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Northeastmom
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Posted: Tue Jul 24th, 2007 12:55 pm |
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| I have looked on paper at a few LACs. The LACs have about 350 to530 freshmen. The range of endowments are from 44.8 million to 310 million. Is a school with only 44.8 million dollar endowment in danger of closing its doors in the near future? Is it risky to send your child to a school with a smaller endowment?
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CarolynLawrence
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Posted: Tue Jul 24th, 2007 07:20 pm |
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The endowment size only tells you a small piece of the picture.
Although this isn't a perfect analogy, think in terms of a family's financial picture. They have an "endowment" that includes savings and investments, some of which are earmarked for special purposes (i.e., kids' college, IRA's, house, etc.). They get some income from the interest on their "endowment" but, in most cases, they aren't living off the "endowment" - they know that to use up the savings/investments to pay for everyday living expenses would be counterproductive. So, they work, bringing in additional revenue/income. As long as their income from work and interest from savings/investments is below or equal to what they spend each month, they're in pretty good financial shape. If you did have a major need - say your primary wage earner gets sick and can't work - you can tap the available savings or cash in on some of your investments.
A college's endowment is much like a family's savings/investments (again, this isn't a perfect analogy). Some of the money in the endowment is earmarked for certain purposes (i.e., endowed for specific scholarships, chairs, etc.) so it can't really be spent for general purposes. The college also really doesn't want to dip into the principle of the endowment if at all possible, but the interest from endowment investments can be used to meet some of the annual operating expenses. In most cases, colleges use only the income from their endowment investments, and that also only makes up a small percentage of what they need to spend to keep operating each year. They still need other sources of revenue/income. For most colleges, that primarily comes from tuition and income-generating programs (for instance, summer programs for high schoolers, funded research, etc.) The parts of the endowment that are earmarked for certain things also help reduce the actual out of pocket costs the school might have each year. And, the school is also (hopefully) continuing to get new donations that it can use for capital expenses like building new buildings, etc., rather than dip into the endowment principle.
In the end, just like a family, a college needs to have its operating costs be less than or at least equal to their income/revenues. At almost all colleges, the endowment investment returns only provide a small percentage of what is needed for operating costs. The big chunk usually comes from tuition an dother income producing things.
Obviously, a school with a $40 million endowment is going to get less income from endowment investments than one with a $500 million endowment, even if they invest in the same type of things. So, the larger endowed school is going to have a bit more cushion when expenses arise, and perhaps, if they choose to, more money to spend on flashy extras.
Regardless of endowment size, the problems start when a college spens significantly more that it takes in. The majority of schools do just fine balancing their books - schools with smaller endowments may have to make tough choices, but they manage. Some schools, however, overspend. They may not get enough revenue from tuition, they may not get enough from their investments, they may just make bad decisions and go on a spending spree of building new buildings that they hope to find donors for at a later date. Eventually, it catches up to them. A school with a large endowment has more "cushion" when it comes to situations like this.
So, while the endowment is certainly a sign of financial resources, it doesn't really tell you much about whether a school with a smaller endowment is in financial danger. For that, you need to look at the school's financial statement. Most schools will give you a copy if you ask, many even put it on their website. Here are some warning signs to look for that *may* (not always) signal danger:
-- The school is spending significantly more on operating expenses than it is taking in over several years
-- The school has started major capital expenditures (building new buildings, expanding new programs, etc.) that don't seem fully supported by existing financial resources or new donations.
-- The school consistently has a low yield of admitted students, or trouble attracting applicants, and/or revenues from tuition have declined (for example, they are attracting less full pay students)
-- You see articles in the school newspaper, the local press, or alumni publications about budget constraints, budget cutbacks, elimination of programs, etc.
-- The school's campus seems to be noticably less well-maintained than other colleges with similar operating budgets. In particular major repairs to buildings and facilities seem to be put off -- i.e., you see bad roofs, windows not repaired, etc.
-- This one can be a double edged sword - the school uses a high percentage of part-time adjunct faculty. By double-edged sword, sometimes it can make financial and educational sense to use part-time adjunct faculty so don't think just because they are used that it is a sign of trouble. But, when you see a school that suddenly starts using a significant percentage of adjuncts - let's say more than 50% of the faculty, that can be a warning sign that they don't have the resources to pay faculty.
