Endowment Strong Despite Economic Turmoil

Editor’s note: This article was initially published in The Daily Gazette, Swarthmore’s online, daily newspaper founded in Fall 1996. As of Fall 2018, the DG has merged with The Phoenix. See the about page to read more about the DG.

The endowment’s historical market value, in millions of dollars.
[Modified from a chart (on page 12) by the Investment Office; values past 2005 are approximate.]

What does the financial crisis mean for the endowment and for our operating budget?

College Treasurer Suzanne Welsh reported that “we started seeing some signs of the credit crisis in July and August 2007,” and indeed, the endowment had a slight dip over the course of the 2007-2008 fiscal year, from $1.44 billion on June 30, 2007 (“the highest we’ve ever had for a fiscal year end”) to $1.412 billion on June 30, 2008, the close of the 2007-2008 fiscal year. On October 17, 2008, Welsh reports, “we estimate it was a little under $1.2 billion, returning to the level it was in 2005.”

During the dot-com bust from 2000-2002, Swarthmore lost a similar dollar amount, going from $1 billion to about $800 million dollars. Welsh reported that the endowment returned to its pre-bust levels within the year after the end of the downturn, and it has clearly grown since then.

When asked about how the current situation will change Swarthmore’s investment strategy, Welsh replied that flexibility in times of crisis is already built in. “The financial markets are always volatile, so we’ve developed a lot of policies… geared towards sustaining our budget through these ups and downs in order to maintain our operating budget through good times and bad.”

For example, “within the endowment, we’ve always had about 15% invested in Treasury bonds… their values usually hold or even increase in bad times, so it’s an ‘insurance’ policy… it’s money we can draw on for our budget needs.” Indeed, operating cash comes “mostly from tuition and is invested in treasury securities.” About a third of the endowment is tied up in hedge funds, private equity, and private real estate, all considered non-liquid assets, but Welsh said that “the majority of the endowment is in liquid securities… things we can easily sell for cash flow.”

Another place where the college had developed a prudent strategy before the crisis was in debt. The college currently has $184.5 million in outstanding debt, which it has assumed “to finance capital projects like building the science center.” Welsh explained, “we had some of that debt in variable rate but decided last April to make it all fixed rate, so all of our debt has been fixed rate since April 2008.” In the current economic crisis, “variable rate debt has gone up, and so that’s affecting a lot of colleges.”

Welsh spoke briefly on the issue of the Commonfund Short Term Fund, an operating cash fund that many colleges had invested in. Wachovia decided to liquidate the fund earlier this year when “some of those investments were running into trouble… institutions could not get all of their money out, so that’s giving a lot of institutions a lot of problems, as many were using it to make payroll.”

Luckily for Swarthmore, Welsh said, “we had taken most of our money out about a year ago… we had a small amount and we hope we’ll get it all back, but the fact that it’s tied up for the time being should not have an effect on operations.”

Asked about how the decrease in endowment would affect the college’s willingness to draw down funds this year, Welsh explained that “we have a spending rate that says we’re going to try to have a sustainable endowment spending amount… we try to pick a dollar amount that we can grow steadily year after year, and we try to keep it between 3.5 to 5 percent of the endowment.”

The rate for fiscal year 2007-2008 was 3.7% of the endowment, and this year the drop in endowment means that the amount planned for fiscal year 2008-2009 ($57 million) will increase to 4.25%, still well within the range. “We’re planning to continue through this year according to our budget… next year’s budget will be developed over the next few months and presented in February. We’ll be running a lot of predictive models—of enrollment, of financial aid, of endowment spending, of faculty and staff compensation—to think about what could happen.”

Welsh stressed that it was impossible to say anything about tuition for next year now. The Gazette will certainly update you once a better idea of what might be necessary for next year’s budget starts to form, but looking towards that budgeting process, the Gazette finds that if Swarthmore drew down the same dollar amount next year as this year ($57 million), that would represent about 4.75% of the endowment, in other words still staying inside the target range.

Freezing the budget from this year to the next would certainly require some cost cutting, but it does not appear that Swarthmore would have to head drastically outside the target endowment spending range to maintain a similar level of quality for next year.

Do alumni keep giving in a recession?

Stephen Bayer, Vice President of Development and Alumni Relations, reported that the economic situation “comes up in almost every conversation we have when we’re talking to alumni.” As could be expected, “people who are approaching or are in retirement age are much more wary about giving money away right now… anecdotally our student phonathon callers have noted that some donors are giving less this year.”

How does the development office respond to this sort of crisis? Bayer said that before the economic downturn, his office had formed the goal of raising 20 million dollars in endowment by June 2010 to support the loan free initiative and to move towards needs blind admission for international students. They have already raised 7.5 million, putting them well on track.

