The August issue of Vanity Fair contains a must-read article for all higher education trustees and institution and foundation administrators about Harvard University’s endowment implosion. Although Harvard is a a great distance both geographically and academically from most West Virginia higher education institutions, there is much to be learned from the Harvard experience.
Lesson No. 1: If investment returns sound too good to be true, they are.
Harvard University got used to double-digit endowment investment returns throughout the early part of this decade and believed they would continue forever. But at one point last year, Harvard reported an $8 billion, or 22 percent, loss in the value of its endowment over a four month period. To put that number in perspective, it’s more than 40 percent of West Virginia’s ENTIRE state budget if you include everything from federal revenue to special revenue like West Virginia higher education’s total tuition and fees. Why did Harvard go from doing so well to doing so badly so quickly? It was investing significant amounts in high-risk/high-return activities (e.g., high-tech start-ups, credit default swaps, cross-currency swaps, venture capital funds, junk bonds). What has Harvard had to do to address this crisis? Sell off parts of its investment portfolio at bargain basement prices and seek bonding at the worst possible time financially – December 2008. One commenter characterizes the situation in which Harvard finds itself now as a “death spiral.”
In Senate Bill No. 603 (2005), the West Virginia Legislature gave West Virginia University and Marshall University authority to invest a portion of their state funds through their foundations instead of through the Treasurer’s low-risk, low-return options. Both institutions were slow to take advantage of this flexibility, but ultimately did so – and, I’m pretty sure, have lost money as a result. The greater flexibility couldn’t have been given at a worse time for those two institutions.
Lesson No. 2: Build what you can afford.
Harvard University initiated an overly ambitious building program, which included construction of a $1.2 billion science complex, that had to be halted. To put this last amount in perspective, the proposed cost is about twice the ENTIRE annual state appropriation for West Virginia’s higher education system.
Have any West Virginia schools engaged in an ambitious building program that has proven difficult to pay for? Yes – Fairmont State University. The debt was undertaken assuming that more students would enroll and thus help shoulder the increased debt. Shortly after the debt was incurred, enrollment began to drop – stretching the University’s resources.