Tuesday, December 9, 2008

The Financial Crisis & Higher Education

The recent unraveling of investment portfolios has profoundly affected endowments at institutions of higher education in the U.S. Clair Cain Miller, Geraldine Fabrikant and Stephanie Strom reported in their article for The New York Times on Nov. 25 entitled "Beyond the Ivied Halls, Endowments Suffer" about the consequences of the current economic crisis on the financial situation of well-endowed colleges and universities. The impact of the stock market collapse was portrayed as serious, but the portfolio managers at the universities were confident that they were able to contain the damage.

Today, Jason Szep reports in his post on Reuters entitled "Harvard freezes salaries as recession bites" that Harvard University projects a 30-percent loss in the value of its endowment in the current fiscal year. As immediate response to the ensuing shortfall in funding, the flagship of the Ivy League will institute a freeze on hiring and salaries. The news are not happy, but the disclosure bears at least a frankness that faculty, students and parents have a right to expect.

It is only hoped that other institutions follow suit in laying their financial situation open with such briskness. In order to build the necessary trust needed in these uncertain times, all parties involved must understand precisely where their schools stand financially. No actual figures and vague promises to live frugally from now on shall be counterproductive!


  • Yale University has followed suit. Read more in Geraldine Fabrikant's post for The New York Times entitled "Yale's Endowment Drops 13.4%". Sic transit gloria mundi (12/17/08)!
  • On Jan. 26, Katie Zezima reports in her post for The New York Times entitled "Data Show College Endowments Loss Worst Drop Since '70s" that, according to assessments by the Commonfund Institute and the National Association of College and University Business Officers, the endowments of private not-for-profit colleges and universities lost on average 22 percent in value between July 1 and Nov. 30, 2008, and those of public institutions lost 25 percent; the steepest declines in more than 30 years. Cornell University lost 27 percent in the second half of 2008, and Dartmouth College reports a loss of 18 percent (01/26/09).
  • In another article posted Jan. 26 with the title ''Brandeis Says It Plans to Sell Art Collection to Raise Cash",  The New York Times reports that Brandeis University decided to sell pieces from its prestigious modern art collection to cover its budget shortfall. National Public Radio's All Things Considered dedicated an interview by Robert Siegel entitled "Art Collector Irked by Brandeis Museum Closing" to this decision on Jan. 27 (01/27/09).
  • Jennifer Brooks reports in her article entitled "Economy batters Vanderbilt University's assets" for The Tennessean today that Vanderbilt University lost roughly 29 percent in the value of its investment portfolio in the past six months, almost could not make payroll last September, and instituted a hiring and building freeze (01/29/09)!
  • In stark contrast to financial performance, private research universities paid compensation packages to its top executive officers in excess of 1 million dollars last year. According to Tamar Lewin's report in The New York Times entitled "Many Specialists at Private Universities Earn More than Presidents" on recent findings of The Chronicle of Higher Education, Vanderbilt University leads the list with Vice Chancellor of Health Affairs (~$2.8M), Chancellor (~$1.0M), and Chief Financial Officer (~$1.1M)(02/23/09).
  • According to Kate Zernike's report in the New York Times today entitled "Gifts to Colleges Fall after Record Highs", Yale University announced yesterday that the institution may have to lay off employees (02/25/09).
  • According to a post by Martha Graybow on Reuters yesterday entitled "Pension, college funds mull damage from WG Trading fraud", Carnegie Mellon University and the University of Pittsburgh invested with fraudulent fund managers (02/26/09).
  • Reuters Health and Science Editor Maggie Fox reported in her post today entitled "U.S. hospital profits fall to zero: Thomson Reuters" that according to a recent Thomson Reuters Healthcare survey of more than 400 for-profit and not-for-profit U.S. hospitals the examined institutions were not able to generate surplus revenue for new infrastructure expenditures already in the third quarter of 2008. Because of losses in investment portfolio and slowed medical insurance reimbursements, half of the hospitals were operating at loss. The study was discussed in Janet Babin's segment with the title "Hospitals ailing with financial stress" on National Public Radio's Marketplace on the same day (03/02/09).
  • According to a broadcast on Nashville National Public Radio (WPLN) today entitled "Zeppos Commits to Cut Pay", the Chancellor of Vanderbilt University committed to a voluntary pay cut this year (03/12/09).
