Harvard Hit by Loss as Crisis Spreads to Colleges
By JOHN HECHINGER & CRAIG KARMIN | WSJ Education
DECEMBER 4, 2008 -- Harvard University's endowment suffered investment losses of at least 22% in the first four months of the school's fiscal year, the latest evidence of the financial woes facing higher education.
The Harvard endowment, the biggest of any university, stood at $36.9 billion as of June 30, meaning the loss amounts to about $8 billion. That's more than the entire endowments of all but six colleges, according to the latest official tally.
Harvard said the actual loss could be even higher, once it factors in declines in hard-to-value assets such as real estate and private equity -- investments that have become increasingly popular among colleges. The university is planning for a 30% decline for the fiscal year ending in June 2009.
Other university endowments also are suffering, and many states are cutting public funding of higher education. Colleges are instituting hiring freezes, planning enrollment cuts and discussing steep tuition increases, intensifying worries about the impact of the recession and financial crisis on college access.
The federal government already has taken emergency steps to boost lending to students, and several well-off colleges have said they will maintain or boost financial aid to help families hurt by job losses, investments setbacks and borrowing problems. But not all colleges have the financial heft to withstand the many forces bearing down on them.
Joni Finney, a professor at the University of Pennsylvania who studies college economics, says she worries that public universities and less-wealthy, smaller private colleges may not be able to keep their doors open to all students. "If you go down the food chain of higher education, it's harder and harder to deal with these kinds of cuts," she says.
Private-college budgets are sensitive to investment declines because they typically tap their endowments each year to help cover operating expenses.
The University of Virginia Investment Management Co. said it lost nearly $1 billion, or 18%, of its endowment over the four-month period, reducing it to $4.2 billion. In Vermont, Middlebury College says its endowment fell 14.4%, to $724 million. In Iowa, Grinnell College's endowment dropped 25%, to $1.2 billion. In Massachusetts, Amherst College says its endowment, $1.7 billion as of June 30, also fell by 25%.
In a letter to Harvard's deans, university President Drew Gilpin Faust and another official blamed "severe turmoil in the world's financial markets" for the endowment loss. She said it would lead to budget cuts, and that the school would sell bonds to increase its financial flexibility.
The Harvard letter said the 22% loss, from July 1 through Oct. 31, understates the actual decline because it doesn't reflect assets such as real estate whose values couldn't yet be estimated. Currently, endowment income funds 35% of Harvard's $3.5 billion budget.
The 30% fiscal-year loss Harvard is planning for would eclipse the loss of 12.2% in 1974, its worst over the last 40 years.
Harvard's loss marks a sharp reversal from the endowment's formerly chart-topping performance. Harvard and Yale University -- which hasn't disclosed its endowment's recent performance -- pioneered an investment approach that de-emphasized U.S. stocks and bonds and placed large sums in more exotic and illiquid investments, including timberland, real estate and private-equity funds. That strategy, which was widely copied, helped the schools avoid significant losses after the technology boom ended in 2000.
But the current market has been far less favorable, partly because both Harvard and Yale have relatively small holdings of bonds, such as U.S. Treasurys, one of the few assets that have performed well. Harvard began its fiscal year with a target of having 33% invested in publicly traded shares, split among U.S. stocks, which have dropped 24% in the four months through October, and international stocks, which have fared worse.
Other investments, such as commodities, which were a boon to Harvard in past years, have turned negative in recent weeks. Harvard has sought to sell off about $1.5 billion in investments with private-equity firms, which typically use their assets to fund corporate takeovers, according to people familiar with the situation. That would be one of the largest sales ever of a private-equity stake. But its private-equity partnerships received bids of only around 50 cents on the dollar, say other people familiar with the matter.
Daniel Jick, chief executive officer at Boston-based HighVista Strategies, which handles money for some endowments, says that in some prior years, investments such as real estate and private equity have helped buffer endowments against losses on stocks.
In her letter, Harvard's Dr. Faust said the endowment loss has "major implications for our budgets and planning, especially since our other principal revenue streams also stand to be challenged by the economic crisis." Along with federal research funding, universities rely heavily on tuition and donations. Strained family finances could make it difficult for more families to afford tuition, while stock-market declines typically curb gifts.
To maintain its programs and commitments, the letter said, Harvard is expecting to spend a higher percentage of its endowment than it had recently. It said it was taking a "hard look at hiring, staffing levels and compensation," and was "reconsidering the scale and pace of planned capital projects."
For College-Bound, New Barriers to Entry
Their Budgets Squeezed, State Schools Cap Enrollment, Weigh Tuition Increases; Fears for Lower-Income Students
DECEMBER 3, 2008 -- As public colleges grapple with reductions in state funding, the prospect of reduced access to higher education is looking more likely.
Florida's state universities, squeezed early by the slumping economy's effect on tax revenues, instituted a three-year cap on freshman enrollment last year. The mammoth California State University system -- with 450,000 students -- has announced plans to reduce its head count by up to 10,000 students for the next school year. Absent a boost in state funding, the smaller, more-selective University of California system has warned of a similar reduction. Enrollment limits are also under consideration in Tennessee and Washington.
