long before it would affect endowments, it would be felt in annual giving and pledges. Endowment donations usually come from the most loyal and sophisticated donors. Penn State is a big university with tens of thousands of wealthy alumni,” Mr. Griswold said.

“The people who give to these institutions are passionate about the institution,” agreed Rae Goldsmith, vice president of the Council for Advancement and Support of Education, a Washington-based organization for college development and marketing professionals. In a campus crisis, “we typically see giving drop significantly, particularly in the program that is the focus of the crisis, but return quickly. When they see leadership addressing the problems, they will start giving again.”

In the meantime, the impact on the endowment “will be minimal,” Ms. Goldsmith said, “particularly when you think about the fact that the returns that they rely on are mostly based on a three-year average. That helps stabilize and allow for planning.”

David Branigan, executive director of Penn State's Office of Investment Management, University Park, Pa., declined to comment on the potential impact the football scandal would have on endowment investment decisions. The fund did buy some breathing room a year ago by increasing daily liquidity to 51% from 50% and decreased illiquid alternative assets to 24% from 26% to take advantage of improving equity markets, according to its fiscal 2011 review.

In the report, Penn State endowment officials credited public equity performance for much of the fund's 23% return for fiscal 2011. The endowment's asset allocation as of June 30 was 37% U.S. equity, 14% foreign equity, 14% in private equity, 13% bonds, 8% equity hedge funds, 8% real assets, 3% global inflation-protected securities, 2% real estate investment trusts and 1% in fixed-income hedge funds.

Mr. Branigan said in a Sept. 9 release that the endowment's value has increased 9.6% since 2007. Average annual net returns of 6.5% over 10 years and 8.8% over 20 years through June 30 “have allowed the endowment to maintain inflation-adjusted spending while achieving long-term intergenerational equity,” according to the release.

Good balance

The Penn State endowment has “a very good balance through maintaining liquidity, as well as their investing,” Diane Viacava, New York-based public finance vice president and senior credit officer at Moody's, said in a telephone interview. The endowment also benefits from “a very loyal base. Even without a formal campaign, they gather nearly $200 million per year.”

A crisis can boost donations as supporters seek immediate ways to show their support and help the campus heal. A group of Penn State alumni, desperate to balance the scandal by focusing on the victims, quickly mobilized social media to collect donations for the Rape Abuse and Incest National Network that brought in $420,000 in less than one week. “Penn State has an incredible reputation for raising funds,” said Katherine Hull, RAINN spokeswoman.

Following the horrific 2007 shooting on the campus of Virginia Polytechnic Institute and State University that claimed 32 lives, “the Hokie nation opened their wallets,” said John Cusimano, director of investments and debt management for the $600 million Virginia Tech Foundation, Blacksburg. Within days, people donated nearly $10 million, most of which the school gave to victims and their families through the new Hokie Spirit Memorial Fund.

All university endowments should be prepared before a crisis hits, said Heather Myers, managing director of non-profits, Americas institutional, at Russell Investments in New York. “The schools that have a game plan in place are better able to deal with it. You need to be able to think about ways that a crisis can come at you and then think through the ramifications” if funding and investment strategies need to be changed.

“It is important to have investment guidelines drafted so that the endowment can establish a special fund for those most impacted. The 2008 financial crisis showed endowments how critical it is to have liquidity and cash management guidelines in place,” said Ms. Myers.

Penn State already reached nearly three-fourths of its current $2 billion capital campaign goal and this year hit a new high of $235 million in total private giving. Now, development officials are trying to keep donors' eyes on the long term. As Peter Tombros, campaign chair and executive in residence at the school's Eberly College of Science BS/MBA program, wrote in a Nov. 9 letter to supporters: “This is not a moment to reconsider our commitment to the university.”

Penn State's loyal donors should help the endowment weather the storm, said John C. Nelson, managing director of Moody's public finance group in New York. “Until we see that the limits to the risk become known, we expect that (giving) in the initial phase to be negative, but eventually, you have a rallying effect.”

Mr. Nelson and other endowment experts credited Penn State's board of trustees and others for taking decisive action as well as keeping in close touch with donors.

“It's a very, very highly rated institution, and it's unusual for us to change a rating by more than a notch. Still, this is a unique event,” said Mr. Nelson, “and we'll be watching.”