-- Faculty salaries are significantly lower than comparable schools in the same geographic region
-- There seems to be a large amount of faculty turnover, or turnover of the executive/administrative staff
-- The school seems to be selling off assets, such as land holdings, etc. for no discernable reason.
-- The school seems to have trouble supporting institutional financial aid programs -- ie a significant portion of students with need have only a small percentage met
-- Regional accreditation commissions have placed the school on notice for financial reasons
-- The school's S&P bond rating has recently been downgraded
-- The schools seems overextended for its endowment size - i.e., it has academic programs in many geographic areas, or is building at a very rapid rate, etc.
-- The school seems to have trouble eliciting major donations, or has very small fund-raising each year.
As I said though, most colleges with smaller endowments do manage to keep things under control financially so a smaller endowment in and of itself is not a cause of worry. A smaller endowment *may* mean less flash in terms of well-known faculty and beautiful new dorms, but even schools with large endowments sometimes set priorities in a way that isn't flashy.
Last edited on Tue Jul 24th, 2007 08:39 pm by CarolynLawrence
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Northeastmom
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Posted: Tue Jul 24th, 2007 10:31 pm |
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| Carolyn, I really appreciate your long post which explains to some extent how endowments might be used. I will be straight forward here. I am looking into Hartwick College. Their endowment is only 59.4 million (Petersons) vs. Drew's 241.5 million (one example of a school wiht a similar sized freshman class). I have done some reading in a local paper, and have discovered that Hartwick apparently cut 7 D-3 sports last summer (ie: baseball, softball, men's golf, indoor and outdoor track) leaving only 3 spring sports, which are men's and women's lacrosse, and men's tennis. They also apparently were looking into selling some of their Pine Lake Environmental Campus, as well as some of their artwork, which they decided not to part with after public outcry. I have no idea if they are financially sound, and are going to be around in the future or not. Some of these cuts and potential sales with a low endowment frighten me. Are these red flags and should I be worried sending my child to this school? I don't care about the sport cuts, but I do care about the possibility of this being a potential Antioch, or Saint Andrews. Thank you for any insight. Last edited on Tue Jul 24th, 2007 10:47 pm by Northeastmom
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CarolynLawrence
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Posted: Tue Jul 24th, 2007 11:25 pm |
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OK, I did a bit of sniffing. It looks like kind of a mixed bag for Hartwick. It's S&P bond rating was reduced by Moody's in 2005 because of its long term debt. Since then, however, they have reduced their long term debt significantly. Their endowment has grown by 30% in the past four years, a good sign, but their income from the endowment has remained fairly steady. They have increased their full time faculty in that time, are in the process of bringing faculty salaries in line with peer groups and have grown their student body by a managable number. To me, it sounds more like they're getting their financial house in order rather than facing worsening times, but I would definitely ask questions if it ends up on any list. I do not, however, think that they are in the same boat as Antioch which basically was down to 300 students and no money at its main campus (their endowment at the end was down below $20 million).
Of course, if you have severe doubts, don't waste your time visiting. There are 2,600 colleges out there, so just move on to the next one if you are truly worried. But, really, I don't see any major warning signs that they're about to go belly up in the next few years, even though they obviously have been through rough patches in the past.
Last edited on Tue Jul 24th, 2007 11:56 pm by CarolynLawrence
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Mezzomom
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Posted: Tue Jul 24th, 2007 11:51 pm |
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| At my daughter's college (Otterbein), the endowment is in the $70 million ballpark, which is on the "smaller" side compared to many schools. Despite that, in the past several years they rebuilt the football stadium; built a new dorm with suites; bought property/buildings adjacent to the campus where the communication and art departments are now housed; have a new equine center which will open in 2008; are renovating/building a new science building also to open in 2008; and purchased a retirement home next to the campus which will eventually be turned into additional dorm space (they won't start renovation until they have the funds to do so). They've been able to accomplish this through private donations, and it seems likely if they weren't asking for monies for special projects, the endowment would have grown further. I fully expect that within the next five years, they will launch a capital campaign to grow the endowment, but in the meantime, the college budget has been balanced every year for the last 15-20 or so. Knowing that they have a pay-as-you-go approach, strong private support for projects, and a history of balanced budgets ameliorated my initial concerns re: the size of the endowment.
