Endowment Drop Causes Cutbacks
Faced with a harrowing decline in the value of Cornell's endowment, the Board of Trustees adopted proposals in January intended, in the words of President David Skorton, to "protect the strength and character of Cornell while dealing with the financial challenges that impact all aspects of the University's balance sheet."
After years of strong growth, Cornell's long-term investments (which include the endowment and two smaller funds) had reached a value of $6.1 billion at the end of the last academic year on June 30, 2008. Between then and the end of the calendar year, their value tumbled 27 percent—more than $1.6 billion.
The 27 percent drop—first reported by Skorton in a January 9 interview with CAM—includes estimates of the current value of so-called illiquid assets such as real estate. A complete revaluation of these assets, which represent about one-third of Cornell's investments, has not been completed. When it is, the loss could be less than 27 percent—or more. And the decline in the value of the long-term investments may continue, despite efforts to revise the portfolio, as most economic experts are skeptical about a quick recovery.
Cornell's problem is not unique. According to a recent survey of business officers at 435 schools, the value of U.S. university endowments fell by 23 percent in the five months that ended on November 30, 2008. Harvard has reported a drop of more than 20 percent and estimated that its full-year decline could be 30 percent. Yale, Princeton, and other large institutions have also announced double-digit declines.
In the January interview, Skorton noted that Cornell is fortunate in one sense: its operating budget is not as dependent on investment earnings as that of other schools such as Princeton, which draws 45 percent of its operating funds from the endowment. "Only about 11 percent of the University's operating expenditures comes from endowment earnings," he said. "It's still a big number, but because we have a larger student body and a smaller endowment than some other schools, the impact is not as great."
Even so, the University has had to take stringent measures to address a budget shortfall of 10 percent caused by the endowment decline, a reduction in state aid, a slowdown in alumni giving, and other factors related to the current economic crisis. The steps approved by the trustees in January include spending cuts of 5 percent on the Ithaca campus (about $50 million) and 8 percent at Weill Cornell Medical College in New York City (about $13 million); extension of the "pause" in external staff hiring and campus construction to June 30, 2009; suspension of the Salary Improvement Program for faculty and staff in the 2009-10 academic year; tapping of $150 million in reserves to improve cash flow; and drawing of $35 million in endowment funds to support financial aid. The trustees also approved 2009-10 tuition increases of 4 percent for undergraduates in the endowed colleges—the lowest percentage increase since 1966— and 7.2 percent for undergraduates in the statutory colleges. (For details, go to: www.cornell.edu/president/statements/2009/ 20090125-fy2009-budget.cfm.)
Because the economic crisis is affecting alumni giving, Skorton says that the "Far Above" campaign may take longer if Cornell is to reach its target of $4 billion. "The goals that I've talked about—the importance of need-based financial aid; the importance of support for faculty; the need for appropriate philanthropy for facilities—everything is the same," says Skorton. "But the pace is going to have to be respectful of what people are going through. It would be offensive to go to people who are suffering enormous changes in their personal lives and presume that our needs are going to be first on their list. Our alumni and friends are continuing to be extremely generous, but we are experiencing a falloff in pledges right now because people are hurting."
Despite the gloomy outlook, Skorton remains optimistic about the University's ability to meet the economic challenge, citing the skill of the managers in the Office of Investment and the efforts of the trustees, especially those who serve on the Investment Committee. "During the most frightening parts of the declines and sell-offs that we went through," Skorton says, "these trustees—all of whom do something else for a living, and many of whom were suffering the same volatility in their personal and business lives as we were here—gave up hour after hour, on short notice, to keep hammering away at finding the best way to protect Cornell."
Skorton also believes that the current crisis offers an opportunity for Cornell to play an important role in the economic recovery—and beyond. "We have the assets to be extraordinarily helpful as the community, the state, and the country dig out from their problems," he says. "Isn't this one of the places where we ought to be tackling the thorniest problems? What other entities in society have this breadth of expertise and inquiry? This is our time to be part of the answer to problems that don't just go away."
— Jim Roberts '71