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Higher ed taps deeper into endowments

Average rate of return for endowments rises for second straight year
University Business, March 2015
The latest NACUBO-Commonfund Study of Endowments shows college increasing spending from their endowments. (Click to enlarge)
The latest NACUBO-Commonfund Study of Endowments shows college increasing spending from their endowments. (Click to enlarge)

U.S. colleges and universities last year paid for operations with bigger chunks of their endowments to compensate for declines in key sources of revenue, particularly tuition and public funding.

The good news is that the average rate of return rose for the second straight year, from 11.7 percent in FY2013 to 15.5 percent in 2014, according to the “NACUBO-Commonfund Study of Endowments,” released in January.

“Endowments are becoming an increasingly important part of the revenue picture,” NACUBO President and CEO John Walda said on a conference call timed with the study’s release. “For the country as a whole, keeping enrollments up will be a challenge. There will be more and more competition from alternative forms of higher education, including online.”

For the 832 public and private institutions participating in the study, endowments funded an average 9.2 percent of operating budgets in FY2014, compared to 8.8 percent in 2013. Endowments over $1 billion contributed an even greater amount to operations, at 16.9 percent, Walda says.

Nearly three quarters of the institutions surveyed also reported spending more endowment money on scholarships, financial aid, research and other activities. The median increase was 9.3 percent.

Overall, bigger endowments continued to see bigger returns last year, said John S. Griswold, executive director of the CommonFund Institute, in the conference call. For example, endowments over $1 billion saw a return of 16.5 percent last year, compared to 15.5 percent for endowments under $25 million.

One concern for endowments is long-term return. The 10-year return for FY2014 was 7.1 percent, which is just below what analysts consider sufficient to support spending.

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