Recession forces increase in endowment spending

The University of Richmond endowment has lost about 19 percent of its endowment during the past year, losses that total almost $320 million in market value, which has prompted the university administration to begin spending a greater portion of the endowment.

The endowment loss equals the budget deficit of the entire state of Nevada and is almost $100 million more than the Texas Rangers were sold for in 1998.

In an e-mail to faculty and staff sent Feb. 17, President Edward Ayers said the increase in endowment spending would provide breathing room for a budget squeezed by a declining market and increasing prices.

The university will increase endowment spending by 11.5 percent during the 2010 fiscal year to more than $60 million, Ayers said.

Ayers cited losses in the university's short-term investment fund as a reason for the increased endowment spending.

The fund is composed of the money students pay in tuition, room and board and is used through the semester as working capital, or money on hand that is tapped to fund day-to-day expenses. The losses in that fund exceeded $1 million, Ayers said.

In addition to the endowment's loss in market value and losses in the short-term investment fund, the utility costs are projected to rise by more than $1 million.

Despite the losses, the university will not lay off employees, at least in the short term. In an e-mail interview, Ayers said layoffs would be counter to the university's mission.

"Dedicated faculty and staff make a Richmond education possible," Ayers said, "and protecting faculty and staff positions will be essential to ensuring the continued quality of the student experience."

Most universities have taken major losses in their endowments. Harvard has announced widespread staff layoffs after its endowment lost 22 percent of its market value -- declines that exceed $8 billion. Harvard is firing 25 percent of the staff of the Harvard Management Company, which manages its endowment, according to The Harvard Crimson, the student-run newspaper.

Harvard is also firing subcontracted custodial staff and library employees, according to the Crimson. Harvard had also announced that some construction projects would be put on hold, part of widespread pressures being felt at public and private institutions across the country.

In Virginia, Gov. Timothy M. Kaine announced budget cuts for higher education, which has forced public schools such as Virginia Commonwealth University to cut down the number of courses offered, halt construction of new buildings and begin sending more rejection letters to high school seniors and transfer students statewide.

But Richmond will not only retain its current employees, but also continue to hire new faculty and give modest, merit-based compensation to faculty and staff, Ayers said.

Herb Peterson, vice president for business and finance, said the university's good credit rating would sustain Richmond through what economists predict will be a protracted recession.

Moody's Investors Services rates Richmond's financial standing at AA1, just one grade below AAA, the highest level. About 35 public and private colleges in the country are rated equal or better than Richmond, Peterson said.

"We shall be 'OK' and persevere better than most because our resources are better than most," Peterson said.

In October, Richmond's debt load was more than $130 million. Now, although the school will add $45 million in new debt soon, the debt load is down to $74.7 million, Peterson said.

The new debt that will be added related to three construction projects: the football stadium, an addition to the E. Claiborne Robins School of Business and the Westhampton Center.

Although the increase in spending, and the good credit rating allows the university to hold up well during the crisis, the fact remains that the endowment bleeding poses a daunting problem for the budget during the recession.

"This increased spending from the endowment provides welcome relief to the budget for fiscal year 2010," Ayers said, "although such increases cannot sustain us through a prolonged market downturn."

The university creates its budget on a three-year moving average of the endowment's market value, and the losses this year represent about 4 to 6 percent of that average, Peterson said.

The downturn began in earnest during the latter part of 2008, in the waning days of the Bush administration, when banks laden with toxic assets and bad mortgages began collapsing under the strain. Most notably, Lehman Brothers Holdings filed for bankruptcy on Sept. 15 after suffering crippling losses in the housing collapse.

With the financial system in disarray, the stock market took a dramatic nosedive, which has yet to reach bottom. On Monday, with signs everywhere that the recession was deepening, the Dow Jones Industrial average, a key market bellwether, closed at its lowest point since May 1997.

The market declines during recent months have triggered the rapid contraction of Richmond's endowment's market value. Richmond has also suffered a decline in philanthropic giving, but Peterson said Richmond had not relied on it as heavily as other universities had.

The economic crisis has also caused a contraction in the job market, which has many students worried about the prospect of finding employment after college. The university has greatly increased the size of its Career Development Center as a way to help upperclassmen search for work.

"We worry about this a great deal," Ayers said. "The Career Development Center is considerably larger than it was just a year ago, and the people there are skilled and experienced, so I hope our seniors will start there."

John Earl, chairman of the finance department at the business school, said students should look in unconventional places for work.

"Students need to lower their expectations a bit during this downturn," he said. "Everybody wants to go to New York, but the jobs just aren't there. Go back to your hometown, find some place that will give you a decent wage while we are in this recession and then look bigger once things start coming back. And they will be back."

Contact staff writer David Larter at david.larter@richmond.edu