As for the annual fund, “we raised 5 million dollars last year, and we want to get to 7 million dollars over the next several years. This year could be tough as it’s not the best time to increase our goals, but we’re still striving for excellence.”

One part of excellence is an appreciation of alumni who have given in the past. “87 percent of alumni gave during the last capital campaign… so now is an appropriate time to thank them and provide excellent stewardship of their previous gifts.”

Bayer continued, “our alumni want to pause and take a look and feel comfortable with what they have before they make any significant decisions… we want them to know that we’re being sensitive and not rushing them, and when they are ready we will be there to help them to make a significant impact with a gift for this college.”

Bayer stressed that giving can still be strong in the midst of economic difficulties. “While the value of our alumni’s assets may have declined, a lot of them still have substantially appreciated assets… there are still opportunities for them to gift highly appreciated assets and get a tax deduction.” He continued, “We’ve always encouraged people to gift highly appreciated securities and assets… if you were to sell it, you’d still have to pay capital gains taxes, but not if you gift it.”

Another tax strategy that makes sense in tough economic times is charitable gift annuities. That means that you give the college an amount of money to be invested along with the rest of the endowment, which creates an annuity that will give you a certain amount back every year in income.

Bayer said that he expects to see an uptick in such annuities, as it “creates a dependable stream of income for the donor in their retirement years, enables a donor to receive a charitable tax deduction, and makes them feel terrific by being able to support their alma mater.”

Asked about the last economic downturn, Bayer said, “it didn’t stop us from going out and talking to people about the value of giving to Swarthmore… it was a tough time to start a capital campaign but we persevered… there’s such a love for this college and a deep understanding that the excellence of the institution is based largely on the generosity of alumni throughout the last 150 years. We’re not daunted by the prospects of a down economy — it can actually be quite motivational!”

How are peer schools performing?

Schools that have made statements about their current financial situation include Williams and Middlebury.

According to a statement released by their administration, the value of Middlebury’s endowment has dipped from $1 billion to $900 million over the past month. Since Middlebury recently finished a major building project which had the college spending over 5% of its endowment for seven years, the school is extremely wary about doing that again, stating that “spending more than 5 percent of the endowment now when investment returns are at their lowest point in many years would jeopardize the College’s long-term financial viability.”

What will Middlebury do to cut costs? In a recent memo to the community, President Ron Liebowitz stated that “we will institute, effective immediately, a hiring freeze on all but the most essential staff positions. We will also reduce travel for College business, and limit significantly the use of outside consultants and contractors. Finally, although we remain committed to the additional faculty positions recommended in the College’s strategic plan, the pace for adding these positions is likely to be slower than originally planned.”

According to notes from a presidential speech posted on EphBlog, Williams may have lost up to 30% of its endowment, going from $1.9 to 1.3 billion. The college spent 4.1% of the endowment last year, but their president Morty Schapiro has announced plans to draw 7% of the endowment this year in order to make up budget shortfalls. Furthermore, Williams is putting off current building and renovation projects, instituting a hiring freeze, and potentially increasing class size to grow the tuition revenue stream.

4 thoughts on “Endowment Strong Despite Economic Turmoil

  • October 24, 2008 at 8:44 am

    Students are always complaining about how conservative the school is with it's endowment. "We have an 1.6 billion dollar endowment, why can't we do X", is a common refrain among the students I know. I hope this sheds some light on the reason for this conservationism. They have to be viable financially for the next generation of students that are going to want financial aid and facilities and they must be able to survive market declines like this one. I hope this will give some students some perspective on the spending habits of the school.

  • October 24, 2008 at 4:49 pm

    Does this mean the dining hall won't be serving squirrel?

  • October 24, 2008 at 8:35 pm

    Fantastic article. I hadn't even thought to look at Alumni donation rates! Nice work Lauren!

  • October 25, 2008 at 1:58 pm

    While I appreciate the energy that went into this article and it certainly is informative, the information is simply not there for a reader to thereby justify the college's spending habits. Just because the college spends limited amounts of its endowment doesn't mean that money is being used "conservatively" or in students best interests. Its completely legitimate for students to insist that a greater share of what they *do* take out of the endowment be put directly towards financial aid and grants, or developing academic programs that students want, instead of towards large-scale projects that have little student input and negligible benefit to our daily lives. Its unreasonable that over the course of 4 years here tuition has gone up over $8000, we're paying more for textbooks and food, and the financial aid office has been consistently dismissive of and unresponsive to students needs. Its almost meaningless that the endowment has been able to weather this crisis, if students who *have* been impacted fall through the cracks because the college decides to raise tuition again, but not increase the percentage of the endowment they put towards financial aid. "Financially viable for the next generation?" What about this generation of students? And looking at basic trends in education, the next generation isn't going to be any luckier.


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