Aided by the recuperating stock market, the financial performance of university endowments was extremely strong in calendar year 2004, a sharp reversal from the investment declines experienced in 2001 and 2002 and the relatively modest reversal of fortunes that occurred in 2003.
While this welcome news, documented by the National Association of College and University Business Officers (NACUBO), means that there will be less pressure on other sources of university revenue, such as tuition, it does not mean that those other sources will be expected to contribute less to the typical university’s bottom line.
Why is it that if endowments are up (on average by 15.1 percent), tuition won’t go down?
First of all, most schools have strict restrictions on the manner in which they can spend endowment funds. These restrictions have a practical purpose, often rooted in long and complicated histories, but which nevertheless come down to a simple premise: without rules, the endowments might be spent in a relative flash, causing a loss of confidence in the university’s business practices and an erosion of trust from its many constituents, including you.
Think of a university endowment as a sort of rainy day fund, albeit one with more zeroes in it than you and I can reasonably comprehend. Knowing that a rainy day fund (with tight spending constraints on it) exists can cause other university money sources, such as line-of-credit providers or state legislatures to feel better about the money that they provide to a school. It’s the old rule of nobody wants to put “good money after bad.”
So, with endowments performing better in 2004, mostly because of the healthy growth of stocks, bonds and hedge funds in which those endowments were invested, the end result is a more tightly knit school safety net, protecting somewhat against larger future tuition increases, but not necessarily having any impact on tuition decisions for the 2005-2006 academic year.
And, of course, not all endowments performed at the same 15.1 percent growth clip; the law of averages means that some did much better and other lagged behind. How did your son or daughter’s school endowment perform? One place to look is on the university Web site, under finances. In the case of a public university, there will likely be financial information contained in various state budget documents, also available on the Web.
Speaking of state budgets, I wrote in a column late last year that there has also been a positive trend in the amount of public funds going into state colleges and universities. This is true as a general rule, but there are exceptions in some states, either where overall budget problems persist, or where higher education is simply not treated with the high priority it should be accorded.
You should be looking at endowment performance and use, no matter where your young adult is enrolled or thinking about enrolling. And you should also examine the amount of funding that your state legislature allocates to higher education, and how that money is spent. This is true no matter whether your son or daughter is currently enrolled in a state school, or even considering attendance in a state school. After all, you are not just a current or future college parent, you are a first and foremost a taxpayer.
So the bottom line on endowment growth and increased state support for higher education is that it is better than the alternative, which seems, in the past few years, to have caused tuitions to go up at a higher clip than they would have otherwise. As The New York Timesput it in today’s edition, “last year’s healthy (endowment) returns helped restore a sense of normalcy for university officials who have occasionally felt that they were fighting, and losing, a war on two fronts: in the legislature and with the stock market.”
When “university officials” believe that they are fighting and losing a battle, it is you who suffer the collateral damage. Our job at College Parents of America is not only to brace you for the onslaught, but to give you some hope that the constant rat-a-tat-tat of tuition increases will soon begin to subside.