The screens before him pulse with worrisome financial news, but Tom Heck exudes Midwestern calm.
That’s particularly impressive considering that Heck, in his role as chief investment officer for the Ball State University Foundation, oversees the public university’s $255 million endowment.
As attention has been focused on classes being canceled and students being sent home because of the coronavirus, another threat to U.S. universities and colleges is looming: tens of billions of dollars in potential endowment losses stemming from the market meltdown following the virus outbreak and a global price war over oil.
“The timing of this particular situation is difficult because a lot of us are going through a budget process,” Heck said. “So suddenly we’re dealing with a lot of very negative investment returns just as we’re planning a budget.”
Three-quarters of the $630 billion in endowment funds at U.S. universities and colleges is invested in equities, or stocks, according to the most recent available accounting, at a time when share prices have plummeted since the start of the coronavirus.
“A lot of endowments are going to suffer big losses from this,” said Charlie Eaton, a sociologist at the University of California, Merced, who studies the financialization of higher education.
Making matters worse, the massive setback comes on top of existing financial challenges resulting from an unprecedented enrollment decline, leaving many universities poorly positioned to cope.
“Most schools are running with very little cushion, especially regional privates,” said Kaitlyn Maloney, senior director of research at the education consulting firm EAB.
More than half of university trustees in a survey conducted by the Association of Governing Boards of Universities and Colleges said they were concerned about the financial futures of their institutions. The survey was released in late January — before the market went into its slide.
Endowments contributed about $23 billion last year to university budgets, or an average of $31 million per campus, and about half of that money went to student financial aid, according to a report by the financial services organization TIAA and the National Association of College and University Business Officers, or NACUBO.
In addition to helping trigger the investment reversals, the coronavirus could cut into international enrollment, an important source of revenue, Maloney and other experts said. Universities and colleges also face the potential cancellation of such events as reunions, which could affect alumni giving. That’s to say nothing of whether those that have stopped in-person instruction or sent their students home will have to give them refunds. (A few have said they would.)
The market may rebound, of course. “We could see a snapback occur very quickly,” as has happened after previous health emergencies, said Dimitri Stathopoulos, head of U.S. institutional sales at the investment management company Nuveen.
And, as with many things in higher education, what impact does occur will vary among institutions: Those with small endowments will be able to squeeze less money out of them for any purpose, Eaton said, while elite colleges could continue spending, but might not.
“The counterproductive logic of austerity may lead even wealthy schools to reduce spending from endowments,” he said — including for financial aid to help low-income students pay for college
Even before the market volatility, university and college endowments were realizing lower returns than endowments that support nonprofit organizations in the arts, human services, health care and religion, according to a study by business professors Sandeep Dahiya and David Yermack of Georgetown and New York universities, respectively.
They also pay out a smaller proportion of their endowments than private foundations, which are required by the IRS to spend at least 5 percent a year in order to be tax exempt.
Higher education endowment distributions for the fiscal year that ended in June averaged 4.5 percent, the NACUBO-TIAA study says — even though they earned 5.3 percent and, over 10 years, 8.4 percent on their investments.
Although that’s been criticized by students and advocates for more spending on financial aid, it may prove in hindsight to have been a good strategy, EAB’s Maloney said.
She’s worked a lot with college leaders, Maloney said, “who want to create better strategic reserves for rainy days, but have faced a lot of criticism about not using the money for things like affordability for students.”
In light of the coronavirus crisis, Maloney said, “A lot of schools probably wish they had a lot more reserves than they do,” especially if predictions hold true that international student enrollment will drop off.
Some colleges, on the other hand, have been spending more than 5 percent a year of their endowment money, typically to cover operating shortfalls. That could put them in an even more difficult position, said Stephen Greenhalgh, a retired attorney who resigned last year from the board of trustees of his alma mater, Albion College, over this.
“Now they’re just facing the same problem with less money,” said Greenhalgh, who provided a document showing that Albion paid out between just under 8 percent and just over 9 percent of its endowment annually between 2011 and last year as it contended with annual budget deficits of from $4.5 million to $7.5 million.
A spokesman for the college did not respond to repeated voicemails and emails requesting comment.
“When an institution takes its endowment money and spends it to plug holes in the budget, it is breaking promises to past donors and it’s stealing from the future,” Greenhalgh said. “People are expecting that money to stay there and be a stable rock for the college forever.”
He added: “It’s also postponing the inevitable. Because in today’s climate of higher education, you have to have that endowment money.”
To Eaton, the image of higher education leaders “busy rearranging the deck chairs on their sinking endowments,” as he put it, offers a longer-term lesson: that unpredictable returns from those endowments are “no way for a society to pay for higher education.”
The steep declines show that “you can’t reliably depend on endowments to make up for stagnant or declining state appropriations to universities,” he said, “or funding for grants for students with financial need.”
This story about university endowments was produced by The Hechinger Report, a nonprofit, independent news organization focused on inequality and innovation in education. Sign up for our higher education newsletter.