Colleges Brace for Investment Losses, Spending Cuts

After a volatile couple of years in the equity markets, U.S. colleges and universities are seeing slowing growth and even losses in their investment portfolios, leading many to reduce annual payouts from their endowments, Bloomberg reports.

After averaging double-digit returns from 2010 to 2014, average returns on educational endowments fell sharply in 2015 to 2.4 percent, and many colleges and universities are anticipating a negative net return for the fiscal year that ended June 30. With less money to spend on financial aid, faculty salaries, and other costs, schools may have to search for other sources of revenue, even as they face increased pushback over rising tuition bills. In the nation's capital, for example, Rep Tom Reed (R-NY) is considering a proposal that calls for the wealthiest colleges to designate 25 percent of their annual endowment income for financial aid — or lose their tax-exempt status. Congress also is examining how tax-exempt endowments are managed and spent at the richest private schools, with two committees reviewing responses to an inquiry that was launched in February.

"Unless universities want to start eating into the growth, we have to decrease our spending," Bruce Arick, assistant treasurer at Butler University, told Bloomberg. The Indianapolis school's $184 million endowment suffered an investment loss of 0.9 percent in FY 2016, and the university's trustees voted in May to reduce the endowment's payout rate for 2016-17 year from 5 percent to 4.9 percent, with further reductions a possibility beyond that.

What's more, while the median draw on endowments among  private schools is about 8 percent, a handful of the wealthiest schools, including Princeton University, Amherst College, and Grinnell College, derive about half their operating budgets from investment income. Carl Vance, chief investment officer at Lewis & Clark College in Portland, Oregon, said that the school's $228 million endowment generated a 0.1 percent return in FY 2015, and that its spending rate of 5.4 percent will be reduced by 0.2 percent annually through 2020-21 to bring it down to 4.5 percent.

"It's going to be a combination of whatever can be identified," said Vance when asked where the savings will come from. "There's no immediate solution here."