  • Today The Tennessean's Getahn Ward reports in his post entitled "Vanderbilt University Medical Center will get new boss in June" that Vanderbilt University's Vice Chancellor of Health Affairs Dr. Harry Jacobson will retire Jun 1. Last year Dr. Jacobson was among the top ten highest paid chief academic officers in the country. He shared this distinction with the new Chancellor of Vanderbilt University, Nikolas Zeppos, and the Chief Financial Officer of Vanderbilt University, Lauren Brisky, who retired earlier this year. The Chancellor is the only top earner of last year left at Vanderbilt University. A small version of G.M.'s demise may perhaps be in the making (03/30/09)!
  • A.G. Sulzberger published a post in The New York Times today entitled "Weill Gives Cornell $170 Million, Well Ahead of Schedule", reporting that Cornell University felt pressed to ask its greatest financial supporter and alumni Sanford I. Weill for the advanced release of a planned donation of 170 million dollars to be able to meet its obligations (04/06/09).
  • The financial crisis affects the portfolios of private philanthropic foundations as much as those of private academic institutions. Stephanie Strom reports in her post for The New York Times today entitled "New Leader Overhauls Ford Foundation", that the second-largest philanthropy in the country, the Ford Foundation, lost a third of its portfolio value and is under new leadership (04/14/09).
  • Abby Goodnough describes the ubiquitous consequences of stalled growth at Harvard University for its community in this illustrative The New York Times post published May 8, 2009, with the title "Slump Revives Town-Gown Divide Across U.S." (05/12/09).
  • Tamar Lewin reported in her post on The New York Times yesterday entitled "Brandeis Halts Retirement Payments" that Brandeis University is joining a growing number of academic institutions that see the need to temporarily suspend their contributions to employee retirement plans in order to meet immediate budget shortfalls (05/22/09).
  • Erin Kutz reported in her post on Reuters yesterday entitled "Harvard cuts 275 jobs, cites drop in endowment" that Harvard University will cut 275 jobs because of budget shortfalls. Another 40 are offered furloughs (06/24/09).
  • I have not written about public universities to date. The financial crisis affects public universities for different reasons than private institutions of higher education. Private colleges and universities spent extravagantly on ambitious expansion in past years of enormous endowment growth. These institutions are having difficulty of meeting their financial obligations now that the value of their portfolios fell by 30 percent. By contrast, many public university systems have been chronically underfunded in the past and are suffering even more now because of the gaping shortfalls in state revenue owing to a faltering tax base. The University of California is a case in point. Tamar Lewin reports in her post on The New York Times today entitled "University of California Makes Cuts After Reduction in State Financing" that the system will be forced to cut 813 million dollars from its budget in the new fiscal year. Layoffs, furloughs and hiring freezes, as well as the elimination of educational programs and services, are planned to meet this goal (07/11/09).
  • CIT Group Inc. is this country's largest lender of short-term loans to small and mid-sized businesses. Pierre Paulden and Caroline Salas report today in their post on Bloomberg entitled "CIT Chapter 11 Filing May Follow August Swap in Plan" that CIT may be forced to file for bankruptcy protection within four weeks. Many private colleges and universities are small and mid-sized enterprises.  The current financial crisis has hit these institutions particularly hard. For example, The COMMERCIAL APPEAL of Memphis, TN, published an AP news release on Apr. 15, 2009, with the title "Lambuth University in Jackson misses payroll", reporting that Lambuth University of Jackson, Tennessee, is unable to meet its financial obligations because of the credit crunch. As a consequence of CIT's troubles, institutions like Lambuth University may find it ever more difficult and expensive to secure short-term financing. Because CIT is also in the business of student loans, students may have to embrace higher fees. CIT's foundering will further aggravate the already dour financial situation of institutions of higher education that are important local employers and are already severely battered by the current economic crises (07/23/09).
  • Examples for the debt colleges and universities have been accumulating are discussed in my post dated Jul. 27, 2009 (08/12/09).
  • According to a report Associated Press published today entitled "Stanford Planning More Layoffs", Stanford University plans to lay off 60 employees in addition to the 484 already sent home in the past year, since the institution anticipates a 30 percent decline in the value of its 12 billion-dollar endowment. Stanford has also eliminated unfilled positions and froze hiring, salaries, and construction (09/03/09).
  • According to Svea Herbst-Bayliss' post on Reuters yesterday entitled "Harvard and Yale endowments suffer heavy losses", Harvard University and Yale University announced that their endowments diminished 27.3 and 30.0 percent, respectively, within the past fiscal year. As mentioned in my initial post above, Harvard had anticipated a loss of this magnitude (09/12/09).
