Last year was financially fraught for private colleges and universities — but endowments were a source of stability, according to Cambridge Associates’ second annual Endowment Radar Study.
Amid the Covid-19 pandemic, endowment dependence in 2020 remained consistent with 2019 numbers, resulting in “institutions with a higher reliance on the endowment” enjoying “less disruption to their overall operating revenues and operating results,” according to Tracy Abedon Filosa, head of the CA Institute and author of the study.
Endowment growth, at an average rate of 2 percent, also remained consistent last year. But this growth was outpaced by college and universities’ institutional debt, which grew at a rate of 12 percent during the same period, according to the study.
Although surveyed institutions “continue to have healthy balance sheets,” Filosa flagged schools’ “debt appetite” as important to watch moving into 2021. Filosa also noted that “colleges and universities where the endowment played a more significant role… had more capacity to access liquidity through the debt markets.”
The pandemic has been difficult for college and universities: Average core operating margins, which measures operating results before accounting for endowment subsidies and other investment income, dropped by 2.1 percentage points in 2020, according to the study. And for some private colleges and universities included in the study, the subsidies from endowments and gifts “could not fully make up the difference.” From 2019 to 2020, the number of institutions that reported negative overall operating margins increased from 10 to 15.
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Meanwhile, the average tuition discount rate continued to climb in 2020, according to the study. Filosa wrote that institutions that have more endowment support for financial aid may be better off when it comes to a balanced budget.
“Without a higher subsidy from the endowment to offset this forgone revenue, they will need to employ other financial levers — such as auxiliary revenue and annual fund gifts and careful expense management — to balance the budget,” she wrote in the paper.
Filosa noted that the pandemic has had an inverse effect on universities and endowments compared to the 2008 financial crisis. In 2008, the financial crisis stressed endowments but left campus enterprises relatively unscathed. In 2020, higher education operations experienced “major disruptions” while “endowments have provided consistent support for institutional budgets and pricing” and served “as a ballast on the balance sheet for today’s borrowing and future spending.”
According to the report, the endowment spending rate remained steady in 2020, indicating that schools stuck to their spending policies. Filosa suggests this consistency may be due to the fact that financial disruptions occurred toward the end of the fiscal year and schools did not need access to liquid funds immediately or had access to other emergency funds.
“The steady level of spending could also be explained by the long-term discipline that is built into most endowment spending policies to provide equitable spending for multiple generations of stakeholders,” Filosa writes.
A representative from Cambridge Associates was not available for comment by press time.