Harvard endowment is down $8B

Parents Forum
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<p>
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In fact, financial reporting obligations (of which mark to market is only one of many obligations) only exist for organizations that are either (1) publicly held i.e. companies that issue stock) or (2) organizations that are subject to reporting under state law. And I don't even know of any such state laws, although others might, other than rather weak state level financial disclosure laws.

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<p>Tax-exempt charities are also required to publicly report year end tax returns and financials.</p>

<p>As a practical matter colleges are concerned about their own bond ratings. Rigorous accounting practices would probably be part of the ratings evaluation.</p>

<p>All of the private colleges I know follow the guidance of the Financial Accounting Standards Board (FASB):</p>

<p>FASB:</a> Financial Accounting Standards Board</p>

<p>FASB has issued several guidelines on establishing market value:</p>

<p><a href="http://www.fasb.org/pdf/fas157.pdf%5B/url%5D"&gt;http://www.fasb.org/pdf/fas157.pdf&lt;/a&gt;&lt;/p>

<p>And this clarification three weeks ago:</p>

<p><a href="http://www.fasb.org/pdf/fsp_fas157-3.pdf%5B/url%5D"&gt;http://www.fasb.org/pdf/fsp_fas157-3.pdf&lt;/a&gt;&lt;/p>

<p>I'm theorizing that colleges are only required to report their year-end financials next June. They are not required to report quarterly, but if they start making pubic statements about precise financial numbers (i.e. endowment values) on a quarterly basis, those public statements should be in keeping with the standard accounting practices. I think that's why colleges don't want to make statements about endowment values right now except in the most general terms.</p>

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<p>
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and not a particularly good year to be in academe.

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Although we are on salary, and its not like we got bonuses in the good years. Thus I expect that commitments will be honored. Although this is probably delusional.</p>

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<p>Interesteddad,</p>

<p>I don't want to get into an accounting argument with you, but you are wrong about FASB being the final word for colleges and universities. To quote one source:

[quote]
There are three major bodies that issue standards for nonprofit organization financial accounting, and some supplementary guidelines that are commonly referenced, which regulators typically relay on for determining if an NPO is conducting its finances responsibly. The standards bodies are the Financial Accounting Standards Board (FASB), the American Institute of Certified Public Accountants (AICPA), and the U.S. Federal Office of Management and Budget (OMB). The FASB is the primary standards issuing body for nonprofit organizations in the U.S. However, this hasn't been the case for very long, and at this time it has developed only a limited set of "Statements of Financial Accounting Standards" for NPOs, although two are critical ones. These are No. 116, "Accounting for Contributions Received and Contributions Made," and No. 117, "Financial Statements of Not-for-Profit Organizations." Unfortunately, the complete text of these is not available online, since the FASB sells printed versions as a fundraising mechanism.</p>

<p>The AICPA publishes the primary guide to GAAP for nonprofit organizations, the "Not-for-Profit Organizations Audit & Accounting Guide." It also releases its own standards, called "Statements of Position." The most recent, and controversial, is SOP 98-2, "Accounting for Joint Activities Accounting for Costs of Activities of Not-for-Profit Organizations and State and Local Governmental Entities That Include Fund Raising." Further discussion of joint costs allocation is presented below.</p>

<p>The OMB develops standards and guidelines specifically for NPOs that receive federal grants. However, even if an organization doesn't currently receive such revenue, there are few that wouldn't like to be able to at some point. Therefore, some familiarity with the OMB guidelines can be useful. Unfortunately, they are rather arcane and picayune, and not something most people would choose to read if they had a choice. The potential size of many federal grants is typically the primary motivation for doing so.

