University Business - March 2008 - (Page 67)

ENDOWMENT MANAGEMENT Five Percent ofrestrictions areLittle IstheEven Less Very popular topics in press. Endowment spending decisions and By Ann C. Logue A L K A BOU T NO G OOD deed going unpunished. For the fiscal year ending in June 2007, the average university endowment earned 16.9 percent on its investments, according to the latest Benchmark Study of Educational Endowments by the Commonfund Foundation. This handily beat market indexes, in part due to the aggressive use of alternative investments. The high return is also an indication of the increasing sophistication of university investment offices. This performance is great, but it may not be sustainable. The financial markets ended 2007 in a muddle, with the Standard & Poor’s 500 index up just 5.49 percent and the U.S. dollar down 9.52 percent T ing relative to performance, with Harvard as exhibit A. After all, according to the 2007 NACUBO Endowment Study, Harvard had a $34.6 billion endowment after growing 19.8 percent from 2006. (As always, Harvard gathers accolades in every field but football.) It’s a fine university, but it’s atypical. The average endowment can’t spend anywhere near what Harvard does, nor can endowment managers make up the difference with performance. On the heels of strong performance and Grassley’s hearings, or maybe just for the heck of it, Harvard announced an overhaul of financial aid policies to eliminate the cost to families with an income below $60,000; families with incomes between $60,000 tion fee, let alone tuition, they consider those schools to be the Platonic form of higher education. When they see deeply discounted tuition coming out of the Ivy League, their impulse is to assume all other colleges should follow suit. They reason that if Harvard, the ideal college, offers generous financial aid to families with an income of up to $180,000, any college aspiring to the ideal (which is pretty much all of them) should cough up some dough. According to the NACUBO 2005 Tuition Discounting Survey, 83.5 percent of all college freshmen already receive some sort of merit-based or need-based tuition discount, with the average discount being 38.6 percent. RIPPLE EFFECT ON ENDOWMENTS “It’s not clear yet what effect this will have” on endowment management, says John Griswold, executive director of the Commonfund Foundation. “There may be pressure on a lot of colleges and universities that are trying to become more selective to increase their financial aid. But this has been true for many years.” He says there’s a perception that if colleges simply spent more from their endowments, tuition would become cheaper. However, few colleges have large enough endowments to make this happen. For instance, 5 percent of Harvard’s $34.6 billion endowment is $1.7 billion, the same as the entire endowment at Grinnell College (Iowa), according to NACUBO data. In turn, 5 percent of the Grinnell College endowment is $85 million, on par with There’s a perception that if colleges simply spent more from their endowments, tuition would become cheaper. relative to the euro. At press time, the stock market had already given up 2007’s gains. Commonfund’s study also noted that the average higher ed institution spent 4.4 percent of its endowment assets in the 2007 fiscal year. Legally, endowment management teams don’t have to spend anything. By contrast, the IRS requires charitable foundations to spend 5 percent of assets each year. IVY LEAGUE AID In September 2007, Senator Charles Grassley (R-Iowa) held hearings on hedge fund transparency that morphed into a criticism of university endowment spendand $180,000 will pay a sliding fee that is not more than 10 percent of income. The dollar value of Harvard’s announcement is roughly $200 million, an amount larger than the endowments of 259 of the 785 colleges included in the study. But like most colleges, Harvard already provides high levels of financial aid, so the incremental cost should be closer to $20 million to $30 million. Harvard competes directly with very few other institutions; a few of those competitors, including Dartmouth, Stanford, and Yale, followed up with similar announcements. Although most American families will never pay a Harvard or Yale applica- universitybusiness.com March 2008 | 67 http://universitybusiness.com

Table of Contents for the Digital Edition of University Business - March 2008

University Business - March 2008
Contents
College Index
Company Index
Advisory Board
Editor's Note
Stats Watch
Sense of Place
Viewpoint
EduComm Insert
Financial Aid
Money Matters
Human Resources
Higher One Insert
Community College
Cadets on Campus
Keeping an Eye on the Network
Sizing Up Second Life
Endowment Management
What's New
Calendar of Events
End Note

University Business - March 2008