College endowments mostly took a beating in the past year, newly-released financial accounts show, raising fears of budget squeezes ahead as colleges are less able to rely on investment income to cover costs.
The losses come at a time when the Government is forecasting deep cuts to higher education spending. Furthering already deeply-felt economic pains, donors have cut back on giving in the past two years.
Most colleges use a small portion of their endowment fund, generally three to four percent depending on past years’ performance, to help cover operating costs. A perfect storm of investment losses, government funding cuts and drops in fundraising may now leave many colleges in perilous position.
One college bursar said: “I don’t think there is anyone in Oxford University who has a clear handle on what the cuts mean.
“We’ve got to stop pussyfooting around – we are all facing some very difficult decisions. We will have to look very hard at expenditure and income.”
Disparities in fund performances
Endowments were down almost across the board, but some college funds proved more resilient than others. Among the biggest losers were those heavily invested in the Oxford Investment Partners’ (OXIP) fund-of-funds, which chalked up a 19.6% loss for the year. Balliol, which had just over half its endowment invested with Oxford Investments Partners, lost 13.1% of its endowment, while St Catz lost 14% of its endowment, most of which OXIP also managed.
The other major OXIP investors are Christ Church, New College, and St John’s. Those three colleges’ endowments together with those of most other colleges outperformed the broader UK equities market, which was down about 10.5% over the same period. College bursars credited the diversity and cautious profile of their portfolios.
“Colleges have done better than equity markets because agricultural land has done better”, said St. Catz’s bursar, Fram Dinshaw. She defended the performance of the OXIP, pointing out that the fund, founded in 2006, is still within reach of meeting its targets.
“OXIP runs a policy of aiming for a 5% real return – inflation plus 5% – over a five-year period… This has been the worst rolling 12 months since we started. Yet in the long run this washes out – there are swings and roundabouts. OXIP is still 3-4% ahead of world indices since its inception.”
Rising costs and shrinking cushions
Alongside shrinking endowments are steadily rising operating costs for the colleges, including staff wages and building maintenance, which in some cases are outstripping inflation.
St John’s College ran a deficit of over £3m, and had to dip deeply into income from its endowment – which itself fell almost eight percent – to cover operating costs. The college’s income increased slightly over the year, while costs were up by 17%.
But the wealthy college still has a total endowment of nearly £277m, or about £450,000 in endowment money for every student, one of the highest ratios among Oxford colleges.
By comparison Balliol holds about £56,500 in endowment funds for each of its students, and expects “financial pressures…for the foreseeable future”.
New College’s report was similarly downcast: “…In common with every other institution in Britain and the United States, the College has not only seen a substantial reduction in the capital value of its endowment, but has also seen a substantial reduction in the yield on its assets.
“At a time with the Bank of England anticipates that interests only a little above zero will persist for some time, it is hard to sustain a spending rate of close to four percent.”
The financial crisis’s chilling effect on donations, added New’s report, “needs no belabouring”.
The national picture
In their reports some college pointed to the role of national education policy – hotly debated ahead of the country’s general elections – in their financial planning.
Worcester, which faced an operating deficit of nearly £1.3m after alumni contributions fell twice as much as the college predicted, suggested that a national increase in tuition fees would be the only path to financial security.
“In the absence of a large increase in tuition fees this College, with its low endowment, will always be vulnerable to sudden changes in donations,” the report reads.
Worcester endowment fell by nearly a tenth to £16.3m – about £27,300 per student, one of the lowest ratios in the university – and its general reserves are now enough only for about a year of operation.
One bursar at another college questioned Worcester’s financial strategy, saying cuts were in need, not more telethons:
“It seems that they have become accustomed to living on windfalls and living beyond their means. It only takes one or two major donors to drop out to create a crisis.”
Worcester Domestic Bursar Steve Dyer rejected the characterisation of its past donations as “windfalls”, saying Worcester had “enjoyed considerable annual support” from alumni.
Dyer acknowledged the credit crunch caused “a major drop” in fundraising and said the college is both working to drum up more donations, particularly from the United States, and to use “the full potential of its assets to increase its long term endowment income”.
Corpus Christi was the one college to show a significant gain on its investments, boasting a return of nearly 14%, ending the fiscal year with its endowment at £69.6m. Yet it also reported a net deficit of £340,000, citing the costs of roofing repairs on its building.
Taken together college endowments suffered a 7% loss, relatively mild compared to other leading universities but presaging financial strain to come. Simply hiking fees in future, even if politically feasible, will not be enough, argued one college administrator: “Some college bursars believe that tuition fee rises are a get-out-of-jail card for the problems we face in balancing our books. I would say it is part of the solution, but not the solution.”
“What happens when colleges run out of money?” asked another college bursar.
“They’re going to have to have cuts or they’re going to go into debt. You can’t raid the piggy bank [the endowment] – otherwise it’s not going to be there in 100 years. We’re facing a very difficult five-year period. It’s going to be bad.”