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<p>To make matters more complex, it is third parties, such as IRS and NIH that have their own standards to be met. </p>

<p>Most of FASB policies, as you should know, ID, were created to, in FASB's own words, "Serving the investing public through transparent information...". Hopefully it is clear that the "investing public" has no dog in a fight over transparency or information accuracy of the books kept by a university. A lender might. The IRS might. But not the public. </p>

<p>You should also be aware that in many states, there is no requirement for a college to disclose any financials. You should also know that many state universities are subject to accounting practices dictated by the state, each with their own approach and differing reporting requirements. For example, how many states practice accrual accounting? How many states follow FASB? (hint, not many!). </p>

<p>In fact, the one university for which I have personal knowledge of its accounting practices, Harvard, practices its own brand of modified cash (or modified accrual, depending on how you want to view it) accounting. And it uses its own approach for valuing historic assets.</p>

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<p>newmassdad:</p>

<p>Completion of the IPEDS Dept of Education surveys are mandatory for any college or university participating in the Federal financial aid program (Pell grants, federal work study reimbursement, etc.).</p>

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The completion of all IPEDS surveys, in a timely and accurate manner, is mandatory for all institutions that participate or are applicants for participation in any Federal financial assistance program authorized by Title IV of the Higher Education Act of 1965, as amended. The completion of the surveys is mandated by 20 U.S.C. 1094, Section 487(a)(17).

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<p>The IPEDS survey includes comprehensive fianancial reporting, including detailed operating expense information by category, endowment returns, and so on and so forth. When you use their online database to return data for groups of colleges, you are asked to choose the data reported by "private non-profit colleges following FASB guidelines" or public college following GASB guidelines. Here are the exact categories of financial data in the IPEDS database:</p>

<p>
[quote]
Public institutions - GASB 34/35 </p>

<p>Public institutions - GASB 34/35 (Component units using FASB)<br>
Component units using FASB</p>

<p>Public institutions - GASB 34/35 (Component units using GASB)<br>
Component units using GASB</p>

<p>Private not-for-profit institutions or Public institutions using FASB</p>

<p>Public institutions - Reporting Standards before (GASB 34/35): Fiscal year 1987 to 2003</p>

<p>All institutions - Reporting Standards before (GASB 34/35 and FASB): Fiscal year 1987 to 1996

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<p>Since these accounting guidelines are referenced by name in the mandatory federal reporting, it's reasonable (I think) to assume that colleges at least consider adhering to these standards.</p>

<p>Here are the categories of data that can be returned for a "FASB" school:</p>

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Assets and liabilities</p>

<p>Student grants </p>

<p>Revenues and investment return</p>

<p>Expenses by functional and natural classification: Fiscal year 2002 to current year</p>

<p>Total expenses and salaries wages expenses by function and total expenses by natural classification: Fiscal year 1997 to current year </p>

<p>Endowment assets

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<p>As you point out, there is almost certainly a range in the quality of the reporting. And, back to the original point: these reports are only required at the end of the fiscal year. There is no requirement to report endowment assets on Oct 31st.</p>

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<p>ID,</p>

<p>I won't waste space here with a lot of quotes out of context or otherwise incompletely explained.</p>

<p>Suffice to say that the financial reporting requirements for higher ed institutions are very different from public companies. Public companies are required by SEC regulations to follow GAAP as developed by FASB. Private and governmental organizations are not required to follow GAAP in most cases. Instead, their reporting requirements are all over the place. And just because someone's policy, even IPED's reports, reference FASB does not mean the obligation is the same as for public companies. Just as importantly, one needs to dig further to see if there are any penalties for "mistakes" in things like IPEDS reporting. I don't know, and don't really care much, but I do know that SOX does not apply to universities, so you can draw your own conclusions. (i.e. before SOX, public companies fudged their financial results all the time. Heck, the fudges still go on. SOX added criminal penalties to reduce the fudging. You think academics are inherently more "honest"?)</p>

<p>To bring this back to the original topic, which is endowments, for a number of reasons, it we lay folks will never see any more details regarding endowments than the institutions want to provide. </p>

<p>An endowment does not need to "mark to market" because an endowment has no public reporting requirement. Indeed, depending on how the endowment is incorporated and managed, the endowment's activities may well be segregated from the university's, so the only info that flows from the endowment to the university reports is the income provided by the endowment to the U.</p>

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<p>Yahoo news

[quote]
Harvard's endowment has lost an estimated 30% just since mid-year.
You read that right.
The endowment of one of the most elite educational institutions in the world, run by some of the best and brightest investment managers, who have been granted privileged access to the innermost insiders in the business world, Wall Street, and Washington, D.C., lost nearly a third of its value in just five months' time.

