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KINDELSPERGER: Historical advantages of endowments dive with market

June 22, 2009

In the world of higher education, especially at private institutions, the conventional wisdom was always, "The best and financially strongest institutions are those with the largest endowments."

Strong fund raising over the past 20 years helped many institutions build large endowments, which became major sources of annual income. Large endowments also were viewed as "insurance" against vagaries of economic downturns, protection against swings in enrollment, and a safety net from unforeseen financial emergencies or budget cuts by state legislatures.

But life has changed in higher education and changed very rapidly. The value of most endowments, just like our portfolios and 401(k)s, has plummeted and, along with them, many of their historical advantages.

Today, institutions with the strongest "bottom lines" are likely to be those with strong management and business plans that work in today's economy, not necessarily those with the strongest endowments.

Historically, private colleges and universities have been grossly grouped into one of two categories&3151;the well-endowed, and those that were "tuition-driven."

Well-endowed institutions boasted endowed professorships and scholarships, facilities maintenance endowments, and often large unrestricted endowments.

Tuition-driven schools, however, depended on student enrollments to generate the majority of their income—hopefully recruited at the lowest "discount rate" (a euphemism for how much the institution needed to lower or discount their published tuition to match the pocketbooks of applicants or, more specifically, their parents).

Nearly all institutional endowments enjoyed dramatic run-ups in their size and earning power in the '90s, and private philanthropy fueled steady annual increases in fund raising. Those with the largest endowments and strongest fund raising often grew exponentially—further separating the "haves" from the "have-nots."

The market crash in some ways has become a great equalizer. And because of this, "tuition-driven" isn't necessarily the weaker position today. Institutions, both public and private, that rely on endowments for operating support have been forced to curtail the practice or even put it on hold temporarily.

Similarly, falling tax revenues have forced significant cuts in appropriations for state institutions and student aid appropriations for students at all types of institutions. There is also evidence of even deeper tuition discounting to ensure enrollments do not dip, which adds pressure to the bottom line.

Which brings us to the simple point&$151;the economics of higher education may have changed for the foreseeable future. Who will be the eventual "winners" in this topsy-turvy time for higher education? For now, you might put your money on community colleges.

In Indiana, Ivy Tech Community College reported a spring term 2009 enrollment increase of 10.4 percent, and recent media stories point out that many campuses actually have too many students—a problem many institutions would welcome right now.

Only time will tell if well-endowed institutions will regain the value of their investments. And tuition-driven institutions that raised discount rates this year to hit their enrollment goals may find they gave away the store.

The likely winners, both short-term and long-term, will be those institutions that historically placed a high premium on strong fiscal management—an issue that received relatively little attention or accolades during strong economic times.

Such institutions are built to survive this downturn. You might recognize them as institutions that have programs that are attractive to students, have held true to their mission, have tuition rates that address value as much as price, and have strong cost containment in place. They are also institutions with strong leadership from both senior staff and trustees.

These institutions are not panicking in these times, because their fundamentals remain strong. Whether an institution is well-endowed, tuition-driven, state-supported, private, large or small, what will likely keep it strong is leadership and solid fundamentals.

No one will likely look back on 2008 and 2009 as the "good old days," but-much like banking, housing and maybe the auto industry—the economic downturn has leveled the playing field. It has leveled it in a way that well-run and strongly led higher education institutions will not only weather the downturn, but come out the winners.•

Kindelsperger is senior executive consultant at Johnson Grossnickle and Associates, a philanthropic consulting firm. Views expressed here are the writer's.

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