Richmond to maintain strong budget despite endowment losses

The University of Richmond's $1.7 billion endowment is projected to lose more than $230 million this year, nearly $80 million of which could evaporate this quarter alone, combining for a possible 13 percent total loss this year, university officials said.

Between Dec. 31, 2007, and September of this year, the endowment had decreased by $150 million, according to Herb Peterson, vice president for business and finance. Combined with an expected $80 million or 5 percent loss this quarter, the endowment could lose nearly 13 percent of its total value during the year 2008. That's enough money to pay for every student at Richmond to attend for a year at full tuition, with money to spare.

Because the endowment is actively invested in the stock market, significant losses have been expected during the global financial crisis. The past few weeks have brought a steady flow of bad news from Wall Street and the broader U.S. economy as job losses mount and frozen credit markets continue to create uncertainty through the global financial markets.

The market's fall two weeks ago was the largest stock market decline in history and represented more than a trillion dollars in losses with the Dow Jones industrial average, a key bellwether for market health, plunged from more than 12,000 points to 8,700 points. The market bounced up and down during last week, but by Friday the Dow was still below 9,000 points.

In an attempt to boost consumer confidence and unfreeze the credit markets, the Federal Reserve has been lowering key interest rates on loans that the Fed guarantees.

The Dow soared Monday by 413 points to close at 9,265 after news of a possible second U.S. economic stimulus package from Federal Reserve Chairman Ben Bernanke. However, the Dow fell 231 points the next day. Wednesday it closed 514 points down, erasing Monday's gains. The surge and fall has been characteristic of the volatile market in recent weeks. Richmond's endowment has not been an exception.

The university had about $100 million invested in the Commonfund trusteed by Wachovia, a bank that failed several weeks ago. Because of its difficulties, Wachovia froze assets in the Commonfund to prevent investors from pulling their money out before the market had a chance to stabilize. Managers would then have to sell assets in a declining market, resulting in losses for all participants.

"In the current environment, people tend to panic first and think rationally second," Peterson said.

Peterson said that the school had access to 40 percent of the $100 million and would have access to another 17 percent by the end of the year.

The Commonfund, formed in the late 1960s, has allowed schools with smaller endowments to pool their assets and gain access to managers with histories of getting high returns on their investments.

Still, President Edward Ayers wrote in a campus-wide e-mail that the university's overall financial picture was strong. While state universities around the Commonwealth and the nation face large budget cuts, Ayers wrote that he believed Richmond could avoid reducing its operational budget.

Layoffs and reductions in the planned endowment spending levels were not anticipated, he said.

Addressing student concerns, Ayers said he foresaw limiting tuition, room and board increases, but he expected to be wary about budget increases amid the financial crisis and would use the strategic plan to dictate new investments.

"We are well positioned to withstand this economic turmoil," Ayers wrote in an Oct. 9 e-mail to faculty, staff and students, "but like all institutions, we are facing a period of financial challenge." The endowment provides more than 25 percent of the university's operating budget annually and gets annual returns of about 6.7 percent.

Richmond is also $131.5 million in debt, which Peterson said in an e-mail was not a significant amount of money compared to the university's total assets -- valued at $2.6 billion as of June 30. The debt is 5 percent of that.

The school acquires debt to pay for new construction costs and other such projects. University officials said that when the school announces a new project, it begins construction as soon as possible, meaning the school must borrow money initially and raise the rest from alumni and other donors later.

John Earl, chairman of the finance department at the E. Claiborne Robins School of Business, said the debt was a healthy amount even in today's financial climate.

"I don't think that there is any question as to the school's ability to pay that money back," Earl said. "Now, it's questionable that we would be able to add any more debt with the credit market the way it is."

The university is planning aggressive construction projects in the coming months, including a new football stadium, road construction, the Weinstein International Center and renovation of the Tyler Haynes Commons.

University officials said projects such as the new football stadium and the Weinstein Center, were already well funded before construction efforts began.

An inability to add new debt could delay the start of some of these projects, but Peterson said it was too soon to say whether any university construction would be put on hold.

The university's budget stands to be squeezed even more by projected increases in energy costs. Already this summer the university was faced with an overall increase in electric utility rates by 30 percent, said Ayers.

Peterson echoed Ayers in saying that students should not worry about the university's financial future.

"Market declines occur from time to time," he said. The school has had "excellent returns on its investments" in recent years, but that this academic year would be difficult, Peterson said.