Double Take

After already announcing plans to deal with the economic crisis, three of the nation's wealthiest universities are employing new strategies.

March 10, 2009

The first cut isn’t always the deepest.

As endowments continue to lose value and economic outlooks grow ever bleaker, some of the nation’s wealthiest universities are calling for greater sacrifices than they were just a few months ago. In recent weeks, administrators at Stanford, Harvard and Cornell universities have laid out financial assessments that will require budget reductions, layoffs and increased borrowing. These measures go beyond earlier plans to deal with the economic downturn, suggesting the first steps were deemed insufficient to address a problem that has grown in scale.

John Etchemendy, provost at Stanford, issued a statement Monday noting that the university would need to cut its budget by 15 percent or $100 million in one year, instead of over two years as was called for in January. The university will also be forced to eat into the principal of its endowment, Etchemendy said.

“Our budget planning assumptions estimated a loss in our endowment of 20 to 30 percent; that figure is now trending higher, and it is increasingly clear that it will be a long time before we see the endowment’s value return to previous levels,” Etchemendy said in the statement. “Since the endowment is the university’s primary source of investment income, the result will be a long-term decrease in university revenue.”

Stanford’s endowment, one of the largest in the nation, was valued at $17.2 billion in August. The university normally draws operating revenue from the endowment’s investment returns, but will now be forced to spend $1.8 billion from the principal of the endowment over the course of this fiscal year and next in order to meet financial obligations, according to university officials.

Stanford has not announced a specific number of anticipated layoffs, but a certain number of layoffs is “unfortunately inevitable,” according to Lisa Lapin, spokesperson for the university.

It’s not surprising that Stanford and other universities with large endowments are just now beginning to reassess their responses to the economic downturn, according to John Nelson, managing director of Moody’s Investors Service. Many institutions made their first adjustments about four months ago, before the full impact of the crisis was even truly contemplated, he said.

“The real falling off the cliff happened in September, so when you’re talking about November and December you’re talking about a fairly short time period as to how to react to that,” Nelson said.

In a letter circulated Feb. 18, Harvard President Drew Faust laid out just how severe the crisis now appears.

“Uncertainty sometimes seems our only certainty,” the letter stated. “But what has become clear is that we are living through much more than a bump in the road. Our economic landscape has fundamentally changed.”

Faust’s letter gives few specifics about how Harvard will respond to a “fundamentally changed” landscape, other than to note that construction projects will be slowed and “discipline and sacrifice” will be required. Even so, Harvard students and employees are already protesting anticipated layoffs.

Harvard’s initial strategy, laid out in December, was to increase borrowing rather than dig into an endowment that is expected to lose 30 percent of its $36.9 billion value by the end of the fiscal year. In so doing, Harvard signaled a desire to hold onto assets that are likely to someday increase again in value, even if those assets never again reach pre-downturn levels.

“They don’t want to liquidate all that endowment because they believe a lot of it will [eventually] be worth a lot more than it is now,” Nelson said. “So the best way to generate cash immediately is to go out on the bond market and borrow it.”

Cornell University, which draws about 11 percent of operating expenses from endowment returns, is less reliant on those dollars than Harvard and Stanford, both of which rely on endowment returns for about one-third of their operating costs. Cornell is taking steps to become even less reliant on endowment earnings, which officials expect to continue to trend downward for the next two or three years.

In a Friday letter, Cornell President David Skorton announced plans to reduce budget support from the endowment, normally provided by investment returns, by 15 percent in the next fiscal year beginning July 1. The university plans even greater reductions in fiscal years 2011 and 2012. The decision reflects an acknowledgment that dollars upon which Cornell once relied simply may not be there in the next several years, according to Simeon Moss, a spokesman for the university.

“That’s part of what planning is about is to try and look to the future, and see how your revenue streams might be affected in the future and plan for that,” he said. “And that’s what this university is doing and others are doing, and the outlook has not improved.”

The lower endowment spending at Cornell comes on top of several other measures the university has already taken, including a $60 million budget cut for the 2010 fiscal year. The university has also paused external hiring and construction, instituted a “voluntary retirement” program and announced plans to issue $500 million in taxable bonds.

“In less challenging times, we might have avoided some difficult decisions that lie ahead,” Skorton said in the letter. “But a new reality is at hand for higher education, as well as for the rest of our economy. We are at a defining moment in Cornell’s history.”



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