  • According to Craig Karmin and Peter Lattman's post on the Wall Street Journal today entitled "Stanford Puts $1 Billion in Assets on Block", Stanford University sees the need to sell 1 billion dollars worth of investments, that is between 10 and 20 percent of its endowment portfolio, to stem its current cash crunch (10/02/09).
  • According to Abby Goodnough's report in The New York Times today entitled "Leaner Times at Harvard: No Cookies", Harvard University completed the layoffs of 250 staff members during the summer. Harvard Arts and Science has trimmed 75 million dollars from its current budget and anticipates a 130 million dollar deficit in the next two years (10/08/09).
  • According to David Lawsky's report on Reuters yesterday entitled "Stanford puts $1 billion of portfolio on market", Stanford University has set its billion dollar asset sale in motion and is cutting 500 jobs (10/10/09).
  • According to John Lauerman and Michael McDonald's post on Bloomberg News today entitled "Harvard Paid $500 Million to Exit Backfired Swaps", Harvard University disclosed in its annual report for the last fiscal year that it paid about 500 million dollars to shed investment contracts of losing value known as interest-rate swaps. Interest-rate swaps resemble home owner mortgages with adjustable rates. The cost was covered by bond issues.  Georgetown University (annual report), Rockefeller University, Vanderbilt University (faculty meeting minutes), and Yale University (annual report) also report losses with similar investment instruments (10/16/09).
  • In his article entitled "Armageddon in Alabama Proves Parable for Local U.S. Governments", published on Bloomberg News Oct. 19, 2009, Ken Wells reports that Birmingham, Alabama, home to roughly 230,000 inhabitants, using the same investment tool as the private universities cited above, that is interest-rate swaps, to finance a sewage system overhaul, ended up as one of the most indebted municipalities in U.S. history, owing more than half a billion dollars for interest payments in default and more than three billion dollars on the sewage project in total (10/22/09).
  • According to Tamar Lewin's report for The New York Times on Dec. 2, 2009, entitled "Harvard Law School Suspends Program Giving Students Free Tuition", Harvard University had to cut back on post-graduate scholarships and is offering faculty voluntary retirement plans. It takes courage and insight to accept such offer, leaving the helm when the time is right. The thieve in Kurosawa's Kagemusha can attest to that (12/05/09).
  • According to Abby Goodnough's report for The New York Times today entitled "Slowing Expansion, Harvard Suspends Work on Tower", Harvard University will indefinitely halt construction on its new one billion-dollar life science campus in the Allston neighborhood. The scientists will have to stay in their old quarters (12/10/09).
  • Collegiate fund raising saw a historic decline during the fiscal year ending in June, 2009. According to Tamar Lewin's report with the title "Sharp Drop Is Seen in Gifts to Colleges and Universities" published in The New York Times yesterday, donations dropped by on average 12 percent. Stanford University ($640 million), Harvard University ($602 million) and Cornell University ($447 million) were the greatest fundraisers among private academic institutions. According to the Council for Aid to Education which compiled the data, donations to Vanderbilt University increased by 20.3 percent from $133 million in fiscal year 2008 to $160 million in fiscal year 2009 (document released by The Tennessean in Jennifer Brook's article with the title "TN universities see plunge in donations" published on Feb. 14, 2010). Among the public academic institutions, the University of California at Los Angeles ($352 million), the University of Wisconsin-Madison ($342 million) and the University of California at San Francisco ($300 million) ranked at the top (02/03/10).
  • Private research universities continue to cut cost through layoffs, early retirement offers, elimination of positions, pay cuts and the trimming of support for educational programs and services. According to Lisa Foderaro's report with the title "Yale, With $150 Million Deficit, Plans Staff and Research Cuts" posted Feb. 3, 2010, this institution is in the process of cutting several hundred positions to close its budget gap. In the past year, Cornell University eliminated 448 posts and Princeton University trimmed 188 positions. Tenure-track candidates should be concerned. Professors with only one federal government research grant will be in peril and those without will become transitory (02/05/10).
  • Some private research universities preserved their endowment during the financial crisis with apparent success. The University of Pennsylvania suffered smaller losses in endowment than other members of the Ivy League. According to Gillian Wee's post for Bloomberg News with the title "University of Pennsylvania Endowment Beats Harvard With Stocks" dated Aug. 13, 2009, the university's endowment fell only 16.0 percent and its stock portfolio has continued to produce higher yields than that of other Ivy League schools (03/31/10).
