<p>Gonzalo</a> Raffo InfoNews: THE BIG SQUEEZE / BARRON´S ( HIGHLY RECOMMENDED READING )</p>
<p>Harvard has $5 BILLION dollars in debt? Wow. And notice how the article delicately says that Harvard, Yale and Princeton are assuming a 25-30% decline in the year ending June 2009, but goes on to demonstrate that the real decline is a lot bigger?</p>
<p>barrons:</p>
<p>That is a very significant cover story. It highlights the liquidity and cash-call problems of the big endowments that the media has largely ignored. Without naming any names (although I’m sure you know who I’m talking about), it also calls into question some of the endowment loss estimates from rock star endowment managers as they have jumped from interview to interview over the last few months peddling their books.</p>
<p>cardinal:</p>
<p>It’s not just the debt. Harvard has $11 billion in cash call commitments to private equity funds – nearly half of their entire endowment value. They don’t have enough liquidity in the endowment to sell off stocks and bonds to cover the cash calls.</p>
<p>Amherst is in the same boat. They have $500 million in cash call commitments, again nearly half of their endowment value. They just borrowed $100 million in taxable bond debt to cover cash calls and operating expenses, bringing their debt to over $300 million.</p>
<p>Roughly speaking, ever dollar of additional debt is another 5 cents in budget cuts in the operating budgets – 5 cents more than colleges without the liquidity problems are having to make.</p>
<p>This is a signficant story. Credit to Barrons for putting it on the cover.</p>
<p>Amherst has $300 million debt on a one billion endowment? That’s bad. That’s very very bad.</p>
<p>Pretty fascinating stuff, but the big name colleges will all be ok. Once the market rebounds, their portfolios will be doing fine and big name gifts will keep on filling the coffers.</p>
<p>…And you thought that paying commissions and paying fees on retail mutual funds was bad. :)</p>
<p>I guess taking the size of the endowment, dividing it by the amount of undergrad students, and pretending that is how much a school can spend on their undergrads, isn’t too accurate a number.</p>
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<p>$1.0 billion. $1.2 billion. Depends how they value all the private equity stuff next week. Amherst was in stellar financial shape until the cash calls forced them to borrow $100,000 million to cover operating cash needs around the 1st of the year. Moody’s kept their AAA bond rating for now, but changed the outlook forecast to negative.</p>
<p>The amazing thing was the way Amherst presented the borrowing as if it was just pure genius financial management for a college to borrow $100,000 million rather than tap their $1 billion endowment for operating expenses and how they were preserving the endowment. Sounds great, except they now have to cut an additional $5 million a year from their operating budget to offset the interest expense over the life of the taxable bond.</p>
<p>Also helps show the impact of paying for new buildings out of endowment. Not all those new buildings were donor financed.</p>
<p>dsark:</p>
<p>Per student endowment spending is still a good number. That’s why all these schools are trimming their budgets.</p>
<p>Barrons:</p>
<p>I’ve only found one school that has been paying cash for new buildings: Grinnell. Every other school does tax-exempt bond issues for new buildings. The endowment gifts from the naming rights are, in effect, used to pay the debt service on the bond issues.</p>
<p>In a way, you can say that colleges were simply leveraging their endowments, investing on “margin”. Great in a sustained up market, not so great during a market collapse.</p>
<p>Interesteddad, I don’t understand your post #9. $100,000 million?</p>
<p>And no, the endowment per student is a phony number. That’s the number I’m talking about.</p>
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<p>Sorry, typo. Should have read $100 million.</p>
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<p>Not a phony number to all the college finance and investment committees that track it religiously. Not a phone number to Moody’s that considers it in assigning bond debt ratings.</p>
<p>As we know I am really limited in my understanding on this stuff. :)</p>
<p>This said, I noted that getting an accurate picture of this stuff is really quite difficult because it is a private institution (not subject to laws of public disclosure I assume) and this is not helped by the fact that the schools and their managers aren’t talking.</p>
