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Budget to Be Cut by Five Percent, Endowment Losses Likely Larger than 27 Percent

Bloomberg News has released a follow-up article to the earlier news that Cornell's endowment has fallen by 27 percent in the last six months.

In the article, not only do we learn that Skorton has enacted across the board budget cuts to the tune of five percent last year, but that we can expect further budget cuts down the road.

Cornell University probably will cut spending by 5 percent next year after the school’s endowment fell 27 percent in the final six months of 2008, President David Skorton said.

“We’re throttling back our expenditures,” Skorton said in an interview today in New York. “We’re going to need a 10 percent correction in our budget in the next three to five years,” which will be achieved through increased revenue and reduced spending.

If you recall, back in the fall I asserted that it would be a blessing if Cornell could scrape by this downturn with anything less than a 15 percent reduction in operating costs. Skorton appears to be treading carefully for now, attempting to limit the pain as much as possible, but we will see what the next year brings.

That said, I'd be really interested to hear how Skorton plans to increase revenue over the next couple of years. Perhaps additional and much needed funding for basic research will come from the federal government, but I don't see additional revenues coming from the state, private gifts, or tuition increases coming anytime soon, especially with the expensive new financial aid plan that was announced in November, not to mention the broken state of the private student loan market which provides a lot of the funding for professional students. One option that's still on the table would be to start accepting more transfer students. Perhaps Cornell's undergraduate enrollment will tap 14,000 in the coming years?

Perhaps Cornell can raise revenues by taking out some debt -- Princeton just announced a $750 million bond offering. But, frankly, this nation needs to get away from debt, not turn more to it.

The other big news is that a full third of Cornell's endowment is held in private equity and real estate, and that losses in these less-liquid assets have yet to be realized. I'm certain that this is par for the course at most endowments

Cornell’s second-half loss doesn’t include returns from hard-to-sell holdings in real estate and private equity, which account for a third of the fund. Values for those assets have yet to be updated, Skorton said. The Standard & Poor’s 500 Index fell 28 percent, including dividends, in the second half of last year.

Earnings from Cornell’s endowment make up 14 percent of its operating budget, which is $2.9 billion for the current fiscal year, said Simeon Moss, a spokesman for the university, in Ithaca, New York.

So if we assume that the private equity and real estate holdings have taken a thirty percent haircut over the last year -- perhaps aggressive but not unreasonable -- that means that there has been an additional 11 percent decline in the endowment. Bringing the total losses likely closer to 38 percent, not 27 percent.


Matthew Nagowski | Posted on January 13, 2009 (#)

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