Northwestern’s Endowment Shrinks Following University Budget Woes

Endowment spending — which was increased to overcome a multimillion-dollar budget deficit — far outpaced the fund’s 2.5 percent return for the year ending August 31.

Bigstock photo

Bigstock photo

The Northwestern University endowment fund shrank by about $200 million during the school’s 2019 fiscal year, reflecting below-target returns and higher-than-usual spending in the wake of a $94 million budget deficit.

According to Northwestern’s recently released annual report, the value of the endowment dropped to $10.8 billion on August 31 from about $11 billion a year earlier. It marks the second fiscal year that the fund’s assets have decreased since the financial crisis, when the endowment lost $1.3 billion in value during the 12 months through August 31, 2009.

Unlike fiscal 2009, investment returns were positive — if below target — in fiscal 2019. According to the report, the fund gained 2.5 percent in fiscal year 2019, which ended August 31, trailing Northwestern’s composite benchmark, which was up 5.4 percent. The endowment also underperformed the university’s target return by 4.6 percent, the report said.

The total inflows to the fund, including the investment gains of $295 million, were “more than offset by spending and administrative support of $589 million,” chief investment officer William McLean said in the report. He said that endowment spending had grown “significantly” over the past several years.

In fiscal 2019, the payout rate — including management fees — was 5.2 percent. This was below the prior year’s 5.6 percent payout rate, but higher than the ten-year average of 4.9 percent.

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According to the report, the university had authorized withdrawals in excess of typical endowment spending for fiscal years 2018 and 2019. These “strategic investment payouts” of $100 million in 2018 and $50 million in 2019 came after the university suffered financial shortfalls in 2018.

Minutes from Northwestern’s faculty senate meeting in January 2019 reveal that the $100 million withdrawn in fiscal year 2018 was used to cover a $94 million budget deficit. The additional $50 million payout in 2019 was intended to counteract a continuing deficit, according to a report on the senate meeting by the university’s student newspaper, the Daily Northwestern.

Beyond the increase in endowment spending, the multimillion-dollar deficit also led to university-wide budget cuts including staff cuts, with the Daily reporting that about 80 non-faculty employees were laid off July 2018. University president Morton Schapiro told the student newspaper in October that the university had achieved a budget surplus for fiscal year 2019.

Prior to fiscal 2019, Northwestern’s endowment ranked as the tenth largest fund of its kind in North America, according to a study of endowments by the National Association of College and University Business Officers and TIAA. It remains one of only a small number of endowments valued at above $10 billion.