NEW YORK - What the financial markets have taken away from colleges and university endowments over the last two years may have to be made up through higher tuition or cuts in operating budgets, according to a new study by Standard & Poor's.
With the capital markets reporting a third consecutive year of negative performance in 2002, college and universities may find 2003 "a challenging year," according to an S&P report titled "Weak Equity Markets Hurt U.S. Higher Education Endowments." The report was based on a survey of the more than 700 private and public colleges and universities rated by S&P as well as data from the National Association of College and University Business Officers, Washington.
"Whatever growth occurred in market value in fiscal 2002 was largely the result of new gifts (to the endowment), which offset poor investment returns," according to the S&P report. Only an institution invested largely in fixed-income assets was likely to see any increase, it said, noting only a few institutions have more than 25% of their portfolios in fixed-income investments.
Some suffered
The move to diversify college and university endowments has only happened in the past 30 years or so, and those that got started late in the game "have suffered," said S&P analyst Joshua Stern, who helped conduct the analysis. Before the early 1970s, most foundations and endowments were heavily weighted toward fixed income.
According to the most recent data from Commonfund Institute, the research arm of Commonfund, Wilton, Conn., the typical endowment has 32% of its assets in domestic equities, 21% in bonds, 13% in international equities and 32% in alternative investments as of June 30.
"Diversification generally has helped them as long as they started slowly and have been diversified for a longer period of time," said Mr. Stern. However, he said, "there are many which have been very cautious and heavily weighted in fixed income and started the move to diversification when the market was peaking (in 1999 and 2000). They found it harder and harder as other endowments grew at a greater rate and got in the game later and have suffered as a result." He declined to identify any of these funds.
Just as in the pension fund area, the end of the good times for college and university endowment funds adds up to belt tightening, spending cuts and the need for additional contributions.
The past two years of poor investment performance "have concerned colleges and universities that have become dependent on endowment spending as a key source of operating support," according to the S&P study.
Mr. Stern said that while the financial status of colleges and universities "is more negative than in the past," the financial difficulties of higher education and their endowments "is less than that on the state and municipal level."
Increasingly dependent
The problem for many colleges and universities is that they have become increasingly dependent on contributions to their operating budgets from their endowments. Now that the markets and the economy aren't cooperating like they did in the 1990s, operating budgets are likely to suffer as well, said Mr. Stern. Many schools have started raising tuition to make up some of the shortfall. According to the New York-based College Board, tuition costs increased across the board in 2002 by an average of 5.8% at private schools and 9.6% at public institutions.
However, said Mr. Stern, tuition hikes might be counterproductive in the long term. "Just as state and local governments can raise taxes, you can only raise taxes so much. You can only raise tuition so much; you can't always look to tuition increases."
"Because colleges and universities follow a three-year moving average for their endowment spending policies, the amount available for operating support could decline in fiscal 2003 if markets do not begin to move upward," the report said.
For many school endowment funds, 2003 could prove difficult if endowment contributions to operating budgets are held steady at the usual 5% level, said Mr. Stern. "They will have to decide if they are going to keep the same dollar amount. If they contribute 5%, it won't give the same amount needed in the past (because of lower investment returns) and may have to increase spending to, say, 5.5%." Increasing the spending amount appears to be the simplest solution, he said, but working off a lower asset base could be the most problematical in the long term.
