The economic downturn has affected Northwestern’s net worth for the second consecutive year, as university assets fell 5 percent to $3.91 billion, according a new financial report.
After a decade of double-digit growth, NU now has lost more than $500 million in the last two years. That significant decline contributed to the need for modest cuts in planning the university’s 2004 operating budget, said Eugene Sunshine, vice president for business and finance.
“You have to manage for the ups and the downs, but you have to be careful not to overreact,” Sunshine said. “If you slice the heck out of your budget, you may do harm that’s not easily reversible. But if you ignore the realities of the market decline, that’s irresponsible as well.”
Administrators announced in January that all university departments will be required to cut their budgets by as much as 2.75 percent to help NU weather the troubled financial environment. Sunshine said NU’s financial planners took the falling markets into consideration when devising the 2004 operating budget.
“We are probably conservative when estimating revenue in order to put our budget together,” he said. “We like to give ourselves a more upside cushion than downside concern.”
The report for fiscal year 2002 also showed the market value of NU’s largest group of investments, including the university’s endowment, declined to $2.73 billion from $2.98 billion in 2001. Those investments fared worse during the previous fiscal year, when they lost $360 million.
Associate Vice President for Finance Ingrid Stafford attributed this year’s drop to continuing effects of the “investment bubble bust.”
“This has been just like a roller coaster ride that we have gone on,” Stafford said. “Sept. 11 happened during the last fiscal period, but the real catalyst for the unwinding of the equity markets was a combination of the corporate scandals and the realization that these technology companies weren’t earning any money. The decline a year ago was the first chunk coming off, and this year we have seen the second part.”
Endowments decreased by an average of 6 percent at the 654 universities that participated in the National Association of College and University Business Officers’ 2002 endowment study, according to a January press release.
But the organization’s president, James Morley Jr., put a positive spin on the downward spiral – focusing on the fact that university endowments performed much better than the S&P 500, which decreased 18 percent during the same time period.
“During the 1990s, college and university endowments experienced increased return rates and reduced investment volatility through excellent asset diversification and a soaring economy,” Morley said in the press release. “The asset allocation that served endowments well in the recent past allows endowments to achieve continued investment returns above the market norms.”
The war with Iraq also could affect NU’s investments in the future, although Sunshine and Stafford both said it is too early to discern the impact of military action.
“It’s the uncertainty of all the possible ramifications that causes us concern, rather than our ability to predict what’s going to go up and go down,” Sunshine said.
Stafford said a decision by Iraqi President Saddam Hussein to burn oil fields particularly would hurt NU’s finances, as higher energy prices could increase heating and cooling costs. But the war may not significantly alter NU’s investments because officials strive for diversified holdings, Stafford said.
“While war is probably not good for any investment strategy overall, I think diversity is the key,” she said. “As for the next few fiscal cycles, I don’t think we would envision any terrific impact per se because of the war.”
