Downturn may impact University spending

Editor's Note Appended

As universities around the country continue to see their endowments plunge in value in the turbulent economy, Princeton, Harvard and Columbia have issued statements this week touting prudent investing and spending policies, reassuring their constituents that their endowments will weather the worst economic downturn since the Great Depression.

“We were at a very prudent endowment spending policy on the back of a very, very good investment return,” President Tilghman said in an interview on Sunday. “So it’s put us in a position where we can survive this much better than most universities.”

Still, forecasts for university endowments remain gloomy, with financial research company Moody’s projecting a 30 percent average decrease in value by the end of the fiscal year. Though Princeton’s endowment posted a 5.6 percent return in the fiscal year that ended in June 2008, “unusually volatile” markets have caused the endowment to shrink since Princeton closed its books, Princeton University Investment Company (PRINCO) President Andrew Golden said in an interview last month. He declined to give an updated figure at that time.

As of June, Harvard, Yale, Princeton and Stanford had all seen their returns drop from the low 20-percents to single digits. Penn’s endowment returned -3.6 percent. Columbia has not reported its endowment return for the last fiscal year.

Though Tilghman has stressed that Princeton is well-equipped to adjust to the recent downturn, institutions that have long enjoyed high endowment returns may have to fundamentally shift how they finance their operations.

Rumors picked up by several finance blogs, including The New York Times’ Dealbook, suggest that Columbia’s endowment fund is illiquid, meaning that it cannot pay out enough to support current commitments.

Columbia officials did not respond to requests for comment.

University investment portfolios typically eschew heavy reliance on stocks and bonds and instead place funds in assets such as private equity, real estate and hedge funds, which are considered “illiquid” because they are not easily converted into cash. Both Princeton and Yale have about 70 percent of their endowments in such assets, according to a Barron’s article published this week. Harvard has 57 percent of its endowment in those categories.

As a result of heavily weighting illiquid assets, institutions can actually spend far less than the simple dollar figure of their endowments. Many hedge funds, for example, lock in investors’ money for years at a time, thus preventing quick withdrawal. Investments in private equity funds, which buy parts or all of companies, are also not easily liquidated. Likewise, selling a building or any sort of property overnight in a worsening credit environment is a tall order.

Based on its estimated asset allocation figures for Harvard, Yale and Princeton, Barron’s calculated that all three universities’ endowments could be down more than 25 percent since June as a result of the falling values of these illiquid assets. Some private equity funds, for example, are selling at about 50 percent of their investment values, as institutions try to unload some of their assets.

Just last week, Private Equity Online reported that the Harvard Management Company is trying to shed about $1.5 billion in private equity holdings.

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Scaling back

“We modeled into our model years like this,” she said. “As a consequence, we’re in a very good position to weather this storm ... with the one caveat that the length of the storm is going to really matter.”

Princeton’s resilience could change if the economy does not brighten up in the next two years. “If it’s not a 12-month, 18-month recession, but … a three-year depression, we will have to entertain changes in the way we do business,” Tilghman said.

Though Princeton has yet to announce any specific spending cuts, other Ivy League institutions have been forced to take action. Cornell has instituted a hiring freeze for non-faculty staff members until March and stopped all construction for 90 days. Brown will not hire new employees through January and will review its pending projects for postponement.

Even the wealthiest university in the United States is scaling back. On Monday, Harvard President Drew Faust wrote an open letter acknowledging that Harvard will be feeling the impact of the global economic crisis, which she said is “the most serious in decades.”

“While we can hope that markets will improve, we need to be prepared to absorb unprecedented endowment losses and plan for a period of greater financial constraint,” she said.

Specifically, Harvard is considering cutting parts of its capital program, including expansion efforts in Allston, a suburb of Boston in which Harvard wants to transform “the existing blighted and chaotic landscape into an entirely new urban, community and campus environment,” according to the website of Harvards' Allston Initiative.

Harvard will have to “look carefully at compensation costs,” which make up nearly half of its budget, she added.

