Endowments Could be Victim of Recession

By Beacon Staff

With a tumultuous financial market, foundations at Flathead Valley Community College and the University of Montana are wary of the negative effects an economic recession could have on millions of dollars in school funding held in endowments.

An endowment is created through donations intended for the long-term support of a nonprofit organization – from churches and museums, to colleges and universities. The endowment principal is rarely touched; instead it’s invested in a diverse range of equities and bonds, and only the earnings on the contributions are used to support projects.

The result, when managed effectively, is a donation in perpetuity: endowments allow groups to make commitments to future needs while serving today’s.

But volatile financial markets can make that balancing act between funding current needs and ensuring future uses difficult. In the late 1990s and early 2000s a national economic downturn forced FVCC and UM foundations to suspend some endowments, forgoing some scholarships and projects in order to reinvest in the principal amount and secure future uses.

“At that time, by law if the endowment fell below the historic gift value we weren’t allowed to spend out of that fund,” Laura Brehm, president of UM’s Foundation, said. “It was difficult, because a school department could’ve budgeted for that revenue from an endowment and then was left without it.”

School officials at both institutions are concerned about the effects of changes in the market as economists warn of a possible prolonged recession, but feel confident their endowments – barring lengthy and severe drops – will stay strong enough to avoid similar cuts now.

“There’s concern just because of the way the market has been performing, but we have a diversified portfolio and are always reinvesting,” Ruth Ackroyd, FVCC’s director of college relations, said. “This isn’t a short-term investment. I think people hear things that make them panic and worry, but this is a slow and steady process and you have to stick through fluctuations.”

Several other nonprofit groups in the Flathead Valley also rely on endowments as an annual funding source, including Flathead Community Foundation and Whitefish Community Foundation, which are both in the process of building endowment funds. The Montana Community Foundation holds endowments for nine other Flathead organizations including the Glacier Symphony, Hockaday Museum and Whitefish Theatre Company.

But the colleges maintain the largest endowments in the region, and are hardly the only schools to use them to provide educational programs and opportunities beyond what could be funded by student tuition and other forms of public and private support. Thousands of American schools rely partly on endowments, and several have done very well in recent years.

The nation’s 76 richest colleges earned a market-beating 21.3 percent return on their billions of dollars in endowment funds in the last fiscal year, according to the National Association of College and University Business Officers. That continued a remarkable run of at least a decade where those schools have posted larger-than-average profits.

But some endowment experts worry those returns are tied to riskier investments that may drain colleges’ funds in today’s tumultuous markets. They also note that smaller schools, which have underperformed in the stock market for the past five years, do not have the great returns of the past to protect them against future troubles.

Schools with endowments below $100 million, like FVCC and UM, earned 15.6 percent last fiscal year, less than the 20 percent the U.S. stock market returned in that time and less than the 17.8 percent a standard diversified portfolio of stocks and bonds would have earned.

FVCC’s endowment total reached $3,322,076 at the end of last year, almost a 15 percent increase from 2006. Endowment scholarship funds, boosted by large donations, took a huge jump over that same time period, increasing from almost $19,000 to nearly $50,000. UM’s had a 16.7 percent investment return last year, raising its endowment total to about $125 million.

FVCC and UM officials are happy with the more moderate returns, saying that the schools have seen steady growth in endowments that have been bolstered recently by large donations. By only spending about 5 percent of their endowment earnings in strong years and reinvesting the rest, the schools say they’re able to “smooth out” year-by-year fluctuations, reducing the likelihood of severe budget cuts if the endowment loses value in coming years.

“We don’t panic over the national scene,” Ackroyd said. “I think we’ve done very well and had sound fiscal management putting away extra money in the good times. You weather the storms and operate with a sense of responsibility because you’re in it for the long haul.”