A Look at Stanford’s Endowment Losses

In recent months, college campuses have been overrun by discussion of the current financial mess and how it will affect college life. Universities small and large have been hit, with endowment losses of at least 20% and cost-cutting measures including capital spending freezes, operating budget cuts, and layoffs. It is an issue that obviously strikes close to home—in the past week, Stanford University has issued $1 billion of debt to provide itself with additional liquidity.

But amidst the ever starker headlines of various university cut-backs, comparison of policies across schools has become nearly impossible. While Harvard lays off staff, the University of California at Berkeley raises tuition, Yale slashes capital spending, and Brandeis considers selling off its treasured art collection. But these stories of desperation tell us little about the relative financial states of these colleges and universities other than the obvious fact that all have been affected.

An initial cross-university measure is the percentage decrease of the endowment in fiscal year 2009 thus far. As mentioned, nearly all colleges and universities have experienced losses in their endowments of over 20% in the previous few months. Interestingly, colleges with the largest endowments have fared best. According to a report by the New York Times, the average endowment losses for universities with endowments larger than $1 billion was 20%, nearly 3% less than the average for schools of endowments of all sizes (from July 1 to November 30, 2008). So it appears that the massive endowment management operations of top-tier schools have been more successful than the more modest investment mechanisms of the rest.

But endowment losses do not tell the whole story because they do not occur in strict correlation with cuts in the operating budget. The principal purpose of the endowment is to provide a university with a financial asset that it can invest; a portion of investment profits then support the operating budget of a university. The amount of profits from investment supporting operations varies across schools, however, so a further important metric for depicting a school’s financial quandary is the school’s dependence on endowment investment revenue.

Although all endowments have been hit hard, the most significant distinctions across schools lie in the actual use of endowment money. For all of the hullabaloo about top-tier universities not spending enough of their endowment, the Princetons, Stanfords, and Yales of the world fund far more of their operations through their endowments than do schools with smaller endowments. Thus these top-tier universities tend to be the most dependent on their endowments’ revenue and may be the most affected by the current financial mess.

A recent article in the University of Chicago Magazine attempted just such a comparison, examining such schools as Stanford, Harvard, Dartmouth, Yale, Penn, Princeton, Northwestern, Chicago, Brown, and so on. Their results correspond nearly perfectly with our expectations – the schools with the four largest endowments, Harvard, Yale, Stanford, and Princeton, are four of the top five most endowment dependent schools in the nation.

Before we proceed with analysis of this data, we should note a minor flaw in the article’s data collection. As illustrated by the pie chart depicting the components of Stanford’s operating revenue (Figure 1), much of Stanford’s operating revenue originates from Stanford Hospital, which has little bearing on the funding of core academic programs. Thus the 26% reported by the UChicago Magazine (i.e. endowment investment profits provide 26% of Stanford’s operating revenue) is under-reporting the extent of Stanford’s reliance on its endowment. Provost Etchemendy confirmed this observation in a letter distributed to the Stanford community in early March regarding the school’s budget in stating, “Investment income supports about one-third of our campus operating costs.”

Upon further investigation, we found that a number of schools, such as Chicago, Harvard, Penn, and Yale, also receive significant portions of their operating revenue from university affiliated medical facilities. Thus the endowment reliance of many other universities, as reported by the UChicago Magazine article, is also understated (Figure 2 illustrates reliance based on UChicago’s data). In fact, core academic programs of Harvard are far more reliant on endowment revenue than the value of 35% suggests. According to Harvard’s 2008 Financial Report, over half of the Faculty of Arts and Sciences is paid for directly by endowment revenues.

Stanford’s financial position relative to its other top-tier cohorts appears stronger than one might expect—Stanford’s endowment dependence value of 26% is relatively low to the values of Princeton (45%), Yale (44%), and Harvard (35%). Coping strategies of these universities, however, have been consistent in various spending sectors for the most part. For example, all four have delayed or even cancelled capital expansion projects and have taken general cuts to academic operating budgets.

Further, these universities have assumed similar postures on hiring and layoff policies. Both Harvard and Yale have announced intentions to implement layoffs of various staff and freezes in salaries of all others. The move prompted fierce reactions on Harvard’s campus, as students unveiled a banner at a protest which read “Greed is the new Crimson,” mocking the newly coined motto “Green is the new Crimson.” Stanford, too, will soon confront similar layoffs, as Etchemendy noted: “We hope that a salary freeze might help to preserve some jobs, although more layoffs are unavoidable.

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