  • Similar, but less severe than in the Birmingham sewage crisis, interest rate swap contracts for municipal bonds have recently generated losses for not-for-profit hospitals across the U.S. According to Ianthe Jeanne Dugan's post yesterday for The Wall Street Journal with the title "Hospitals' Wall Street Wounds", Municipal Market Advisors estimate that more than 1 in 6 not-for-profits may be affected (07/08/10).
  • According to Jeff Lockridge's report in today's Tennessean entitled ''Vandy coach says it was time to retire", Vanderbilt Commodores' highly-commended Head Football Coach Bobby Johnson stepped down abruptly from his post yesterday, three weeks before the new season begins. He is replaced by Assistant Head Coach Robbie Caldwell, emblematic for a common trend in U.S. higher education. Everywhere these days, long-standing leaders with expensive pay packages are being replaced with less costly in-house promotions (07/15/10).
  • According to Lingling Wei and Dinny McMahon's post entitled "CIC Seeks Harvard's U.S. Real-Estate Portfolio" on The Wall Street Journal published online today, Harvard University's 5.4 billion-dollar investment in commercial real estate lost more than half of its value during the fiscal year ending June 2009. Now 500 million dollars-worth may be sold to the Chinese sovereign-wealth fund CIC to raise more cash (08/03/10).
  • As a consequence of the financial crisis, the tenure system of higher education will change. Two recent books discuss possible options (09/06/10):
  • According Geraldine Fabrikant's post for The New York Times published online today with the title "Increase in Harvard Endowment", Harvard University reported a 11-percent growth of its endowment portfolio value during the past fiscal year. Analysts anticipate endowment increases reported by academic institutions this fall to range between 9 and 14 percent. Recovery happens in small steps (09/09/10).
  • Columbia Unversity's investment portfolio gained 17.3 percent in the last fiscal year, Geraldine Fabrikant reports in her sequel entitled "Columbia’s Endowment Posts 17% Return" for The New York Times today. The university had incurred a 16.1-percent loss in the financial crisis, roughly half of what other Ivy League schools lost (09/15/10).
  • According to Getahn Ward's report with the title "Children's Hospital Chief is leaving" posted online in The Tennessean today, the CEO of Vanderbilt University's Monroe Carell Jr. Children's Hospital, Kevin B. Churchwell, is leaving. This is the second senior academic medical officer departing from Vanderbilt University in a bit more than a year. In June of last year, Vice Chancellor of Health Affairs Harry Jacobson stepped down  (09/21/10).
  • Geraldine Fabrikant reports in her post yesterday entitled "Yale Endowment Gained 8.9% Last Year" for The New York Times that Yale University's endowment investments returned 8.9 percent, i.e. at the low end of expectations, in the past fiscal year. By contrast, University of Pennsylvania gained 13 percent (09/25/10).
  • Geraldine Fabrikant reports in her article with the title "Princeton Endowment Posts a 14.7% Return" published online in The New York Times today that Princeton University gained 14.7 percent on investments of its endowment in the last fiscal year. The return constitutes the second highest result among Ivy League schools to date and raised the endowment's value to 14.4 billion dollars. The 1.85 billion-dollar increase is, however, offset by bond issues worth 1 billion dollars earlier this year to raise much needed liquidity. Half of Princeton University's operating budget used to be paid from endowment proceeds (10/15/10).
  • Other private research universities did not fare as well as Princeton University last year. According to Jennifer Brooks' report in The Tennessean with the title "Gifts to Vanderbilt endowment soar as other charities struggle" published online today, Vanderbilt University's endowment lost 300 million dollars or 8.6 percent in the past fiscal year. However, the university succeeded in raising 84 million dollars in donations, that is a 20.7 percent increase over the year before (10/21/10).
  • According to Tamar Lewin's briefing with the title "Smallest College Endowments Perform Best, Study Finds" posted online today with The New York Times, the endowment investments of institutions of higher learning returned on average 12.6 percent in the last fiscal year, that is roughly the median of the anticipated spread mentioned earlier. The institutions used on average 4.3 percent of their endowments for operations; donations contributed 6.2 percent (11/04/10).
  • According to Kelly Nolan's report entitled "Harvard Bonds Have to Adjust" published online in The Wall Street Journal today, Harvard University recently raised $600 million with the passage of costly long term bond issues, $200 million short of expectation (11/09/10).
