<p>We have all been hearing stories about how individual colleges are choosing to deal with the economic downturn. I am wondering if there are any colleges out there that have been somehow unaffected? Or just minimally impacted? I imagine this might apply to small private colleges with little to no endowment but a niche market that will continue to draw students.</p>
<p>If we just look at the short run ( the next year or so) and take the possibility of institutional collapse off the table analysis becomes more clear. First are the institutions that will be affected the most.</p>
<p>Rich schools that depend on the earnings form their endowments will face large changes to their budget. For example, Dartmouth ( this analysis is on the internet) depends on the earnings from it's endowment for 35% of it's budget. With essentially zero endowment earnings for the present and near future ( not to mention principle losses) it will have to cut it's spending by 35%. </p>
<p>High end state schools with high spending per student and a high percentage of operating funds coming from the state budget will see large reductions in operating revenues and will have to make big changes. Examples are the U.C. system in California. Even though these schools are often well endowed this will not help in an era of low investment earnings.</p>
<p>Expensive schools with low endowments that have just barely been getting enough students to enroll to make their targets will suffer enrollment setbacks and financial cutbacks. Many of these are lower tier regional LAC's</p>
<p>Now for the least affected:
State schools from poor states with very little real estate activity that had become used to low budgets and frugal spending. Examples are the University of North Dakota or the University of Wyoming.</p>
<p>Second tier state schools with very low costs per student who have learned to live with very low contributions from the state. An example is Western Oregon University. These schools will find ample prospective students from those who drop down from the flag ship schools they can no longer afford.</p>
<p>Private schools with historically rich student bodies and moderatly exclusive admissions standards, that don't depend on endowments. An example would be Washington and Lee.</p>
<p>Sherman, from your analysis of what would happen to ivies in a meltdown, I tagged you one of the most talented analysts here on CC. Do you really believe Dartmouth will cut back 35%? Have you factored in that it has lost a far lower percentage of endowment than the others? Please let me know before I have to pay Spring term tuition!</p>
<p>"Affected" can mean different things. I imagine that big state schools will be harder on applicants from out-of-state, since they need to use their dwindling funds for in-state folks.</p>
<p>taking a contrarian pt of view on the out of state thing ...places like Penn State (which makes no differentiation between in and out of state applicants, might be inclined to take MORE out of state students. Why not generate 2 or 3X the amount of tuition revenue per student since virtually none receive any aid from the U?</p>
<p>Whistle is correct, the UCs are quietly moving to take more OOS students for the extra tuition.</p>
<p>taking a contrarian pt of view on the out of state thing ...places like Penn State (which makes no differentiation between in and out of state applicants, might be inclined to take MORE out of state students. Why not generate 2 or 3X the amount of tuition revenue per student since virtually none receive any aid from the U? </p>
<p>In fact the strategy of taking more in-state students would simply drive up expenses in the absent of supplemental revenues, i.e. most states will be diminishing both/either per capita contributions to their publix or the general contributions made, such as PSU, Pitt, Temple which are not compensated by the state on a per capita basis. </p>
<p>Of course, this specific strategy will only work for the more prestigious publix (vs. the Slippery Rocks, Western Oregons, etc.) that have the marketing cachet sufficient to attract those outta staters.</p>
<p>One thing we do know history has taught generally ...in bad economic times larger proportions of the population pursue higher education. However, the question remains ...where? Generally net cost, perceived and identifiable value, and "employable" curricula leading become much more significant in the "where" determination. Thus one might be rightly inclined to perceive that the myriad of under-endowed, tuition dependent smaller privates are at severe risk should this remain a prolonged situation. Conversely ...and unexplainably, perhaps ...colleges and churches have a unique capacity to survive against all odds. Just look at them ...many, many no-name insitutions that are 150 years and aging. Corporate America could have MUCH to learn from this phenomenon when we realize there are virtually no corporate survivors of the past 75 years.</p>
<p>I was mostly referring to less-prestigious state schools. Everything above makes good sense :)</p>
<p>hmom5, thanks for the props.</p>
<p>In the short run it is not really important what percentage of the endowment was lost at high endowment schools, because at most or all of these schools the principle of the endowment is not spent, only the investment income from it. Right now endowments can either be invested in equities etc. where they are not only not getting a return but losing money or they can be in safe treasury bonds etc. where the yield after inflation is essentially zero. This means that no matter the size of the endowment in the near term it is probably earning near zero ( most likely still losing). This means that there are no earnings to spend. So for institutions like Dartmouth, Yale etc. they will have budget holes equal to the amount they have historically gotten from endowment earnings. Will this make them poor or insolvent---No. The schools with high endowment contributions all have very high spending per student so if they cut back by this amount they will generally be no worse off than schools that didn't have it to begin with. But they will have to make significant budget adjustments in the short run. Unless!!!!! they decide to spend the principle from their endowments to keep up budgets unchanged. who knows.</p>
<p>I'd say in the short term that top state schools are going to be getting the top students who might have left their state previously for a private somewhere else. This will increase the overall quality of student at the flagship universities.</p>
<p>Universities are somewhat buffered from economic downturns as their revenue base is somewhat more diverse than simply state funding. This is an example for my alma mater
