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Amherst-to-Yale Funding Need Follows Harvard’s Crisis Over Cash

Yale University Chief Investment Officer David Swensen.  Photographer: Chris Kleponis/Bloomberg
Yale University Chief Investment Officer David Swensen. Photographer: Chris Kleponis/Bloomberg

Sept. 23 (Bloomberg) -- Harvard University, Yale University and Stanford University, with combined endowments about equal to the gross domestic product of Lithuania, are among 15 of the wealthiest colleges and universities that borrowed $7.2 billion because their highbrow investing left them suddenly strapped for cash.

The unprecedented borrowing took place as the universities eliminated at least 2,000 jobs, froze faculty salaries and scaled back expansion plans. The taxable bonds are also straining their operating budgets, currently costing the 15 institutions about $360 million a year in interest, according to data compiled by Bloomberg.

The loans and interest are the continuing price the colleges are paying for embracing the endowment investing model pioneered by Yale’s David Swensen. The approach produced market-beating profits by loading up on real estate, private equity and hedge funds. During the worst collapse of credit since the Great Depression, the reliance on hard-to-sell assets left them short on cash both to meet investment commitments and run their campuses.

“They thought they were terribly clever and they took those risks and now they are paying for them,” said Andrew Hacker, professor emeritus of political science at the City University of New York’s Queens College, and co-author of “Higher Education?: How Colleges Are Wasting Our Money and Failing Our Kids -- and What We Can Do About It” (Times Books, 2010).

Taxable Bonds

At least 15 private nonprofit colleges and universities sold bonds to raise cash after the credit collapse, including six of eight schools in the Ivy League -- a group of selective institutions in the northeast U.S. -- according to reports from Moody’s Investors Service. Most of the securities mature in 2019.

The 15 colleges have never sold so much in taxable, long-term bonds before, according to John Nelson, head of Moody’s higher education group. The borrowing from December 2008 to November 2009 left the schools with 25 percent more debt on their books, Moody’s reports show. Overall, indebtedness of the 287 private, nonprofit universities tracked by the New York ratings company rose to a record $75.4 billion in 2009, almost doubling in five years, Nelson said.

The bonds were taxable, rather than tax-exempt, which carry lower interest rates. That’s because much of the proceeds were used as working capital to pay for operations and bolster reserves to guard against another panic, according to bond documents, rating reports and interviews with school finance officials. Some colleges also refinanced taxable commercial paper, which matures within a year.

Harvard’s Dilemma

Harvard, with $36.6 billion in its endowment at the end of fiscal 2008 -- more than any other institution of higher education in the world -- was forced to sell $1.5 billion of taxable bonds in December 2008, three months after Lehman Brothers Holdings Inc. went bankrupt, in the depths of the recession, and is paying $87.5 million a year in interest, according to data compiled by Bloomberg. The Cambridge, Massachusetts-based institution raised more than $800 million of working capital after it retired some debt and paid to end interest-rate swaps, according to its annual report and bond documents.

No Omelets

The university, which suffered the biggest drop in the year ended June 30, 2009, as its endowment fell 30 percent to $25.7 billion, removed hot breakfasts from weekday dormitory menus, reduced shuttle bus service between campuses, offered retirement incentives to staff and cut capital spending by 50 percent, including shelving an expansion in neighboring Allston, to help close budget gaps. John Longbrake, a Harvard spokesman, declined to comment.

Yale, whose endowment fell 29 percent to $16.3 billion in fiscal 2009, borrowed $1 billion in November at a cost of $29 million a year, according to data compiled by Bloomberg. The university, which cut $350 million from its annual budget by postponing $2 billion in construction, eliminating at least 600 jobs and reducing the number of new graduate students, used the money to add about “$190 million of additional working capital liquidity,” and pare existing debt, according to bond documents.

Steepest Losses

Tom Conroy, a Yale spokesman, and Swensen, the university’s endowment chief, declined to comment.

Universities with the biggest endowments faced the most severe cash crises because, in addition to suffering the steepest losses, they were the most dependent on investment earnings to finance their operating budgets, said William Jarvis, head of research at the Commonfund Institute, a division of the Wilton, Connecticut-based money manager Commonfund. Borrowing to raise cash was cheaper than selling assets tumbling in value and easier than making even deeper spending cuts, he said.

Harvard last year spent $1.44 billion out of its endowment to subsidize operations, or 37.6 percent of its total budget. Yale in fiscal 2009 spent $1.15 billion of its endowment, accounting for about 45 percent of its budget, according to Yale’s website.

“Normally when you have a calamitous event the worst impacts are on the weakest organizations,” Nelson of Moody’s said. “In this case, you had the strongest universities have the most-severe impacts because they were the dependent on investment income for a higher share of their operating budgets.”

