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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Sunday, June 7, 2009

The Age of Diminishing Endowments

Wall Street Journal op-ed: The Age of Diminishing Endowments, by Matthew Kaminski:

Richard Levin, the longest serving president in the Ivy League, had enjoyed a charmed run at Yale. In his first 15 years Yale's endowment notched up the best returns of any university's, and its innovative investment strategy became a model for many others. Mr. Levin rode the bull market to restore morale, launch a building spree, and strengthen the school in sciences and internationally. Yale dollars even spruced up shabby New Haven.

Then came the Great Recession. What went up so fast for elite universities -- Yale's endowment grew to $23 billion last summer from $3.1 billion in 1993, Mr. Levin's first year -- dropped like a stone. The impact was immediate: Mr. Levin announced a 5% spending cut in December (later adjusted to 7.5%), then froze faculty pay and most large capital projects. By the end of this month he says the endowment will be marked down by a quarter to around $17 billion. Harvard, the only university with a larger endowment, got caught out on arcane fare like interest rate swaps and now projects a 30% decline, to about $24 billion. ...

So what does the dawn of the era of unplenty mean for the future of his university, and others? Mr. Levin, a youthful 62, finds some comfort in the numbers to downplay the impact on Yale.

Long ago, private universities designed "spending rules" for their endowments to support them less lavishly in flush years and more in the tough. That cushions the blow to the budget. "We'll spend 6.5% or 6.7% of our endowment next year when the endowment declines," he says. "That's the flip side of the spending of 3.8% we were spending when the endowment was rising very rapidly." While the endowment will provide some 43% of next year's budget, tuition -- once the principal source of income -- accounts for just 11% after financial aid. Yet if the investments don't rebound over the next few years, Yale and other schools in its league will have to rethink long-term priorities and expansion plans. ...

As with other schools that might like to switch neighborhoods -- think of Penn, Columbia, the University of Chicago -- the economic downturn exposes Yale's New Haven handicap. In recent years, the city's largest employer and landowner tried to improve long-strained town-gown relations and gentrify the areas around campus. So when Mayor John DeStefano came with an emergency request to help cover New Haven's $29 million deficit, Yale in February increased its voluntary financial contribution to the city by 50%, to $7.6 million -- despite its own shortfall. (As a nonprofit, Yale pays little in taxes.) Financially, he says, "the city is in deep trouble."

Yale lives in fear of a return of the old New Haven.

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