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February 4, 2010

Annual endowment study marks worst-ever year

Pitt had plenty of company when it came to the steep drop in its endowment last year.

Fiscal year 2009 took its toll on institutional endowments as investments tanked and donors tightened their purse strings. The benchmark National Association of College and University Business Officers (NACUBO)-Commonfund Study of Endowments (NCSE) survey of 842 American colleges and universities, released last week, found the institutions’ endowment investments averaged a -18.7 percent return in FY09. That was the worst in the 37-year history of the survey and the second year in a row with negative investment returns. Average returns in FY08 were a -3 percent.

The overall  value  of  the schools’ endowments also declined an average of 23 percent by year-end. Changes in endowment values are impacted by investment returns, but also by other factors such as gifts and distributions made during the fiscal year.

Harvard, which had the largest endowment in the study, saw its endowment value fall 29.8 percent to $25.66 billion, down from $36.56 billion at the end of FY08.

Pitt’s endowment value, 27th largest among the 842 institutions, fell from $2.33 billion at the end of FY08 to just under $1.84 billion, a 21.3 percent decline, according to the survey.

Part of the drain on Pitt’s endowment was attributable to the alleged securities fraud involving the operators of Westridge Capital Management and related firms with whom Pitt had invested endowment money. The University’s FY09 financial statement reported the value of its investment with Westridge as $34.9 million, representing a 50 percent write-down from previously recorded fair value. (See Oct. 29, 2009, University Times.)

Gifts to the University in FY09 also were down, falling from $21.27 million in FY08 to less than $19.39 million.

According to Pitt’s FY09 financial statement, the University’s endowment returned a -21.3 percent.

The value of Pitt’s endowment, which takes into account not only endowment earnings but also gifts, distributions and transfers, declined from $2.34 billion at the beginning of FY09 to $1.84 billion, a 21.7 percent decrease, at the fiscal year-end. (Due to reporting differences, the values cited in the NCSE differ from those on the University’s annual balance sheet.)

Pitt Vice Chancellor for Budget and Controller Arthur J. Ramicone noted that although January 2010 was a down month, Pitt’s endowment value now is hovering around the $2 billion mark.

Institutions participating in the NCSE represent $306 billion in endowment assets. In a prepared statement, NACUBO President and Chief Executive Officer John D. Walda said, “These results illustrate the extreme difficulties colleges and universities faced at the height of the global economic crisis. Our hope is that the strong first half of FY2010 augurs well for the full fiscal year and that a year hence the story will be much more positive.”

Commonfund Institute Executive Director John S. Griswold stated, “Many educational institutions have taken steps to adapt to the realities imposed by endowments that have been buffeted by losses averaging nearly 20 percent. Future NCSE reports may well reflect fairly significant changes in investment management, spending, debt practices and governance policies.” The institute is the education and research arm of Commonfund, which manages endowments for educational institutions and other nonprofit organizations.

Institutions with endowments of more than $1 billion had the worst investment returns, with the 52 schools in that category averaging a -20.5 percent return. Schools with the smallest endowments, under $25 million, fared better, with returns averaging  -16.8 percent.

Ramicone said the fact that smaller endowments did better was unusual, but not surprising, given  that  they  usually  hold higher percentages of cash and fixed-income assets — the only two asset classes that yielded positive returns for FY09.

The NCSE showed the average spending rate was 4.4 percent, with 43 percent of study participants reporting they had increased their spending rate. A quarter of the institutions decreased their spending rate and 28 percent reported no change.

Fifty-four percent of the institutions increased their spending in dollars, “indicating that colleges and universities stepped up spending to maintain programs and services central to their missions even as their endowments lost value,” the study stated.

Pitt’s formula for endowment spending, adopted in 1996, calls for the University to distribute 4.25 percent of the endowment’s average market value based on the preceding three fiscal years. However, a “floor” built into that policy ensures that recipients of endowment funding will not receive less than in the previous year.

Ramicone said the University distributed approximately $84 million in FY08, and $96 million in FY09, but has invoked the floor in FY10 to maintain prior-year support levels.

He said next year’s NACUBO report will be interesting in terms of the adjustments universities will make in light of the recent endowment performances.

The University will see its peak endowment year, 2007,  fall off the calculation of the prior three-year average.

Trustees committees decide on asset allocation and investment policy with discussions typically occurring in March. Ramicone said his office, in conjunction with consultants, is working to prepare options to present to trustees for consideration this spring.

—Kimberly K. Barlow

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