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<p>Lessons</a> learned from Harvard's 30% endowment loss - MarketWatch</p>

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<p>If it is 30% loss, it would be a loss of over 10B then. I wonder about the endowments for other elite schools (YPSM).</p>

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<p>To me, what is intriguing is the back story: Why did Harvard go public with this, when it did not need to? To manage expectations? To address questions arising out of the internal memo, which probably leaked to the press? </p>

<p>Institutions like Harvard guard their public image and press as much as they can. When I was an employee there, I coordinated many an emerging issue with public affiars folks. They are good, they know their job, and they are real guardians of the image. </p>

<p>So, did this spin out of control? Sure got a lot of what appears to be mostly negative press - NYT, WSJ, probably Newsweek or Time next week? The level of detail in the articles I read tell me that someone was pretty frank with reporters, in ways they did not need to be. </p>

<p>Or, was this a planned "leak" to alert their constituents (alums etc) about coming changes? </p>

<p>I don't know, but I wonder.</p>

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<p>My guess is that they were getting calls all the time from reporters pursuing the "downturn hurts higher education angle", and decided to get out in front of the story, maybe use it a bit. (See other stories about Drew Faust telling departments to scale back, etc. Also, they're probably in the midst of year-end fundraising activities.) What did they have to lose? The information would have come out in a few months anyway, they're not going to make the money back by then (and if they somehow do they'll get credit for it), there's no way they could market $1.5B in private equity interests without half the world knowing they were doing it. And if everyone disclosed their losses, Harvard would still be on top of the heap. What's the downside?</p>

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<p>
[quote]
To me, what is intriguing is the back story: Why did Harvard go public with this, when it did not need to? To manage expectations? To address questions arising out of the internal memo, which probably leaked to the press?

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<p>They knew the endowment decline would get the ink and distract attention from the real shocker: the announcement that Harvard is selling a sustantial amount of TAXABLE bonds to raise cash for liquidity purposes.</p>

<p>As you know, well-heeled colleges only issue tax-exempt bonds tied to specific capital construction projects. The fact that Harvard has to raise cash (presumably to meet their cash-call obligations) by borrowing this way is just mind-boggling. It's being completely overlooked in these stories.</p>

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<p>"decided to get out in front of the story"</p>

<p>I think this theory makes the most sense. The story is theirs to control when it's their announcement.</p>

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<p>Any borrowing Harvard (or any nonprofit) did to purchase or carry investments would be taxable. And it's probably prudent for Harvard to borrow at what are likely to be very low taxable rates to fund capital calls rather than to sell long-term investments into a depressed market. So, even though it's unusual, I don't see it as shocking or cataclysmic that Harvard is talking about issuing taxable debt.</p>

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<p>Harvard borrowing because it doesn't have the cash to cover its endowment cash calls is, however, newsworthy. From a PR standpoint, they've done a good job of burying that "man bites dog" story under the more obvious "dog bites man" news that their endowment is down, especially since they conveniently gave out a figure that they know understates the decline.</p>

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<p>JHS, </p>

<p>Listen to interesteddad. I used to know Harvard finance well. Harvard and its sister institutions use tax exempt bond issues because they are much cheaper to do - the tax exemption of interest is a "gift" to the debt issuer by the government in the form of lower interest rates.</p>

<p>So why would an institution issue "taxable" debt? I can think of only two reasons: They're tapped out for tax exempt debt (a real possibility) or the markets are so hostile to tax exempt that they must go the taxable route. </p>

<p>Keep in mind, too, JHS, that tax-exempt borrowing is tied to the secured asset, not the use of funds. I know of at least one case (can't give details for obvious reasons) where H used existing buildings as collateral for tax exempt bonds to get money for a new project. Because money is fungible, it is rarely a problem to obtain funds through a tax exempt offering that frees up cash to be used for things like investments. The fact that H is not doing this is, in fact, most curious.</p>

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<p>I wonder what interest rate Harvard is going to pay? I might like to buy some of its taxable bonds. :)</p>

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<p>Harvard needed to get in front of the story, yes, but it also needed to tell its faculty that it needs to retrench, that there won't be any new hires, that some programs may have to be cut, etc... It's not going to be pretty. This is prime hiring time at most universities.
And it's not just Harvard. I was told of universities where faculty and staff were asked to prepare for scenarios of 5, 10, 15% cuts.</p>

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<p>
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So why would an institution issue "taxable" debt? I can think of only two reasons: They're tapped out for tax exempt debt (a real possibility) or the markets are so hostile to tax exempt that they must go the taxable route.