Hurdles to Learning
Forces that may hurt students pursuing a college degree:
- Caps on freshmen enrollment and reductions in overall head counts.
- Hefty tuition increases that offset losses in state funding.
- Some continued difficulties getting private student loans.
- Higher admission standards and tighter application deadlines.
Meanwhile, hefty tuition increases are on the drawing boards in many states, while private student lending has shrunk sharply amid a broader credit crunch. Together, the pressures are threatening to restrict access to higher education at a time when the economic crisis is driving more Americans to seek new degrees or additional training, a common reaction in a downturn.
They also come as budget-strapped state schools are eliminating majors and reducing course offerings -- moves that could also make the road to a bachelor's degree steeper. According to the latest federal data, an estimated 15.4 million undergraduates attended degree-granting institutions in 2007, up about 1.2% from 2006. Roughly 78% of those students went to public colleges and universities.
The federal government has tried to help college students and their families cope with the turmoil by stepping in to insure the availability of federally guaranteed loans and to provide financing to investors who buy securities backed by private student loans.
Some observers contend that most state schools are unlikely to adopt enrollment caps because of the risk of sparking backlash from both the public and state legislatures that help fund them. But others fear that amid economic turmoil and declines in state tax revenues, the schools will have no choice. Would-be students would be forced to either forgo higher education or attend two-year community colleges, many of which face the same economic pressures.
"It's going to be a remarkably challenging situation," says economist Michael McPherson, president of the Spencer Foundation, a Chicago-based nonprofit focused on education issues. "This is going to be bad, and it looks like the near-term impact on state budgets is going to be quite dramatic."
With public universities in Washington state being told to prepare for reductions in state funding of up to 20%, "all the expectations are that we are going to be looking at some serious budget cuts," says Norm Arkans, a spokesman for the University of Washington.
The president of the American Council on Education, a big college trade group, has predicted that students could face double-digit tuition increases next year. Rhode Island recently took the unusual step of instituting midyear tuition increases of up to 6.5% at three state colleges. Trustees of the State University of New York system have voted to increase tuition by $310 a semester, starting in the spring, making for an annualized tuition increase of more than 14%. Elsewhere, public colleges and universities in Idaho have asked the state board of education for permission to pursue tuition increases of more than 10%. And Jim Rogers, chancellor of Nevada's public colleges and universities, has proposed a 25% increase.
Researchers say the impact of enrollment caps -- which are likely to be accompanied by higher admission standards and tighter application deadlines -- will fall hardest on low-income and minority students whose parents and high schools often have fewer resources to navigate the college-application process.
"They are not only going to have caps, they are going to have big tuition increases," says Gary Orfield, co-director of the Civil Rights Project, a research and advocacy group at the University of California, Los Angeles. "You put those two things together, and you have what was already a bad access situation turning into something much worse."
State funding is a critical source of revenue for public university systems, which have long been a more affordable path to a degree than private universities. State appropriations account for about a quarter of the revenue for public degree-granting universities, according to the latest federal data available.
But because state universities have other sources of income, such as tuition, state legislatures tend to cut funding to them during a recession before they reduce spending for other budget items, such as elementary and secondary schools and Medicaid.
The Denver-based Education Commission of the States, a nonpartisan research group, estimates that 35 states face budget shortfalls in the current fiscal year, and that more than 40 face similar problems in the fiscal year that begins July 1, 2009, in most states.
Michael Griffith, a financial analyst for the commission, says the full impact for higher education won't be known until early next year, when most state legislatures begin meeting to hash out their budgets. But in the meantime, some governors have already begun telling public university systems and other state agencies to either cut their budgets or to prepare to do so.
In California, Gov. Arnold Schwarzenegger has proposed more than $460 million in cuts to higher education to help make up for an overall budget shortfall expected to top $11 billion this year. In Kansas, Gov. Kathleen Sebelius has called for a 3% cut in the budgets of state schools this year and a 4% reduction next year.
College enrollment typically increases during a recession, but some observers wonder whether a continuing slump will actually keep enrollment numbers down next fall. Donald Heller, an education professor at Pennsylvania State University, says the current downturn appears to be a prolonged one that will erode state funding and endowment gains even as it affects the financial wherewithal of potential students. "The wild card is that this is a very different recession," he says.
As for the Florida enrollment cap, a recent report by Enlace Florida, a Tampa-based advocacy group for college readiness among Latino students, estimated that by 2012, the limits could prevent 40,000 or more students from pursuing degrees at Florida's public universities.
Mark Rosenberg, chancellor of the Florida system, says that he is sympathetic, but that he favors maintaining the cap -- in part because he has seen what funding problems have meant for his children, who both attend Florida International University in Miami, a public school.
The dance degree his daughter, Ginelle, was pursuing is being phased out, so she made theater her major. His son, Ben, a junior majoring in management, is taking classes online this semester because he couldn't get the courses he needed in an actual classroom.
Mr. Rosenberg says he is a strong supporter of access, but that it is a "false promise" to admit students to a public university and then not be able to provide the courses and counseling that they need to succeed. "The challenge," he adds, "is that we are not funded for the level of access we would like to provide."
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