<p>These are the most lucid explanations I've read anywhere. Thank you!</p>
<p>Does anyone have any info on Columbia? The university is suspiciously quiet, but has some real vulnerabilities that make me wonder. They felt forced to follow Harvard and Yale in financial aid promises, in spite of having a much smaller endowment, and based this on the pledge for a huge bequest from a single alumni (Kluge). One has to wonder how his investment portfolio looks at this point and whether he will honor that pledge. Columbia has expansion plans, similar to Harvard's. And, its relationship to the investment banking community must be significant, given its location. I believe that Columbia's president even sits on the NY Fed board, talking about cross-pollinating.</p>
<p>^^I believe Columbia is dependent on endowment income for only 13% of operating expenses, putting it, in relation to Harvard, somewhat in the position of Dickinson to Swarthmore (or, more realistically -- <em>Haverford</em> to Swarthmore.) Something tells me, there's an absence of game-changing potential, there.</p>
<p>Interest, your example is based on 2 assumptions I would not agree with atleast as it affects HYPS. I believe these schools were already getting their endowment spending up above 5% partly as a result of pressure from Congress and elsewhere. Secondly, it assumes the endowments are only down 30%. I believe and many have speculated that they are down atleast 50% if you used realistic asset values.</p>
<p>dstark, I would agree that the largest dollar problem has resulted from alot of small mortgages going bad, but from what I have seen in Florida most of these real estate developments and condo projects could not have been done in the first place without private equity capital.</p>
<p>"dstark, I would agree that the largest dollar problem has resulted from alot of small mortgages going bad, but from what I have seen in Florida most of these real estate developments and condo projects could not have been done in the first place without private equity capital."</p>
<p>I don't remember addressing this in this thread.
sm74, you're confusing me.</p>
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I believe these schools were already getting their endowment spending up above 5% partly as a result of pressure from Congress and elsewhere.
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<p>They say their targets were above 5%, but that's not what they were spending. According to their June 2008 statements, Harvard's endowment spending was 4.8%, Yale's was 3.8%. </p>
<p>Coming off several years of large endowment growth, the spend rates should have been at or near their low points for schools that have the luxury of spending less than the max.</p>
<p>A good annual financial report will have management discussion and "notes" that spell out the key indicators in plain English, such as endowment spending rate. Yale was kind of cagey in theirs. The Management Discussion was written for Senator Grassley, talking only of the spending targets: 4.5% to 6% if I recall, without mentioning what the spending rate really was. The actual spending rates for 2008 (3.8%) and 2007 (3.7%) were in the notes.</p>
<p>If there's no management discussion, some things can be easily deciphered from the actual financial statements themselves, but endowment spending is not always one of those, unless the college has a very clear line item. Some do, some don't.</p>
<p>If you can find them, the annual financial reports are the place to start. The management discussions are often surprisingly comprehensible and forthright.</p>
<p>The reason the spend rates should have been at their low points over the last few years is that, in addition to guidelines for percentage of endowment to spend, there are also guidelines for maximum growth in spending year to year. If a college sees three years in a row of 20% endowment growth, they don't want to increase the endowment spending by 20% a year because they would be struggling to figure out how to even spend that much increase in a college budget. It's just not smart. So they attempt to "smooth" the annual budgets, spending a smaller percentage from the endowment when the markets are rising and a larger percentage when the markets are falling. For example, if you target a 5% annual increase in operating budget and your endowment goes up 20%, you are going to end up at the low end of your endowment spending range the following year. This smooths the operating budget over time and (hopefully) avoids whipsaw increases and decreases.</p>
<p>The smoothing mechanism works great except this particular market decline is more than anyone ever anticipated. There is insufficient smoothing built-in to accomodate this. Hence, we will be seeing real cuts to bone and muscle in the college budgets. The schools with a cushion can implement their cost-cutting over time, so they might get away with reducing staff and faculty through attrition whereas schools that must have the cuts NOW will be turning layoffs. But, everyone is going to end up in the same place.</p>
<p>According to a press release from Yale spending from the endowment for the 2008-09 school year was budgeted at $1.16 billion, and the endowment was $22.9 billion as of Sept 30, 2008 and $22.5 billion as of Sept. 30, 2007. That is over 5%.</p>
<p>Guess that Dartmouth is not one of those colleges with a "cushion" (even though it is the smallest Ivy and has(d) an endowment approaching 4 bil), because it is laying off 60 of its staff.</p>
<p>As a local columnist and others have pointed out, wouldn't it have been great if Dartmouth had decided to take across the board cuts in pay to avoid the layoffs -- leading the way as a college that truly appreciates the community of which it is made -- and saying that "No, we will not lay you off, because as small a part as you play in this endeavor called higher education, your job is more important than ensuring that so many of those "above" you are not made to sacrifice any of their far higher salaries."!</p>
<p>What would that tell the current crop of students, many of whom seem to have grown up with, what's it called, oh yes, GoldmanSachsHead?!</p>
<p>Actually, Dartmouth looks OK. They've got the same issues everyone else does, but endowment spending has been under control. They've got $1 billion in cash call commitments, but had not tapped a line of credit established to cover those by October. The are moving quickly towards an overall 10% reduction in operating expenses, a number that requires some pain. Salary freezes, early retirements, staff layoffs. It's hard to really find fault with what they are doing.</p>
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Hewlett-Packard recently did an across the board pay cut instead of laying off 20,000 so there's a big public example right there.
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<p>But, the ability to do that is greatly dimished with a heavily unionized workforce. With union contracts "protecting" the workers, there's no choice but to layoff employees. You can't do an across the board pay cut.</p>
<p>What I'm seeing in city and town negotiations with unions is the choice: take a pay cut or we lay off x workers. Cities and towns are following through when the union says no pay cuts. The cities and towns have no choice.</p>
<p>So, you are saying that Dartmouth is heavily unionized -- from bottom to top?!. I guess I don't know enough about union/management relationships, but how can unions stand in the way of pay cuts yet allow layoffs?</p>
<p>dstark, yes sometimes brevity is more the cause of confusion than the soul of wit-what I was responding to was your comment about AIG. My understanding is that their huge losses were from providing insurance on real estate debt(credit default swaps). My point then was that much of that debt on real estate would not have occured had not private equity firms provided the initial captal to those developments. Does that make any sense?</p>