When the National Association of College and University Business Officers released its 2008 Endowment Study findings for the fiscal year ending June 30, 2008, showing Boston University’s 4 percent total endowment growth from fiscal 2007 to more than $1.1 billion, it seemed like some kind of sadistic joke.
In an email President Robert Brown sent to BU faculty and staff on Jan. 12, he said the total endowment has since dropped 24.1 percent to $897 million during the first five months of fiscal year 2009, and it is expected to drop to at least 30 percent by the end of June. Although the status of BU’s endowment has been steadily improving since its dramatic 27 percent dip in 2001, it would seem as though this recent drop effectively means the successful investing between 2001 and 2008 has gone to waste.
‘There is an important difference in the drop of our endowment in 2001 and in 2008,’ Brown said in an email to the Daily Free Press. ‘In 2001, our performance was one of the poorest in the country (NACUBO comparison) because we were badly over-invested in some sectors. Today, we have a much more balanced and sophisticated investment strategy, and although our endowment has dropped significantly, we have performed well – as far as we can tell at this point – relative to others.’
In response to the current economic climate and its impact on investment markets, NACUBO released a follow-up survey to show how endowments fared in the first five months of fiscal year 2009. The endowment market value has decreased by about 23 percent during this time, according to the follow-up. Given BU’s 24.1 percent drop, the school’s status is on par with those in the sample pool, just as Brown said.
‘No one likes to see the magnitudes of these loses, but we know our investment strategy for growing the endowment long term has served us very well, and we do not see deviating from this strategy in the long term,’ Brown said.
To understand the meaning of the endowment drop and whether the university protects itself adequately, it is essential to know that the endowment makes up less than three percent of BU’s annual operating budget. As such, things like auxiliary operations (such as BU’s ownership of 660 Corporation, which generates revenue from Campus and City Convenience stores, among other businesses) as well as tuition and fees, contribute a great deal more revenue to the university to be used for the operating budget than the endowment, BU Chief Investment Officer Pam Peedin said. This means that the endowment’s dip will generate a muffled impact on university operations.
‘The bigger and more complex the operation, its possible that the endowment would make less of an impact,’ Peedin said. ‘If you think about the potential for us in auxiliary operations or in research funding, [they] don’t exist at a smaller liberal arts college.’
BU has a system for insulating its endowment from volatile markets and preventing erosion, Peedin said. To determine how much of the endowment should be delivered to the operating budget for a given fiscal year, BU takes a five-year (20-quarter) average of market value endowment performance, and it has delivered a rate of about four percent of the endowment to the operating budget since 2003. For example, even if the total endowment goes up by 20 percent, spending will still stay low because of returns in previous years.
The five-year average can be both good and bad. When the markets provide fruitful results, the university cannot reap the benefits of immediate revenue, but still must accommodate for presumably lower numbers from several years prior, spending less. However, this protects BU from more trying economic times, preserving the operating budget.
‘You’d like it to continue to go up, but that’s not realistic,’ Peedin said. ‘It’s not the end of the world, especially because this is precisely the reason why we take an average of those market values in the long term . . . We don’t want what we deliver to the operating budget of the university be dramatically affected by the kind of downturn we’ve seen.’
In fact, if the endowment generates healthier returns in the investment markets during the quarterly values of this fiscal year than those of five years ago, the average will go up, which would mean the endowment could deliver more dollars to the operating budget than last year. At least for now, the endowment’s most recent plunge will not sink the operating budget. If the endowment continues to generate poor returns, however, it will remain part of endowment spending practices for several years.
In short, although it is tempting to cower in fear at the endowment’s performance over the last five months, all is not lost ‘- at least not in the immediate future.
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Brown and Peedin don’t seem to be too concerned. And, if the operating budget is intact, why is there still a hiring freeze in effect in most academic administrative offices across the University??