<p>^^ speedo,
Read what it says: “the endowment provides 3% of its operating budget compared with 25% at Wooster.” That means the payout from endowment—probably about 5% of endowment assets—produces enough money to fund 25% of Wooster’s overall operating budget. It most assuredly does NOT mean that Wooster is spending 25% of its endowment assets annually; that would be insane as it would leave the college dead broke in just a few years.</p>
<p>Now certainly, if the endowment payout accounts for 25% of Wooster’s operating budget, and endowment assets are down 30%, that’s going to but a big dent in Wooster’s operating budget. But it’s not quite the 7.5% hit you’d get if you just did a straightforward mathematical calculation (30% of 25% = 7.5%). That’s so for a couple of reasons. First, the payout is calculated on the basis of a multi-year moving average of endowment assets; so this year’s payout will be somewhere around 5% (more or less) of the average endowment assets over the last 3 years (or 5, or 7, or whatever the college uses for its average). That multi-year average figure will surely be higher than the present asset value after the recent sharp market downturn. Since market values were very high in the first two of those three years, we’re talking about maybe a 4% or 5% hit to the overall operating budget for the coming year—though they need to be careful going forward because unless the markets recover strongly and quickly, next year’s multi-year average endowment value will be lower, as it will have two down years figured into the average.</p>
<p>But colleges also usually have some maneuvering room to further mitigate the impact. I use the figure of a 5% payout, but some colleges are a little below that, some a little above. Either way, they do have discretion to make adjustments, either by changing the payout rate, or by changing the multi-year average on which they calculate the payout. You don’t want to make these kinds of changes precipitously or often, because you don’t want to get into the habet of breaking into the piggybank every time you want cash. But if need be, they can tweak these numbers to take a slightly larger payout.</p>
<p>Colleges can generally deal with a 5% hit to their operating budget by deferring big capital projects, deferring hiring, deferring maintenance, and so on. So I don’t think a school like Wooster is in big trouble. And colleges are generally better off if they have diverse revenue streams—tuition and endowment is better than tuition alone; tuition and a large research capacity that produces lots of outside research grants, plus tuition, plus endowment is even better. That’s why I say the colleges that are most vulnerable are those that are exclusively or almost exclusively reliant on tuition, because even a few empty chairs can wreak havoc on their budgets, as can a heavier-then-usual demand for financial aid, because with only a single revenue sources, their only choices will be to leave financial need unmet (and risk losing students), raise the sticker price to produce additional revenue to support FA for those that need it (and again risk losing students, this time the most financially able), or make significant cuts elsewhere in what are already generally lean budgets, because these are schools that are trying to provide on tuition alone what their better-endowed competitors provide on tuition plus substantial endowment payouts. It’s not a happy time to be a college administrator, but the worst job of all has to be at these totally tuition-funded schools.</p>