University</a> of Wisconsin–Madison Facts: Budget</p>
<p>The state contributes about 20 percent of the overall revenue and the rest is made up by federal programs, grants, gifts, tuition and tech transfer. Certainly gifts, tech transfer and state funding will decrease during a recession but it is not like they are going to have to shut down. Obviously this situation is different for private universities and small colleges, but this is true of most large public universities.</p>
<p>Actually, distributions from endowments don't work at all as sherman outlined.</p>
<p>Colleges spend a defined percentage of the endowment's value annually, with the rate varying from 4% to 6% for most Ivy League schools. There is generally a two-year lag in the rate’s calculation and redistribution of funds from the endowment so as to smooth out the effect of any fluctuation of the endowment value.</p>
<p>So, let's take MIT policy as an example (Harvard and Yale function in the same way), which I know well. It has currently a 5.1% distribution rate which can be adjusted annually. The 2010 endowment distribution is calculated on the basis of 80% of the 2009 distribution (plus inflation) + 20% of the endowment value in 2008 multiplied by the 5.1% distribution rate. So the actual distribution next year will actually increase as the endowment value in 2008 was higher than the year before. It won't be until 2012 or 2013 that the net effect of any drop in the current value of the endowment will be reflected in a drop in the distribution from the endowment.<br>
Endowment</a> Spending Policy at MIT</p>
<p>So, despite the major hits that all endowments have taken in the past year, the high endowment schools won't show any actual budget deficits for a while. A number of them like Yale, which depends for 35% on the endowment (as opposed to 20% for MIT for instance) are taking a proactive stance and decided not to spend all the additional money from the 2010 distribution in that year, but spreading some of it to later years, when they would actually face a real deficit. They are raising the distribution rate to the maximum of 6%.</p>
<p>Yale</a> Daily News - Spending rate to rise</p>
<p>So the well-endowed schools are going through some belt-tightening in anticipation of future capital needs, but nothing like what the second tier private schools or public schools are facing. Harvard, Yale, Princeton and MIT have actually increased significantly financial aid in the middle of the current year to meet additional needs from students. </p>
<p>By far, the wealthiest private schools will remain the best choice over the coming few years. They have set up generaous aid policies over the past few years, and these won't be rescinded. Private schools with low endowments which depend essentially on tuition revenues will be the hardest hit. Student loans are harder to get and fewer families will be able to afford the cost of tuition.</p>
<p>
[quote]
For example, Dartmouth ( this analysis is on the internet) depends on the earnings from it's endowment for 35% of it's budget. With essentially zero endowment earnings for the present and near future ( not to mention principle losses) it will have to cut it's spending by 35%.
[/quote]
</p>
<p>Like cellardweller said, this is simply not the way that institutions operate. I would be absolutely gobsmacked if Dartmouth did things this way. I would be gobsmacked if they even based their payout on as short-term a basis as a four-quarter calculation, and even then there is NO way they'd have $0 payout--the value would have to go BELOW $0 to have an average 5% payout of $0. Impossible.</p>
<p>Dartmouth already has annoucned significant cuts in spending and building.</p>
<p>**Indiana University has not had to lay off any employees yet.
In fact, they just recently built a new honors college and are
building a new neuroscience building right now.</p>
<p>The Dean gave a speech talking about the wise investment
of the University and how it's paying dividends. Horray IU! :D
Tis a good time to be a hoosier.</p>
<p>Just my .02**</p>
<p>State revenues are way down, too, so state-supported colleges can't count on increased state spending to supplement endowment shortfalls.</p>
<p>"At least 46 states faced or are facing shortfalls in their budgets for this and/or next year, and severe fiscal problems are highly likely to continue into the following year as well."</p>
<p>"[At] least 30 states have implemented or proposed cuts to public colleges and universities."</p>
<p>"At least 41 states have looked ahead and anticipate deficits for fiscal year 2010 and beyond."</p>
<p>Center on Budget and Policy Priorities. State</a> Budget Troubles Worsen</p>
<p>BusinessWeek magazine reported in December that the state governments hardest hit by economic woes are, in order, Arizona, California, Rhode Island, Florida, Nevada, Alabama, Illinois, Georgia, Virginia, and South Carolina. <a href="http://finance.yahoo.com/banking-budgeting/article/106338/States-in-Worst-Budget-Trouble%5B/url%5D">http://finance.yahoo.com/banking-budgeting/article/106338/States-in-Worst-Budget-Trouble</a></p>
<p>Almost all of those states' governments cite cutting public college and university expenditures as part of the state's plan to close budget gaps. Two that did not, Florida and Georgia, receive a good deal of education revenues from state lotteries, so that may be a way some states can dampen the impact of revenue shortfalls in higher education.</p>
<p>I agree in a way Senior's Dad. But I also think that no state is going to allow it's flagship school to suffer so harshly that it will diminish its overall reputation. At least not initially.</p>
<p>Cutting flagship universities' budgets is probably not on any legislature's wish list. But when states are struggling with paying medical care for the very young and the very old, keeping court systems operating, and paying police, firefighters, paramedics, and teachers, they've got to look at flagship universities too.</p>
<p>Note also that many states whose state governments are among the most troubled are those where state universities have made the most recent progress, Clemson, in South Carolina, being a prime example.</p>
<p>Will the legislature of South Carolina, for example, be able to continue to spend on Clemson at levels that will allow Clemson to continue its rise in recent USNWR rankings?</p>
<p>I thought USC was the flagship school of SC? Perhaps not. If so, this might be a prime example where a school like Clemson will suffer more than a school like USC.</p>
<p>USC may well be the "flagship," but Clemson is higher ranked in USNWR (61 v. 108) and is Number 2 on USNWR's list of up-and-coming national universities.</p>