Columbia, similarly, “will look carefully at every new or vacant position in the central administration before allowing it to be filled,” Columbia President Lee Bollinger said in an e-mail sent to the Columbia community Tuesday night. Columbia will also conduct a review of its capital projects, though those that are already underway or have been funded by private donation will continue as scheduled.

In outlining potential spending cuts, both Harvard and Columbia affirmed their commitment to maintaining financial aid.

Princeton’s Priorities Committee, which Provost Christopher Eisgruber ’83 heads, has yet to make recommendations on the budget to Tilghman, he said, noting that Princeton’s Board of Trustees has “the final authority about whether to accept the recommendations of the Priorities Committee.”

Nevertheless, cutting salaries and spending projects is under consideration.

At a meeting of the Council of the Princeton University Community (CPUC) on Monday, Eisgruber said that Princeton will also be re-examining its salary pool, which represents the money available to pay existing and potential new employees and to fund any pay increases.

“Salaries are likely to grow more slowly than in past years,” he said in an e-mail.

Though Eisgruber said at the CPUC meeting that he could not guarantee that graduate student stipends will rise to meet increased costs of living, he said on Tuesday that he “expect[s] salaries and [graduate student] stipends to increase this year; the question is by how much.”

University spokeswoman Cass Cliatt ’96 said in an e-mail that the University has “no plan at this point to alter our approach to staffing as a result of the current state of the economy.”

The capital investment plan may also shift to adjust to the economic downturn.

Princeton will “have to postpone some projects in its ten-year capital plan,” Eisgruber said, noting that “transfers to the renovation budget” constitutes one of the University’s biggest expenses.

University Vice President and Secretary Bob Durkee ’69 said in an interview earlier this month that as a result of the “the current financial climate … projects might be scaled back or deferred,” though University officials have not yet determined which construction projects will have to be delayed.

Undergraduate financial aid, however, is not on the table, Tilghman said. For more on the effects of the economy on Princeton’s financial aid, please see a related article in today’s paper.

From 2003-2007, when Princeton’s endowment returns ranged from 16.8 to 24.7 percent, construction projects were prolific, as the University built Whitman College, the Lewis Library and Sherrerd Hall, demolished and began rebuilding Butler College and announced a campus plan that includes a new Arts and Transit Neighborhood and a series of science buildings along Washington Road.

The $1.75 billon Aspire Capital Campaign, announced in 2007 as the funding mechanism for the University’s various capital projects, had reached $925 million as of late October. In an interview with The Daily Princetonian last month, University Vice President Brian McDonald ’83 said that there was “absolutely no plan to change the timeframe” of the capital campaign, which is slated to end in 2012.

“[The Aspire] campaign continues to go forward with enthusiasm,” Eisgruber said at Monday’s CPUC meeting. “Yes, there are headwinds there, there are challenges, but this is a marathon, not a sprint.”

Mandating spending

“The big issue here is the escalating cost of tuition that is rising way faster than inflation and wages,” Welch said in an interview with the ‘Prince’ last month, questioning the $54 billion dollar tax deduction that educational institutions receive each year. “My major goal is to call upon our university leaders to be aggressive in managing cost. We simply can’t sustain this burden on the taxpayer.”

With university endowments no longer generating the double-digit returns they did in recent years, congressional pressure to mandate a payout may be on the way out.

“We are now seeing times where I think it’s going to be difficult to achieve our long-term endowment goals,” Christopher McCrudden, former treasurer and University secretary for finance and current senior adviser to Tilghman, said in an interview last month.

Averaged over the last 10 years, the cost of attending Princeton has decreased by 25 percent in total because tuition increases — which have been kept to low single digits — have been “massively outstripped by increases in our financial aid budget,” Tilghman said last month.

“Given that statistic, I find it very difficult to understand how anyone could argue that we are not using our endowment to support our students,” she said.

Editor's Note

An earlier version of this article contained a statement about Boston's Allston neighborhood that, due to a missing attribution, implied that it was said by Harvard president Drew Faust. The statement actually came from a report on Harvard's Allston Initiative website.