NEWS

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November 15, 2002

Universities across the country feeling economic slowdown

The recent decline in the economy has made a noteworthy impact on many universities, forcing schools to review their fiscal policies and, in many cases, take measures such as hiring freezes or postponing building projects. The University of Chicago, however, has not found it necessary to resort to such drastic measures.

With several consecutive years of decreasing returns on investments, no university with an endowment is immune to the effects of this decline. The U of C lost 8.6 percent on its investments in 2001, which is in the mid-range of reported losses; Duke University lost roughly four percent, while the Massachusetts Institute of Technology recorded losses at about 13 percent.

In an effort to combat the shortfalls, Stanford University announced a hiring freeze three weeks ago. While this does not involve layoffs at the moment, it could in the future. Stanford has also had to cut back a capital plan and postpone building projects.

These losses, however, have not had the same effect on the U of C as it has on other universities. Building projects remain in full swing, and there has been no talk of hiring freezes, layoffs, or major budget cuts. Even large construction projects like the Gerald Ratner Athletics Center and the Comer Children's Hospital are moving ahead full steam.

There is no single factor responsible for the U of C's relative stability.

First, the method by which administrators determine how much of the endowment is spent in any given year is slightly different from that of most other universities. An average return on investment for several years—generally three years—is taken and then endowment spending is determined from that point. This softens the blow of one bad year, and guards against excess spending in the aftermath of one good year.

The difficulties arise when there is more than one bad year following many consecutive years of increasing returns. The difference at the U of C is that in addition to averaging the returns for 12 quarters, one year of lag time is added. This means that while other universities are now being hit by unexpected losses, it will be a year before the University is impacted by the recent market shifts.

Some worry that this is just postponing the inevitable, but Donald Reaves, Vice President of Administration and chief financial officer dismissed this. "We have an extra year to think about it. We have time to plan," he said.

Reaves explained that the Provost has already put together a small group of deans and senior officers of the University to begin planning for the future. They recently had their first meeting.

Yale University is also in a somewhat better situation than many other universities. Despite the falling market, the school's investments have done relatively well. Some strategies that Yale has used to keep their funds stable are reducing the amount of stock investments and diversifying the stocks that the institution holds.

Gifts from friends and alumni may also have been affected by the economic downturn. The University launched a new $2 billion fundraising effort, the Chicago Initiative, last April. However, while the planning of this effort has spanned several years, Karen Alexander, assistant vice president for communication in development and alumni relations, said that the $2 billion target has remained constant throughout the planning process, and will not be changing now. "We are moving forward with that goal," Alexander said.

Alexander continued to say that "philanthropy grows in the face of economic downturn," despite the common misconception that giving would decrease. Reaves backed her up, stating that there has been no drop in contributions to the University.

One additional relatively simple way for universities to increase revenue is to raise tuition. However, many universities are reluctant to do so, seeking out alternative methods to cut budgets. According to The Chronicle, the daily student newspaper at Duke University, the administration there has been discussing several alternatives to a tuition rise. Suggestions include increasing undergraduate enrollment or possibly reducing the size of the faculty.