Highest Rate

Top-rated Harvard borrowed at the highest rate for the 15 schools, selling 30-year bonds as credit markets collapsed that paid a coupon of 6.5 percent, 3.37 percentage points more the comparable Treasuries. Yale, which is also rated AAA, paid the lowest, selling $1 billion of 5-year bonds almost a year later at an annual rate of 2.9 percent.

Borrowing money was cheaper than the alternative, which was selling “the really good parts of the private equity portfolio,” said Tallman Trask, the chief executive officer of Duke University. The school in Durham, North Carolina, sold $500 million at rates as high as 5.15 percent in January 2009.

The endowment losses marked a reversal after the universities with the largest endowments produced the biggest gains for more than a decade by shifting investments away from public stocks and bonds into an ever-growing share of alternative assets. The strategy was popularized by Yale’s Swensen, who altered the university’s endowment approach after he was hired in 1985. Yale had the best-performing university endowment in the decade preceding the recession, growing at an annual average rate of 16.3 percent through June 30, 2008.

Plummeting Returns

Colleges were so confident of ever-increasing returns that they directed their cash on hand into the endowments to make more money, further fueling the crisis as returns plummeted. Harvard lost $1.8 billion of the $6.5 billion in its general operating account in the year ended June 30, 2009, because most of the cash was invested in the endowment.

“The entire structure was based on this idea that liquidity was free,” said Commonfund’s Jarvis.

As schools manage their money more conservatively to preserve cash, they will be unable to reproduce the returns they earned before the credit markets seized up, said Ronald Salluzzo, a college finance consultant at Attain, LLC, in Vienna, Virginia.

Harvard said on Sept. 9 its investments rose 11 percent to $27.4 billion in the year ended June 30, trailing the 13 percent average earned by a broad group of institutions compiled by Wilshire Associates.

Princeton, Stanford

Princeton University borrowed $1 billion in January 2009 at a rate as high as 5.7 percent to fund operating expenses and expects to spend all the money by the end of this year, according Emily Aronson, a spokeswoman. She declined to elaborate. The school, in Princeton, New Jersey, last year postponed $695 million in construction projects as it sought to close a budget gap.

Stanford University, near Palo Alto, California, the third-wealthiest university in the U.S., borrowed $1 billion in April 2009 as its endowment headed to a 27 percent drop. As the crisis lifted, it placed $800 million of the proceeds into money-market-like accounts, which provide ready access while earning next to nothing. It’s paying $36 million a year in interest for the money.

The average money-market fund paid an annualized yield of 0.1 percent as of Sept. 15, according to Crane Data LLC, a money-fund research company in Westborough, Massachusetts.

“At that point we didn’t know if things would get a lot worse,” said Randy Livingston, Stanford’s chief financial officer. “It gives us a great sense of security particularly given the dramatic continued volatility in the market.”

Stanford’s Cutbacks

Stanford dismissed 412, or 3.2 percent, of its non-faculty workers last year, froze about 50 faculty searches, postponed $1.1 billion in construction projects and closed its physics library.

The other universities and colleges that sold taxable bonds at the height of the credit crisis were: Brown University in Providence, Rhode Island; Amherst College in Amherst, Massachusetts; Vanderbilt University in Nashville, Tennessee; Johns Hopkins University in Baltimore; Emory University in Atlanta; Cornell University in Ithaca, New York; the University of Notre Dame in South Bend, Indiana; Pepperdine University in Malibu, California; George Washington University in Washington and Dartmouth College in Hanover, New Hampshire, according to Moody’s. Many of the institutions said in bond documents and annual reports they used the proceeds for working capital without disclosing details.

Notre Dame

“We felt like we’re going to be OK but it doesn’t hurt to have liquidity right now,” said John A. Sejdinaj, vice president for finance at the University of Notre Dame in South Bend, Indiana.

Notre Dame put $150 million it borrowed in January 2009 into an existing pool of working capital where the balance is invested in money-market funds, Sejdinaj said. The university, is paying about $6 million a year in interest because it felt it needed an additional source of liquidity beyond lines of credit and commercial paper, Sejdinaj said.

“We just decided in that environment we should have a little extra,” Sejdinaj said.

The following are schools that sold taxable bonds for working
capital and the amount borrowed:
Harvard University            $1.5 billion
Yale University               $1 billion
Stanford University           $1 billion
Princeton University          $1 billion
Cornell University            $500 million
Duke University               $500 million
Johns Hopkins University      $400 million
Dartmouth College             $250 million
Vanderbilt University         $250 million
Emory University              $250 million
George Washington University  $200 million
University of Notre Dame      $150 million
Amherst College               $100 million
Brown University              $100 million
Pepperdine University         $50 million

To contact the reporters on this story: Michael McDonald in Boston at;

To contact the editor responsible for this story: Jonathan Kaufman at;

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