Over the last 14 years, University President Henry Bienen has seen Northwestern through a period of enormous economic growth. The endowment, which peaked at about $7.4 billion in April 2008, was the 11th largest among national colleges and universities in 2007.
But with the economic crisis rapidly worsening in the first half of this fiscal year, NU’s endowment currently stands at $5.6 billion, marking a 24 percent decline. Though administrators continue to assure the university community that the recession has not affected NU as severely as it has peer institutions, the endowment continues to shrink and is dragging the school’s operating budget down with it.
The recession hits higher ed
Nationally, colleges and universities have lost an estimated $94.5 billion over the last six months, said Kenneth Redd, director of research and policy analysis for the National Association of College and University Business Officers.
“That’s obviously a good bit of revenue for institutions to have to make up,” Redd said. “It’s unlikely they’d be able to make that all up in one fiscal year.”
Endowment values saw a collective 3 percent decline during the 2007-2008 fiscal year, according to a report released by NACUBO in partnership with the Commonfund Institute and TIAA-CREF, an asset management firm. This came after the organizations released the follow-up study for the first half of 2008-2009, which reported an additional 23 percent decline.
Although higher education has not been hit as hard as other sectors – the S&P 500 index lost 29.3 percent in the first half of this year alone – the loss is forcing schools to consider a slew of cost-cutting options, including salary and hiring freezes, layoffs, construction delays and, of course, tuition hikes.
Because there is no foreseeable saving grace for the downward spiraling investment markets, Bienen said endowments nationwide may shrink an additional 20 to 25 percent.
“If that happens, the face of higher education as you’ve known it – as we’ve known it – will be completely different,” he said. “It’s already changing.”
Counting NU’s losses
Since the current fiscal year began July 1, NU’s endowment has lost about $1.8 billion, nearly a quarter of its value. In a letter to the university community last week, Bienen said it was likely the endowment would see further decline.
Still, the administration says there is reason for hope.
During a strong fiscal period, a university typically relies more heavily on its endowment to “float” its central budget, normally funded from gifts, tuition and other sources, Bienen said. This allows spending room for new programs and initiatives.
NU, a fiscally conservative school under Bienen, did not follow this tendency and based less of its operating budget on endowment money.
For this fiscal year, 18 percent of the university’s operating budget came from endowment distribution funds. Many of NU’s peer institutions, like Harvard and Yale universities, take upwards of 30 percent of their expenses from endowment. Princeton University’s endowment supports 45 percent of its budget, according to a university publication.
“Historically, as certain schools have gotten wealthier and wealthier, they’ve really ramped up their spending and put more pressure on their endowment,” said William McLean, NU’s chief investment officer. “Some of them have larger endowments, but we have a broader source of funding.”
Although NU has been criticized for its historically conservative policies, using a relatively small portion of the endowment for annual costs has resulted in greater security during the downturn, Bienen said.
“It turned out to be, at least in the short run, a kind of blessing not to have such a big hunk of your budget come from your endowment,” he said. “That doesn’t mean we didn’t have an adjustment to make.”
Still, both Bienen and McLean said the recession has threatened NU’s long term financial health as much as it has any other institution.
“We don’t want to give the impression that our endowment performance is that much better than our peers’,” McLean said.
Another factor, asset liquidity, the ability of an institution to use its invested money, is also compounding NU’s financial woes in the stagnant market.
Because strong endowments are mainly composed of long-term investments, wealthy universities are struggling to move their assets in the current climate. For NU, this means the resources that do remain are all but useless in the immediate future.
“It’s bizarre,” said Michael Mills, associate provost for university enrollment. “It’s almost like a penalty for people who have the largest endowments, who have been saving the most.”
Making up the difference
Next year, tuition at NU will rise 3.6 percent. The increase places the school in the middle of its peer institutions, ranging from 2.9 percent increases at Princeton and Brown University to a 4.9 percent increase at Cornell University.
The spike, Bienen said, was inevitable.
The university also announced a 3 percent cut in its operating budget for all academic and administrative areas. These departments usually receive a 2 percent annual increase, resulting in what is essentially a 5 percent cut.
However, several academic departments do not anticipate severe impacts from the cut since they receive external funding in the form of grants, gifts and other donations.
“We very much value what the university provides for operating costs,” said Prof. Joseph Hupp, chair of Weinberg’s chemistry department. “But it turns out to be tiny in comparison to the value of the research dollars that flow through the university.”
Still, funding for some student services has been reduced already.
SafeRide, NU’s student driving service, is one of multiple programs that normally depends on surplus funds from NU administrators – funds that are now unavailable to them. Because of the lack of extra money, SafeRide will be limiting its number of drivers to one per car, effective for the 2009-2010 academic year.
The popular Saturday intercampus shuttle service, developed by the Associated Student Government last year, also faced a shortage of funds that normally come from the administration. When ASG met in February to determine a longer-term spending plan, members voted to set aside the majority of ASG’s discretionary budget, almost $4,000, to keep the service afloat.
Aiding financial aid
This year, NU used budget cuts and other penny-pinching strategies to protect its financial aid resources this year, Bienen said. In his letter, he announced a 10 percent increase in scholarship funding from $78 million to $86 million next year.
Although many peer institutions have employed a similar strategy, Bienen said schools like Princeton and Harvard may be hard-pressed to maintain their “extreme” financial aid policies, since so much of their aid budgets are endowment-based.
“We never went that far. We couldn’t go that far,” Bienen said. “We’ll see who can preserve it and who can’t.”
But both Princeton and Harvard have announced financial aid funding increases greater than NU’s for the coming year.
Robin Moscato, Princeton’s director of undergraduate financial aid, said the school will be able to support its expected 13 percent aid increase through unrestricted funds such as private donations.
“The portion of the scholarship budget that can be met by the endowment has taken a hit, just as everyone’s has,” Moscato said.
As for NU, there is a small chance the school’s own 10 percent increase will not be enough to meet the demand for aid, Mills said. Should this happen, he said, the Office of Financial Aid would likely make a supplemental request as well as increase the work-study component of each student’s aid package.
“I think we’ve got enough of a cushion to absorb a big spike in financial aid requests,” he sa
id. “Knock on wood and cross our fingers – we hope that we’re prepared.”
