Endowments take hit in economic recession

By Liz Garrett
November 13, 2008

Cabrini is just one of all institutions of higher education that have felt the effect of the economy’s downturn. The ongoing economic collapse has put a tight squeeze on the endowment funds of universities and colleges across the United States.

Endowments are like the savings accounts and investments of colleges and non-profit institutions.

Colleges seek gifts from benefactors and alumni, put the money into the endowment fund and use the interest and profits for specific purposes such as scholarships and large institutional improvements.

But when the stock market drops as dramatically as it has this year, college endowments get hit in two ways. First, no income comes in the form of interest and dividends, and second, the total value of the endowment decreases.

“While Cabrini doesn’t rely on or benefit from endowments to the extent that some other schools do, this loss of income hurts [much like it hurts retirees, or parents trying to pay for college],” Dr. Eric Malm, assistant business professor, said.

“Endowment giving, like other forms of charitable giving, rises and falls with the economy. So one would expect that this downturn will produce less new giving to endowments as well,” Malm said.

Although many college endowments have been impacted, larger institutions that are tied up with private equity, real estate and have made risky investments prove to be struggling the most. That is not to say that smaller private colleges that base their dependence on tuition revenue and large benefactors are not in danger as well because of the economic crisis, according to insidehighered.com.

The reason behind the drop in endowment value is due to its reliance on the stock market. The investment in different types of stocks, bonds and mutual funds directly affects endowments. “Cabrini has a more conservative investment strategy, which means that we may not have significant gains when the market is strong, but we will weather a down market better than other endowment funds,” Dr. Mary Harris, business administration chairwoman, said.

“When the total value of the endowment drops, this could impact the amount of spending that is available to Cabrini in a given year, which could affect financial aid for students.”

According to Dr. Ken Boyden, vice president for institutional advancement, the consequences of the economic slump affect the college’s major benefactors’ donations the most.

“Typically, major leadership gifts for non-profits come in the form of non-cash. A depleted economy will deplete a great majority of the assets. “Smaller gifts in size tend to come from a credit card or a written check, so they are not suffering as much as larger endowments,” Boyden said.

“Very few stocks are highly appreciated today, more are at a loss. Therefore, donors are holding back on those stocks. When benefactors lose money in their stocks it affects their donations to the endowment funds.”

Scholarship dollars, since they are generally produced by an institution as a result of their own investment or endowment, are impacted negatively as well.

“Smaller colleges such as Cabrini that are in fine financial situations are going to suffer because of the economy,” Boyden said. “One of the ways that the suffering economy manifests itself is through the scholarships. You have fewer capabilities when dipping into an endowment fund for scholarship money when the economy is as it is.”

The endowment fund belonging to Cabrini has felt the pinch of the downward spiraling economy in a number of ways.

“Cabrini is suffering as a result of the downturn in the economy.

There is undeniably a negative effect on endowments due to these losses,” Boyden said.

Liz Garrett

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