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CarolynLawrence
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Posted: Tue Jul 24th, 2007 11:55 pm |
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Beloit's endowment is around $52 million. They watch every penny but the quality of education is excellent (and the focus of spending) and their budget is balanced every year. I will admit that some of the buildings could use a bit of sprucing here and there, but its mostly minor stuff. They are in the process of building a new state of the art science center, but they have raised almost all of the funds for doing so and don't appear to be borrowing extensively for the project.
Again, many smaller schools have smaller endowments. What matters is how they use what they have, how conservative they are in their spending, their liquidity if revenues from other sources suddenly dry up, and how much debt is being carried compared to the available assets and revenues.
Last edited on Wed Jul 25th, 2007 12:16 am by CarolynLawrence
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CarolynLawrence
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Posted: Wed Jul 25th, 2007 12:03 am |
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And, another related article:
http://boston.bizjournals.com/boston/stories/2006/09/04/story1.html
For those who are curious to know even more, Standard & Poors provides an excellent article on how they determine a college's bond rating, as well as the bond ratings of the 225 colleges it currently has bond ratings on. You may have to register to gain access to it, but registration is free.
http://www2.standardandpoors.com/portal/site/sp/en/us/page.article/4,5,5,1,1148446133226.htmlLast edited on Wed Jul 25th, 2007 12:27 am by CarolynLawrence
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Mezzomom
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Posted: Wed Jul 25th, 2007 12:22 am |
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And here's a link with information from Moody's: Never mind, I can't get the link to work!
Last edited on Wed Jul 25th, 2007 12:29 am by Mezzomom
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CarolynLawrence
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Posted: Wed Jul 25th, 2007 12:34 am |
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Mezzomom, thanks for posting it. I got it to work, here it is:
[url=http://www.nacubo.org/Images/Moody's%20HE%20priv%20medians%20May07.pdf]http://www.nacubo.org/Images/Moody's%20HE%20priv%20medians%20May07.pdf[/url]
It is a .pdf file
(Edit: Urgh! Just copy and paste the address from http:// to the .pdf
. It is interesting to see the different ratings. However, I think you have to keep the information in perspective. Ask, for example, how the bond rating may or may not affect the actual educational experience for the typical student. Also keep in mind that part of the bond rating is tied to the selectivity of the institution - kind of puts a whole new spin on those admissions rates, doesn't it? But, really, it is important to look at the overall financial picture, get a hold of the actual financial statement if you can, and consider any possible effects on education. Remember, sometimes borrowing is a GOOD thing IF you can afford to pay the debt, of course.
Last edited on Wed Jul 25th, 2007 12:39 am by CarolynLawrence
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Northeastmom
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Posted: Wed Jul 25th, 2007 01:06 am |
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Thank you all for this very interesting information! I feel like I need to be a financial detective, to pick out colleges now!
Carolyn, where did you get that endowment # regarding Beloit? Peterson's lists Beloit's endowment at 109.6 million. This makes me wonder about the accuracy of the endowment figures that I am looking at!
Last edited on Wed Jul 25th, 2007 01:23 am by Northeastmom
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CarolynLawrence
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Posted: Wed Jul 25th, 2007 02:49 am |
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Well, heck. Sometimes I have so much information cluttering up my noggin that the old brain cells misfire. You are right - Beloit's endowment is somewhere in the $106 million range. Not sure where I pulled the The $52 million number out of -- perhaps it is the amount they're trying to raise for the new science building. OK, I go shamefaced into the night having slandered one of my favorite colleges in the universe.  Thanks for catching that one. Last edited on Wed Jul 25th, 2007 03:02 am by CarolynLawrence
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Northeastmom
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Posted: Wed Jul 25th, 2007 03:40 am |
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LOL Carolyn! I just happened to take note, since Beloit is on our midwest list. After this endowment concern of mine, I looked up the endowments of most schools on our list. At least I know that I am probably looking at the right numbers. Thanks again.
Mezzomom, thanks for chiming in. It is interesting that Hartwick, I have heard also has construction going on, but they also cut sports and looked into selling some assets. Go figure.
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