  • According to Ben Levisohn and Eleanor Laise's assessment with the title "How to Play the New Muni Market" published online in The Wall Street Journal today, it has become more difficult and expensive to raise money with tax-exempt bond issues, because investors sense more volatile risk in this market. According to Michael McDonald's report for Bloomberg with the title "Amherst-to-Yale Funding Need Follows Harvard's Crisis Over Cash" published online Sep. 23, 2010, 15 of the wealthiest institutions of higher education had to pass bond issues totaling $7.3 billion to improve liquidity in the past fiscal year. Three private Southeastern universities contributed $1 billion to the total: Vanderbilt University's and Emory University's share was $250 million each and Duke University's was $500 million (11/20/10).
  • According to Brian Reisinger's post with the title "Vanderbilt University caught by interest rate swap" published online on NashvilleBusinessJournal Nov. 18, 2010, Bloomberg Businessweek reports in a recent survey that Vanderbilt University needed to spend $87.2 million on backing out of costly interest rate swaps in the last fiscal year (11/22/10).
  • Today, the NACUBO-Commonfund Study of Endowments was released. The study reports the percent net change in endowment value of 865 academic institutions in fiscal year 2010. The tabulated results can be downloaded here. On average, university and college endowments gained 7.4 percent. Among the 62 institutions listed with current endowments greater than 1 billion dollars, Yale University gained at 2.0 percent the least and University of Nebraska at 18.5 percent the most. Most endowments still appear roughly 10 percent lower than two years earlier before the financial crisis unfolded (01/27/11).
  • In dire times, some private research universities seek liquidity by resorting to peculiar measures for stirring interest in their bond issues. According to Nicole Hong's report with the title "Check back in 100 Years" published online in The Wall Street Journal today, the University of Southern California joined Mexico in offering bonds that will mature in a century. The university hopes to raise 300 million dollars with this bond issue (08/10/2011).
  • Today Melinda Dickinson reports in her post with the title "Alabama county files biggest municipal bankruptcy" published online on reuters that Jefferson County, AL, which includes the city of Birmingham, filed for bankruptcy protection over a three billion dollar sewer improvement project financed with municipal bonds proved toxic. This represents the most expensive bankruptcy of its kind. I discussed this case earlier as an example for non-for-profit institution financing gone awry because of the financial crisis of 2008. While Jefferson County will survive, this calamity would mean the end for any private institution of higher learning. No bank would lend a dime (11/10/2011).
  • Tamar Lewin reports in her article with the title "Private-College Presidents Getting Higher Salaries" published online Dec. 4, 2011, in The New York Times that according to The Chronicle of Higher Education 36 leaders of private institutions of higher learning in the U.S. earned more than one million dollars in 2009, that is the year after the financial crisis. Vanderbilt University's Chancellor Nick Zeppos garnered $1,843,746.-. As mentioned above, he had promised to accept a pay cut after the sudden, painful loss in endowment investment value of roughly 30 percent (12/05/2011).
  • The most recent NACUBO-Commonfund Study of Endowments (NCSE) about to be released reports that the endowment investments of academic institutions of higher education returned roughly 20 percent in fiscal year 2011 in accord with Ken Redd's preliminary report with the title "Preliminary data show endowments returned 19.8 percent in FY 2011", published online Nov. 7, 2011. It is important to note, however, that the endowments of half of the 850 institutions surveyed have not recovered to pre-financial crisis levels (01/31/2012).
  • According to Krishnadev Calamur's post with the title "Wealthy Colleges See Spike In Fundraising" published online by National Public Radio's News Blog today, the Council for Aid to Education (CAE) reports that U.S. institutions of higher education achieved to raise 30.3 billion dollars last year, an eight-percent increase compared to the year before. The list was topped by Stanford University ($709 million), Harvard University ($639 million), and Yale University ($580 million). Plenty institutions discussed above that rewarded their leaders with more than a million dollars last year, Vanderbilt University in the lead, did not make the top twenty on CAE's list (02/15/2012).
  • According to Norimitsu Onishi's article with the title "Californians Back Taxes to Avoid Education Cuts" published online in the New York Times Nov. 7, 2012, 54 percent of Californians approved Proposition 30 that will provide six billion dollars per year for the state's public education system. The money will be raised with a seven-year increase in income tax on incomes greater than $250,000.- per year and a four-year increase in sales taxes. In response the California State University system will not increase tuition this year, Mary Slosson reports in her post with the title "California universities roll back tuition after tax hike passes" published online by Reuters Nov. 7, 2012 (11/19/2012).
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