Value of College Endowments Decline Sharply
With investments tanking, U.S. college and university endowments lost an average of 24% in the second half of 2008, the biggest loss in more than three decades. By comparison, endowments previously experienced their worse year in 1974, when the average loss was 11%.
The financial pain is being felt by institutions large and small. According to a recent report by the Commonfund Institute, institutions with endowments under $10 million have been hardest hit, with their funds losing more than 30%. Even endowments of more than $1 billion lost an average of 20% in 2008.
Poor returns on alternative investments were a key factor behind the losses. As of Dec. 31, 2008, approximately 51% of endowment assets were allocated to alternative investments, including derivatives - an increase of 46% from six months earlier, according to the Commonfund survey.
A number of schools are now coming forth with claims they were recommended investments unsuitable for endowments or misled about the stability of certain financial products.
In addition to tuition and fees, income from endowments serves as a vital source of revenue for postsecondary institutions. The recent financial free fall has forced many colleges and universities across the country to delay capital improvement projects, freeze salaries and cut back on scholarships and academic programs.
In March, the University of Chicago announced plans not only to reduce its operating budgets for the current year but also in 2010. In addition, the university halted $30 million in building projects after its endowment fell 30%.
“It’s really a firestorm of bad news,” said John Griswold, executive director of the Commonfund Institute, in a March 5 story by Bloomberg. “Those kinds of declines in such a short time frame are very upsetting in a number of ways from the standpoint of having to test the impact on operating budgets.”
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