Feeling the force of falling endowments

A number of Ivy League universities – including Yale, Cornell and the University of Pennsylvania (Penn) – are directly feeling the affects of the negative performance of their endowment funds, and are being forced to cut operating budgets for the 2009/10 financial year.

Yale University’s president, Richard Levin, announced further budgetary cuts last week, a direct result of a fall in the endowment’s asset value.

Income from the Yale endowment accounts for 44 per cent of the university’s annual expense base of US$2.7 billion, and the current fall of 25 per cent in the endowment’s value is contributing to a shortfall of $100 million in the 2009/10 fiscal year.

Among cuts that Levin announced were: slashing capital spending in the form of postponing any new building or renovation projects; and a reduction in university staff salaries of 7.5 per cent for the fiscal year (previously budgeted at 5 per cent).

Unusually, Levin announced interim results for the endowment in December last year, and at that time estimated the endowment’s value at $17 billion, a decline of 25 per cent since June 2008. This is the value being used for budget purposes.

“It is not our custom to announce the mid-year status of our endowment portfolio, but these unusual circumstances call for a departure from custom,” he said in a statement to faculty and staff.

“Thanks to the outstanding work of [chief investment officer] David Swensen and his colleagues in the investment office, our endowment has declined significantly less than market indices.”

However he went on to say that the 25 per cent decline experienced has a very significant impact on operations.

In the university press, Swensen has defended the endowment’s investment strategy.

Meanwhile, Cornell University has also announced cost cutting in the form of staff reductions in the next financial year, and Penn, whose endowment has fallen by 19.4 per cent, will increase its term bill by 3.8 per cent, raising the cost of attendance to $50,000. Penn’s endowment contributes only 9 per cent to operating expenses.