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<p>While it may be possible to play some games saving cash for investments (if you have cash lying around), the tax-exempt HEFA bonds have to be tied to capital construction or renovation projects.</p>

<p>I think the size of the taxable borrowings (and the size of the endowment cash calls), is going to pretty much preclude playing any games. </p>

<p>The State of New Jersey pension funds just answered an emergency cash call of $155 million to a Black Rock hedge fund. Remember, Harvard just tried (aparently unsuccessfully so far) to unload $1. 5 billion in private equity commitments. We are talking serious coin, cash that even Harvard can't raise without borrowing.</p>

<p>Harvard didn't have to say that their taxable borrowing would be "substantial". They volunteered that information, which suggests to me that it will probably be VERY substantial.</p>

<p>I am by no means suggesting that Harvard is in a fiscal crisis. Don't get me wrong. I am suggesting that the size of the cash calls to endowments with heavy investments in alternative funds is probably the real story here. Much more than trying to budget with a 20% reduction in endowment spending for the operating budget.</p>

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<p>newmassdad: It's a technical point (and at the outer limits of my technical competence), but there are hundreds of pages of regulations designed to make it impossible for nonprofits to borrow on a tax-exempt basis to carry investments. Being secured by tax-exempt property isn't enough, there has to be very close ties between the debt and some tax-exempt-purpose use (building educational facilities, hospitals, etc.) in order for the debt to be tax exempt to the holder. There are even special rules for what to do with the excess proceeds while you are waiting to spend it to preclude using that as a float to finance endowment investments. If debt isn't specifically traceable to the tax-exempt use, at least a substantial portion, maybe all, will be allocated to the investment use. So there's no way to borrow to meet capital calls besides taxable borrowing.</p>

<p>I also doubt that Harvard really HAS to borrow to meet its capital call commitments. I'm sure it could raise $1.5 billion by selling marketable securities it holds over a reasonable period. But why should it? What's Harvard going to pay on its taxable debt, 5%? 6%? That's a pretty cheap price to pay to avoid having to liquidate investments in the near future. I'll bet the premium on a 1-year SPDR option is a lot more than that</p>

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<p>JHS, I don't disagree with anything you say in your first paragraph. But, the point is that, to the degree they can use tax exempt bond proceeds for things, that frees up other cash they might have. The fact that they don't have any other cash to free up points to a cash flow problem that can only be fixed by issuing taxable bonds.</p>

<p>There were times in the past when Harvard did not even resort to tax exempt bonds for projects, so much of this is curious.</p>

<p>Needless to say, Harvard would rather get cheaper funds than through a taxable bond offering. In fact, I don't think they've ever had to do this before. If you have decent data access, maybe you can check.</p>

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<p>In recent years, Harvard has raised significantly more through taxable bonds than tax exempt bonds. In the first six months of 2008 alone they raised $722 million out of which more than $500 million was in taxable bonds. That is not counting another $350 million in taxable commercial paper. </p>

<p>The funds raised through non-taxable bonds are for specific purposes and the amount is controlled by the state of Massachusetts. They could not use a taxable bond issue to cancel the swap agreements, a major purpose of the current offering. As of June 2008, the cost of cancelling these interest rate swap agreements was over $330 million (up from $13 million in June 2007). </p>

<p>Despite the size of its endowment, Harvard badly needs cash as most of its holdings are highly illiquid. Only around $6 billion of its endowment funds (as of June 08) were unrestricted, most of that also illiquid. They are also getting a number of cash calls on their private equity and venture deals forcing them to dump $ billions worth of these investments at a fraction of their cost. </p>

<p>By the time the dust settles, the value of the endowment could drop by 50%.</p>

<p>Financial</a> Administration - Annual Financial Report of Harvard University</p>