Last week, I joined NACUBO, along with two of my peers, for a presentation about university endowment spending, but with a twist of COVID-19 reality baked into the conversation. Some highlights of the discussion include:
- Spending rates across the board averaged 4.5% in FY19 as reported in the NACUBO Annual Study of Endowments 2019, and have had minimal fluctuations the past 10 years (range was 4.2% to 4.6%).
- The dispersion by size cohort showed mid-sized institutions spent the least, averaging 4.18%, while smaller and larger institutions were closer to 4.5% to 4.6%. When comparing public and private institutions, the average was 4.2% versus 4.7%, respectively.
- Public Institutions support on average 6% of the University operating budget, while Private Institutions average 11%.
Key question: Is now the time to increase spending?
The answer is not a simple yes or no. As stewards and fiduciaries of these long-term asset pools, the proper analysis and discussion must be done to justify changing your governing process and policies. So, now more than ever, take time to do your homework (no pun intended).
Spending "homework" checklist:
- Consider holistically what other revenue sources the institution has available, especially now with some of the federal stimulus recently approved, and what additional support might be pending for higher ed. The great unknown at the moment is fall enrollment numbers. Building out different scenarios and forecasts will be helpful to identify how much pressure might be on the endowment distribution. Moody’s, in their recent revised outlook, estimated that 30% of higher ed institutions are already operating in the red, with 5-10% at such dire levels that more radical approaches may be warranted, like financial exigency.
- State appropriations have not yet rebounded from pre-2008 levels (on average still behind 15%), and it is anticipated that the gap will widen for FY21 and FY22. That means that fundraising related inflows will likely be taking a hit in the near term. It might be worthwhile to have donor conversations to release certain restrictions in the short term.
- If spending increases at the individual endowment levels, think about what an increase might that do to Uniform Prudent Management of Institutional Funds Act (UPMIFA) considerations. Do you have a policy on spending reductions as these endowments fall from their original values?
- Borrowing might be an option for shorter term hurdles. You could consider either short term lines of credit, repurposing a portion of existing loan proceeds (recommend legal opinion), or using the endowment assets as collateral for other lending options. Remember to test the impact on loan covenants and other key financial metrics, especially if endowment values continue to decline or are flat from here.
- Examine all assets on the balance sheet. Are there unrestricted and/or non-endowed assets on the balance sheet that can be utilized in the short term? What is their current purpose? Are special appropriations allowed?
Beyond an increase in spending
You’ve thought through all of your potential scenarios and weighed your options. We thought of some potential work-arounds that might be an option instead of an increase in spending for your school:
- Can we change the make-up of how the endowment distributions are being used, even if just for the short term?
- Majority (50+%) goes to student financial aid (according to NACUBO)
- Academic programs 16%, faculty 10%, “other” 18%
- Can we change the way we calculate spending? What’s the difference between 12 and 20 quarters? What if we had floors and ceilings to control the year over year change?
- Should there be some form of spending immunizations account (e.g.: invested in short-term high quality or laddered bonds) for short-term spending needs, while long-term portfolios can seek additional return and not be forced as quickly to withdrawal at importune times? Is two quarters enough? One year?
We strongly recommend going back to your good governance practices, a key piece of the foundation for long-term success:
- Do the analysis as frequently as needed as things are changing rapidly and significantly
- Recalibrate cash flow, liquidity, risk management
- Look at the number to see if you can you stay the course with short-term modifications
Our presentation with NACUBO went into these topics at length. The slides show some detailed analysis to support these ideas. Please contact us for the slides or if you would like to discuss in further detail.
Information provided by SEI Investments Management Corporation, a registered investment adviser and wholly owned subsidiary of SEI Investments Company. Investing involves risk including possible loss of principal.
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