Stanford announces plans to reduce endowment spending

L.A. Cicero academic council meeting

President Hennessy discussed 'The State of the University and the Economy' in his annual address to the Academic Council on Thursday, April 30 in Kresge Auditorium.

To protect the university’s shrinking endowment, Stanford plans to reduce the amount of money it will spend from the endowment over the next two years, a move that is likely to result in additional budget cuts, President John Hennessy announced Thursday.

Speaking at the annual meeting of the Academic Council, Hennessy said the decision will primarily affect academic units that rely heavily on the endowment for funding.

He said the goal is to “reduce the draw on the endowment and realign expenses with the reduced value of the endowment as fast as possible.”

Valued at $17.2 billion in 2008, the endowment is expected to fall an unprecedented 30 percent this fiscal year, declining to about $12 billion.

During fiscal 2009, which ends Aug. 31, Stanford will spend $1 billion from the endowment, which helps pay for a variety of expenses, including faculty salaries, financial aid for graduate and undergraduate students, and programs across the campus.

Under the plan Hennessy announced Thursday, Stanford will spend $900 million from the endowment in 2010. In 2011, the amount—known as the endowment payout—will drop to $750 million.

“By decreasing the payout by 10 percent next fiscal year and 15 percent in fiscal year 2011, we hope that the endowment payout will begin to recover within three to four years, rather than five or six,” Hennessy said.

Hennessy said investment income is one of three major sources of revenue for the university, along with sponsored research and tuition.

This year, for the first time in Stanford’s history, investment income—including endowment income and other investment income—was the largest source of revenue, accounting for 29 percent of the university’s $3.5 billion in operating revenues.

While the university was “well-positioned to ride out what might be normal fluctuations in the market,” it was not prepared for the dramatic, one-year downturn that has disrupted the financial plans of individuals, businesses, universities and countries around the world, he said.

Hennessy said last summer it appeared that the endowment would remain flat, or decline slightly. The situation changed radically during the last three months of 2008.

“All asset classes—natural resources, real estate and private equity as well as public equities—experienced significant downturns in the last quarter of 2008,” he said. “These losses continued in January and February of this year, with a small recovery in March.”

Originally, the university thought that trimming 15 percent from its general funds budget in 2010 would be the maximum cutbacks required. In recent months, administrative units dependent on the general funds budget—including Student Affairs, the Alumni Association and the Land, Buildings and Real Estate division—have cut their budgets and laid off staff.

But more cuts are needed to align the university budget with a smaller endowment.

“Although the economic crisis has forced us to rethink the university’s finances and significantly restructure the budget, I remain confident about the future of this university,” Hennessy said, adding that Stanford had overcome many crises, including two major earthquakes, the Great Depression and severe reductions in federal research support.

Last week, Stanford raised $1 billion through a bond offering, Hennessy said.

“Fortunately, we do not have a pressing need to spend these proceeds immediately, but we believe that the added liquidity will enhance the university’s financial stability and provide insurance against the need to raise funds at a time when the market might be less attractive,” he said, adding that Harvard and Princeton had recently raised money through bond sales.

“Of course we will have to pay that money back, with interest,” he said. “For that reason, those funds are being kept in a segregated account of highly liquid securities, and they will be kept there unless a true emergency demands their use.”

Hennessy said The Stanford Challenge is closing in on its $4.3 billion target but will need to raise “considerably more” money than that originally planned to fulfill its goals; much has changed since the university launched the ambitious campaign, he said.

“First, while we expanded several major aspects of the campaign, we still have not met some of our important original goals,” he said. “And second, the investment losses of the endowment and the increased demand for financial aid will require us to significantly expand our financial aid goals as part of the campaign.”

Hennessy departed briefly from his prepared text at the beginning of his 30-minute speech to address another unfolding crisis: the spread of swine flu.

“Just when we thought finances were our worst problem, along came the swine flu,” he said. “Happily and fortunately for us, we have had for several years now a pandemic planning group. That group has mobilized and made preparations should the pandemic arrive on our campus.”