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Endowment stands to lose $800m

Simmons reports huge losses

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Wednesday, January 28, 2009

Confronted with staggering losses to its endowment, the University plans to scale back nearly all of its most ambitious goals in the years ahead, President Ruth Simmons announced Tuesday.

The University has adopted a “working assumption” that the endowment, valued at $2.8 billion in mid-2008, will be worth $2 billion at the end of June, according to Simmons.

The dramatic news, announced in a campus-wide e-mail from Simmons Tuesday afternoon, came amid violent market turmoil and economic contraction that has rocked the country especially hard since the fall. As 2008 came to an end, Simmons wrote, administrators faced “significant credit, liquidity and revenue constraints on our near-term planning.”

The expected losses to the endowment mean its payout to the University’s operating budget will fall $40 million short of projections, officials said. Combined with expected fundraising shortfalls and increased demand for financial aid, officials will need to slash $60 million from next year’s budget, said Richard Spies, executive vice president for planning and senior adviser to the president.

As credit markets froze, large American banks failed and a series of peer schools announced unprecedented losses in recent months, the University before yesterday had remained largely silent on the health of its endowment.

The last time the University publicly announced details about its investments was September 2008, when Simmons reported that the endowment grew by a modest 6.3 percent in the 12 months ending that June. That figure compared favorably with Brown’s competitor schools, many of whom witnessed stagnant or negative growth during the same period.

But if officials’ current estimate proves correct, the endowment will have lost almost 30 percent of its value in just one year – approximately $800 million.

In her e-mail, Simmons outlined a number of avenues to trim expenditures, which she will recommend to the Corporation when it meets in February to vote on the new budget.

Those include a moratorium on salary increases for nearly all faculty and staff, $4.5 million in cuts to the overall budget for administration and lower targets for the University’s ongoing expansion of the faculty, a cornerstone initiative of Simmons’ presidency. The University also plans to halt previously outlined growth of the Graduate School.

“We will have to not only pare expenditures and eliminate some amenities and services,” Simmons wrote in her e-mail, “but think about doing some things differently. There will surely be some discomfort arising from these circumstances, and I ask that you be prepared for this eventuality.”

In addition to deep cuts to the annual budget, Simmons raised the possibility of a deferral of all “discretionary capital projects” – such as the Nelson Fitness Center and a new swimming pool – until all funding for those buildings has been raised.

Looking beyond fiscal year 2010, Simmons anticipated further reductions of at least $12 million in “administrative and support areas,” smaller increases in compensation and “essentially no growth” in the total number of doctoral students over the next several years.

“Our highest priorities throughout this process have been to protect the most essential elements of the University’s academic excellence and positive momentum,” Simmons wrote. She emphasized that the University will continue to meet the rising demand for financial aid.

Simmons also hinted at a smaller increase in the hiring of new faculty over the next three to five years – a break from the ambitious additions of previous years during the brightest years of the Plan for Academic Enrichment.

Moreover, according to Spies, the current hiring freeze – initially scheduled to expire at the end of the month – will be extended. All recently vacated positions will be carefully evaluated by the Vacancy Review Committee to determine if they need to be filled.

“We are trying to do anything we can to avoid layoffs,” Spies said.

Because search processes for new faculty starting in fall 2009 began last summer – before the worst of economic crisis hit – the number of new incoming faculty will not change dramatically in September, Spies said. But fewer searches will be authorized to begin this summer.

The value of the University’s endowment is difficult to measure because much of that money is invested in non-marketable securities – investments that, because they are not publicly traded, cannot be priced with great precision.

For example, about a quarter to a third of the University’s portfolio is held in alternative investment options like hedge funds and private equity, Spies said. “It’s not shooting in the dark,” Spies said of that kind of investment. “But it’s pretty difficult to measure.”

However stunning, Brown’s losses seem to be on a scale roughly commensurate with those its leading competitors are projecting. In December, Harvard announced its endowment had tumbled 22 percent – a whopping $8 billion – between June and October, while Yale estimated its endowment losses in the second half of last year at 25 percent. Harvard is bracing for losses totaling 30 percent of its endowment by June, according to the Harvard Crimson.

The deep losses Brown and other schools are reporting stand in stark contrast to the double-digit gains Brown and its peers regularly reported in past years. Brown spent its endowment and fundraising gains aggressively to fuel growth under Simmons.

The University has also taken on a substantial amount of new debt in recent years in a calculated attempt by University officials to move forward quickly with the Plan for Academic Enrichment. As Simmons noted in her e-mail, “Debt markets continue to be extremely volatile and the annual cost of debt service and liquidity protection has risen dramatically.”

Spies also said the University will stop tapping into the $60 million in reserve funds the Corporation approved in 2004 to fuel growth under the Plan for Academic Enrichment – approximately half of which has so far been spent. That University officials are now reluctant to spend down rainy day funds seems to underscore that the storm clouds of 2008 are far from passing.

“The basic point is to conserve what we have in order to be in a position to move forward in the future,” Spies said.

Although Simmons’ e-mail suggested the University was expecting its donors to give more reluctantly in the battered economy, the Campaign for Academic Enrichment remains likely to reach its goal of $1.4 billion by the end of this fiscal year, ahead of schedule, Spies said.

To date, the campaign has raised over $1.3 billion to support Simmons’ Plan for Academic Enrichment, according to the Office of Advancement.

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