The American Interest
Analysis by Walter Russell Mead & Staff
Underperforming Investments Squeeze Higher-Ed

American colleges may be going broke faster than we thought. According to a recent New York Times report, investment returns on university endowments fell by 0.3 percent last year. This could be the beginning of a major funding crisis at many universities.

“The long-term goal of most endowments is to exist in perpetuity and grow with the rate of inflation,” said Verne O. Sedlacek, president of Commonfund.

To do that while paying out 4 percent to 5 percent a year, he said, would require annual returns of at least 8 percent, given that the higher education price index has been rising about 3.8 percent a year over the last decade. “Universities are still not back to where they need to be,” Mr. Sedlacek said.

Given that, as one person quoted in the piece said, the average rate of return over the past ten years has been about 6.2 percent, this poses a major problem for schools already facing steep declines in philanthropic giving, alumni donations and government funding. Ordinarily, schools would raise tuition, but students and parents are beginning to balk at higher fees and annual tuition hikes.

There’s no way out: Schools should be looking for ways to cut costs. Fortunately, there’s plenty of low-hanging fruit. State-of-the art dorms, dining halls and athletic facilities are often among the most expensive and the least useful line-items on university budgets, and new building projects should be the first to go. Next, schools need to think seriously about how to lower the cost of education itself, cutting down on administrative costs and embracing cost-saving technology whenever possible.

The revenue crisis is undoubtedly scary for many a college administrator, but universities should be embracing the opportunity to make much-needed changes.

Published on February 1, 2013 5:33 pm