Endowments at Duke University, Case Western Reserve University and Pomona College paid out more to help operate the schools than they earned in the most recent fiscal year, according to letters submitted to two U.S. congressional committees.
The gaps between spending and investment returns were revealed this month in documents sent to lawmakers. They are reviewing the responses from 56 of the wealthiest private colleges about their tax-exempt status as the cost of college exceeds inflation. At least a dozen schools reviewed by Bloomberg reported such shortfalls.
Endowments that posted lackluster returns in fiscal 2015 can maintain spending in at least the short-term. But if gains remain sluggish -- and 2016 is shaping up to be even gloomier than last year -- some schools may have to review how they operate with less income from investments.
“We can deal with volatility on the time scale of two or three years,” Lyle Roelofs, president of Berea College, said in an interview. “What we can't do is tolerate a decade of low investment returns.”
Berea, which doesn't charge tuition to the low-income students it serves, had a 0.1 percent return in fiscal 2015. Its endowment value fell 3.1 percent to $1.1 billion, as it spent more than it earned and didn't make up the difference with fundraising. The Berea, Kentucky-based school's investment return through March is down about 3 percent.
School endowments determine an annual payout rate based on a spending target, often determined by an average of three to five years. In years in which investment gains exceed the payout, the excess typically remains in the endowment.
Pomona's $2.1 billion fund earned 3.4 percent in the fiscal year through June. The value of the fund declined by 0.1 percent because it spent more than it took in, according to the school's letter to the Senate Finance and House Ways and Means committees.
“In a bad year, we just can't turn the endowment spending off,” David Oxtoby, president of Pomona, said in an interview. “We have to manage through good and bad years.”
Duke's investment return in fiscal 2015 wasn't enough to cover the $307 million it paid to help fund operations. The school's $7.3 billion endowment used its entire 4.4 percent investment gain and then made up the difference, spending 116 percent of its investment gain, according to Duke's response. The previous year the fund had almost $1 billion in net growth and spent $285 million for school operations.
“There is considerable variation in the percentage of investment gain that is expended from year to year because returns have fluctuated, and we have a smoothing formula to ensure some stability in the spending and budgeting,” said Michael Schoenfeld, a spokesman for Duke, based in Durham, North Carolina.
The average return for endowments was 2.4 percent in fiscal 2015, according to the National Association of College and University Business Officers and money manager Commonfund. For school endowments with more than $1 billion, the average return was higher, at 4.3 percent.
Some of the queried schools -- all had values of at least $1 billion as of June 30 -- are at their highest fund levels. Harvard University's fund, which is the richest at $36.4 billion, earned more than it provided the school.
The largest endowments with assets of more than $1 billion generally outperformed smaller ones. Yale University's $25.6 billion endowment had $2.6 billion in investment gains in fiscal 2015. Case Western Reserve, based in Cleveland, earned $50 million in its fund, valued at $1.8 billion in the fiscal year, according to its letter.
“Investment markets regularly vary, but our commitments are ongoing,” said Chris Sheridan, a spokeswoman for Case Western Reserve.
The fiscal year that ends in June is shaping up to be worse for returns. Fifteen endowments that provided Bloomberg with total returns for the second half of 2015 lost 3.6 percent on average. Washington University in St. Louis said in its response that its endowment, valued at $6.9 billion as of June 30, was down 6.7 percent as of Jan. 31.
Amherst College, whose $2.2 billion endowment contributes roughly half of its operating budget, said in its letter that preliminary investment returns through February are negative. While the school earned more than it spent in fiscal 2015, it recently authorized a modest increase in its endowment distribution rate for the 2016 budget, Carolyn “Biddy” Martin, the Amherst, Massachusetts-based school's president, wrote in the letter.
“Maintaining this delicate balance between endowment spending and preservation is one of the greatest management challenges,” Martin said.