<p>While I understand the desire to not panic people, it would seem that those students paying tuition or being hit up for various support would be curious, yes?</p>
<p>And while this article spoke of the big ivies and some larger universities, is it that smaller universities or those with fewer endowment dollars don’t use their endowment to meet as much of their budget needs? I thought all private schools had to use 5% of their endowment a year. </p>
<p>As usual, I am confused. Is there a way to find out all the schools who borrowed to cover operating costs like Amherst has?</p>
<p>Most reputable colleges are pretty forthcoming with their financial information. There is just no standard presentation. You have to dig around their websites for financial reports. Search the school newspaper. Use Google news to alert you to stories. Go to Moodys and find the most recent bond issues. And so on and so forth.</p>
<p>I think that, by and large, consumers are oblivious to the financial condition of the colleges they are considering. Every student enrolling next fall will face the impact of signficant budget cuts during their four years – at some schools more than at others. I am quite surprised how little attention is being paid to these issues.</p>
<p>Consumers hang on the ratings, but seem to not care that some of these schools are already planning to change their student/faculty ratios by more than 10%. Amherst for example, is increasing enrollment by 180 students – that’s more than 10%.</p>
<p>My university is not funding anyone past the fifth year, after so many years of funding students in their seventh years.</p>
<p>“Not a phony number to all the college finance and investment committees that track it religiously. Not a phone number to Moody’s that considers it in assigning bond debt ratings”</p>
<p>That kind of cracks me up because if a school has $11 billion in capital calls, the endowment per student number doesn’t really work.</p>
<p>That’s $11 billion that won’t be going to students. At least not the ones at Harvard today or in the near future.</p>
<p>Then there is the debt…the debt service payments have to come from somewhere.</p>
<p>As far as Moody’s goes…please. ;)</p>
<p>It’s phony number. That’s a fact. There is a lot more to a college’s finances than endowment per student. And the students never see the endowment per student. For example, Amherst students are not going to see $1 million or whatever the endowment per student is these days. At the very least, the number should be divided by 20 (if 5% of the endowment is spent on students per year). Divided by 25 if 4% of the endowment is spent per year.</p>
<p>“Amherst for example, is increasing enrollment by 180 students – that’s more than 10%.”</p>
<p>There goes Amherst’s endowment per student numbers. I guess Moody’s is going to downgrade Amherst’s debt, even though the school’s finances might improve by taking this action. Lower endowment per student, healthier financially…Hmmmm.</p>
<p>“I thought all private schools had to use 5% of their endowment a year.”</p>
<p>Nope. 501(c)(4)s have different requirements than 501(c)(4)s. My d’s school spends about 1% per year (but funds new buildings and the like outside its endowment.)</p>
<p>I agree on budget cuts. It’s easier to see what’s happening with publics because they are … public.</p>
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<p>Of course. One of the other key numbers is the percentage of endowment spent each year. Total spending per student is an important number. Net tuition, room, and board revenues per student is a key indicator. Debt as a percentage of endowment is important to look at.</p>
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<p>That depends. Amherst’s financial position will only improve if they cheapen the product, i.e. if they don’t hire the extra 22.5 FTE faculty it would take to maintain their current student/faculty ratio with the expanded enrollment. Any college can “improve its financial position” by spending less on education. Reducing the student/faculty ratio is the biggest cost savings a college can implement.</p>
<p>They are in no financial position to expand the faculty, so classes will get larger, seminars will be dropped, they won’t be able to fix their competitively weak Arabic program (one post-doc teacher), and so on and so forth. These are real ramifacations of their investment mismanagement that is costing them $5 million a year in additional debt service that can’t be spent on operating expenses.</p>
<p>The other colleges in Amherst’s per student endowment range are not being forced to make anywhere near these kinds of cuts. None of them are taking on additional debt.</p>