Sunday, December 7, 2008

Endowment Decline Expected To Continue

By Hillary Darling


Vice President for Administration and Business Affairs James Muladore hasn’t seen anything like the current economic recession in his career. But could the recession cause both a decrease in available scholarship funds and an increase in the demand for financial aid? 

It’s a fair assumption, says SVSU Foundation Executive Director Andrew Bethune.

Muladore, who expects an increase in financial aid requests, said SVSU’s endowment declined by 14 percent in market value from July 1 to Oct. 31. Once November’s data is available, he said the decline will most likely be 20 percent to 25 percent.

Endowments are funds donated to a university and invested for scholarships, endowed professors and other programs. SVSU’s endowment fell from $44 million to $38 million in the four month period ending in October. 

“We’re not going to be insulated from the general market conditions,” Bethune said. “As the markets go down in such a drastic way, it takes everything with it. We are very conservative investors, and even the most conservative investors are affected by volatile markets.”

While SVSU’s funds dropped by 14 percent, the overall market, as measured by the S&P 500 Index, fell 24 percent in the same period. Muladore explained that not all of SVSU endowment is invested in stocks. Some funds are invested into fixed income assets and alternative investments.

The S&P 500 Index is one of several benchmarks SVSU uses to evaluate the performance of its endowment. The index is based on the performance of 500 stocks tracked by the Standard and Poors Corporation. 

As of Dec. 3, the S&P 500 had declined by about 40 percent in 2008. Historically, the average market change is an increase between 8 percent to 10 percent annually.

If the market conditions continue, Muladore said the available amount of endowment distributions for scholarships and other programs would decline.

While he doesn’t expect the number of scholarships to decline, he said the dollar amount offered for each award could be less. University officials are reviewing the situation to see how a long-term market decrease could affect funds available in the future. 

Muladore expects the need for the scholarships to grow.

“More individuals or families that in the past have not received financial aid may be in a position [to] now because of their jobs or financial situation,” he said. “I think all universities are thinking about that. It’s safe to say that a large number of have been negatively impacted to some degree by the current economy.”

The University Foundation will distribute approximately $350,000 in scholarships from endowment funds for the current school year. About
$1.5 million was distributed last year for scholarships, endowed faculty chairs and other university programs. 

The University has not yet calculated the amount of endowment funds to be provided for scholarships next year. 

The University will honor scholarship commitments for the current year. University Foundation endowments do not have an effect on outside aid programs, such as those funded by the federal and state governments or directly by SVSU.

SVSU’s $37 million in endowments is made up of more than 200 separate endowments. The original amount donated to the University is invested. The University Foundation then distributes a certain amount each year to the University based upon a distribution formula linked to the current market value of the individual endowment. The original amount donated remains invested in perpetuity.

About $9 million to $10 million of SVSU’s Oct. 31 endowment value is for scholarships. Each year, the University estimates the next year’s endowment distributions based upon the average value from the past three years. As a result, wild swings in the market, up or down, do not result in severe funding changes. 

“With endowments,” Bethune said, “we err on the side of being conservative. We are here for our students. We need to make sure our dollars are there for our students.”

Muladore said the University is prepared as best it can be for the economic downturn. SVSU’s resources have been managed efficiently and conservatively, he said, while SVSU has kept scholarships a priority in the budget.

And SVSU is still the least expensive of the 15 Michigan state universities, he added, about 33 percent less on average.

“The cost of education at SVSU makes it accessible to families,” Muladore said.

Other colleges are also affected by the economic downturn.

While performance numbers from other institutions are not available until early next year, Muladore said all endowments operate in the same investment environment. Although each institution can have investments unique to that school, most similar asset classes have experienced negative performance. Muladore said he is not aware of any particular endowment that is currently experiencing a positive return. 

“Across the board, the losses are in a similar range,” Bethune said. “If you see someone who hasn’t lost as much or lost more, they invested with different risks.”

Private universities are facing a different situation, Muladore said. While SVSU is funded by state appropriations and tuition, many private schools depend upon funding from endowment investments for basic operating expenses. For those schools, drastic market decreases could affect staffing and programs.

“[The economy is] on everyone’s minds,” Bethune said. “Markets have gone up and down over the years. This is a pretty wild swing, but things will get better. We have to know how to react. The warning signs are out that this is going to be a rough recession for the entire country. We’ll get through it. It’s just a matter of how long.”

1 comment:

Angelina said...

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