The University of Florida prides itself on disciplined endowment management, but officials there say it’s time to throw out the old playbook and take some greater risks.
Market downturns have taken a toll on Florida’s endowment, but university officials say they can’t afford to slow spending because state budget cuts have already been so crippling to the institution. By retaining current spending levels, the university is bucking a tried and true formula that is designed to preserve the principal of the university’s endowment, even during economic downturns.
As the university’s student newspaper reported, the decision to maintain spending levels was made by Bernie Machen, Florida’s president.
Paul Robell, Florida’s vice president for development and alumni affairs, sent a memo to administrators October 16 citing “highly volatile” investment markets that necessitated the change.
The university’s investment returns declined by 8.3 percent during the first quarter of the fiscal year that began July 1. Under Florida’s own policy, this decline would prompt a 7.2 percent, or $835,000, reduction in spending this quarter. Robell noted, however, that the “extraordinary times” led Machen to depart from the policy.
In an e-mail Wednesday, Machen said the university is suspending its policy only for the current quarter.
“Our endowment is almost all dedicated to some specific function (endowed chair, scholarships ...) so this will prevent cutbacks on those programs,” Machen wrote. “We do encourage reduced spending, wherever possible, but wanted to give the deans and faculty as much support as possible.”
The State of Florida has been particularly hard hit by turmoil in the housing market, and higher education has taken deep cuts as a result. The University of Florida took a $47 million budget cut -- about 7 percent of its recurring educational and general budget -- this year. That budget reduction came on top of a previous cut of $22 million the university absorbed last October.
Tapping Sacred Funds
Endowment funds are theoretically “permanent,” because universities typically spend only as much as they expect to earn off investments. Leslie Bram, vice president and chief operating officer of the University of Florida Foundation, said it’s unclear to what extent the university will invade the principal of its endowment by forgoing spending reductions.
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“It is an unknown depending on the market,” she said. “I think at this point we can anticipate a very slight nibbling into the principal, but hopefully market returns will come back and we’ll be able to [replenish the endowment]."
Preserving the university's endowment isn't simply a matter of preference; it's a contractual obligation. The university has a stated "fiduciary responsibility" to protect donors' endowed funds, ensuring the income stream supports its stated purpose "in perpetuity," according to Florida's Annual Endowment Report.
In 2004, the university adopted a new policy that adjusted endowment spending levels based on the quarterly market values of investments. Prior to that time, the university had adjusted spending only on an annual basis, and spending levels were determined by calculating the three-year average performance of investments. That policy was in keeping with the approach taken by many colleges.
Florida’s new policy, introduced by an investment firm that was hired to manage the university’s endowment, was designed to be more nimble. Instead of relying so heavily on the past performance of investments, Florida aimed to evaluate its financial position in something closer to real time. As a result, the university’s spending formula isn’t based on investment returns from last year, when endowments were setting records.
Ken Redd, director of research and policy analysis at the National Association of College and University Business Officers, said he was surprised that Florida’s calculated spending rate plummeted so much, even in the current economic climate.
“It doesn’t surprise me that they were having a negative spending rate,” he said. “The only thing that surprises me is the severity of it. Seven percent, that’s pretty steep -- no doubt about it.”
While Redd said he wasn’t familiar with the specifics of Florida’s strategy, he noted that any action that threatens the principal of an endowment goes against best practices.
“If the endowment is the place they have to turn to, they have to turn to it,” Redd said. “But as every investment manger would tell you, it does defeat the purpose of an endowment. You would only do that in a dire emergency.”