Sunday, December 14, 2008

Despite Duke endowment's $1B hit, Steel & Brodhead "very, very" positive

James Gallagher reporting Dec. 12 in Triangle Business Journal - - -

Duke University’s endowment, which funds about 15 percent of the university’s annual operating budget, has lost $1.1 billion since June 30 and now stands at $5 billion.

School officials are tight-lipped about the status of the endowment, but a source familiar with the university’s investment returns says the endowment portfolio is down by about 19 percent from the fiscal year ended June 30, when it stood at $6.1 billion.

Those losses are in line with what other universities have reported to the National Association of College and University Business Officers. Ken Redd, NACUBO’s director of research and policy analysis, says endowments generally have lost 20 percent to 25 percent of their value this year.

Of Duke’s $1.93 billion annual operating budget, about $300 million, or 15 percent, was supplied by endowment returns in 2007-2008.

Tuition payments provided 14 percent of the operating budget, according to Duke’s annual report, with the university’s remaining revenue coming from grants and contracts, donations and other enterprises and investments.

In general, private universities fund between 15 percent and 20 percent of their operations from their endowments. Public universities, by contrast, rely more on state funding than endowments for their operations, says Redd.

Though its losses have been severe, Duke doesn’t feel they will severely crimp its operation. The university averages its endowment funding contributions over three years to smooth out any major ups or downs in investment performance.

Other private universities battling similar losses, including Harvard, Dartmouth and Brown, have cut their budgets or imposed hiring or wage freezes. So far, Duke has not taken such action.

“We’re obviously being very prudent and careful with our expenses,” says Michael Schoenfeld, Duke’s vice president for public affairs. “We’re going to be taking a very close look at our expenses and other expenditures to preserve our focus on students and faculty.”

Duke has been looking to unload about $100 million worth of private equity investments, which sources say is a small portion of the endowment’s private equity investment.

Harvard University, which is facing even greater endowment losses, also has been trying to sell some of its private equity stakes.

The Cambridge, Mass., university is trying to unload about $1.5 billion worth of private equity investments as its endowment has lost more than $8 billion since June 30, when it stood at $36.9 billion.

Harvard President Dawn Gilpin Faust wrote in a letter to deans this month that the endowment had fallen by 22 percent over the past four months and was likely to be down 30 percent before the end of the year.

Harvard’s endowment provides as much as 40 percent of the university’s annual operating budget.

Schoenfeld says Duke will detail its endowment’s performance when it releases its annual financial report after the fiscal year ends in June. Still, NACUBO is preparing a survey of its members to gauge exactly how much impact the market has had on university endowments.

Besides the university endowment, Duke also operates the Duke University Health System endowment, which at last report stood at $1.4 billion.

Last Monday, four days before publication of Gallagher's TBJ story, Chelsea Allison, editor of The Chronicle, Duke’s student newspaper, reported on Duke’s BOT’s just completed meetings and BOT chair Bob Steel and president Dick Brodhead’s praise of the "very, very good day-to-day controls" they say they've used to manage the University - - -

As other universities announce cuts for budgets impacted by the economic crisis, Duke's Board of Trustees spent the weekend culling information about-rather than passing resolutions on-the underlying structures that have kept its finances relatively secure.

"There is a fact that we are in a very challenging financial time for everyone," Chair Robert Steel, Trinity '73, said in an interview with The Chronicle Saturday.

"The good news is that Duke has been very prudently and conservatively managed from a financial perspective for quite awhile. No. 2, we also have very, very good day-to-day controls. And the combination of having been managed prudently and having good controls puts us in a position of having to work through the current challenges as well as one can."

Although officials have said they anticipate that more students may seek financial aid, this need will be cushioned by the 2005 Financial Aid Initiative, which has reached its overall $300 million goal.

President Richard Brodhead and Steel said there has been no discussion of tuition changes; last March, the Trustees approved a tuition increase of 5 percent. Actual budgeting across the University will come in January.

The agenda for this meeting was more than a year in the making, meant to deeply analyze financial modes for the University, health system, DUMAC and strategic planning and fundraising.

"As it turned out, that was a really good thing to be doing at this meeting," Brodhead said. "We just want to make sure that we match our resources with our mission and aspiration in the right way going forward."

Brodhead and Steel did not disclose specific numbers, noting that Duke has had to be adaptive but relies less on its nearly $8 billion endowment than some peers.

DUMAC's most recent quarterly report for fiscal year 2008 showed the endowment had increased by 6.2 percent-still a much more conservative gain than typical-but Executive Vice President Tallman Trask told The Chronicle in October that he expected much of that had been lost in the ensuing economic crisis.

Other streams of revenue for the University include tuition, gifts and grants.

"In some ways, it's a good thing to be the richest of the poor kids, or the poorest of the rich kids," Michael Schoenfeld, vice president for government affairs and public relations, said in an interview Thursday.

Steel added that University management is not a contest, but a matter of the individual execution of a University's priorities.

Brodhead and Steel noted that current projects may be completed at a different pace or in a different order, depending on how each is funded or on the current economic outlook.

Folks, just so you’re all sure I’m not making any of this up, Gallagher’s TBJ story’s here and Allison’s TC story’s here.

I’ll be posting again soon on both stories.

Tonight I just want to get the stories to you, and encourage you to pass them on to others.

But I can't help adding this: The last time Steel and Brodhead sounded so positive they were misleading us all about their disgraceful response in Duke University's name to the lies of Crystal Mangum and Mike Nifong.


Jason Trumpbour said...

John, I hate to correct you, but the last time Bob Steel was so positive was when he got on CNN’s “Mad Money” and was telling everyone what a great future Wachovia had as an independent company. Days later, when Citigroup offered him $1 a share, he jumped right on that buck. Needless to say Wachovia shareholders, some of whom purchased shares based on Steel’s glowing pronouncements, were not amused. Nor was the host of the show who told his viewers he felt used by Steel. Read about it here:

To make this story even better, Steel agreed to this deal and then welched on it after Wells Fargo offered a better price.

You are perfectly correct to be concerned. Bad things happen when Bob Steel is positive.