Outlook for the Endowments of Black Colleges

Due to conservative investment strategies many black colleges and universities may have recorded a lower percentage drop in endowment values compared to the nation’s wealthiest universities. But this does not mean the black colleges are going to have an easier time weathering the severe current economic downturn.

The situation could be profoundly changed for the better by the huge flood of aid to education expected from the Obama administration.

Harvard University recently reported that its $36.9 billion endowment lost 22 percent of its value in the July 1 to November 1, 2008 period. In dollar terms, Harvard’s decline is about $8 billion, a loss that is more than the total endowment value of all but four of the nation’s universities: Princeton, Stanford, MIT, and Yale.

The Harvard loss is expected to turn out to be larger because Harvard has not yet dealt with valuation problems in its alternative assets such as timber, real estate, hedge funds, and private corporate equity placements. The latter are currently flooding the market at discounts of up to 50 percent.

The $8 billion or more loss from its endowment will greatly reduce the income Harvard uses to fund current operations. The loss in operating revenue could be $100 million or more. In response to this unprecedented collapse in value, Harvard has instituted a hiring and promotion freeze for all faculty in its Arts and Sciences division, which includes Harvard College.

Harvard is not alone. Many other of the nation’s wealthiest colleges and universities have reported endowment losses of 25 percent or more since the first of July. As year-end results are published, further damage is expected.

Over the years, JBHE has regularly collected information on the endowment performance of the historically black colleges and universities. As of June 30, 2007, Howard University had the largest endowment of any of the black colleges. Its funds totaled nearly $524 million. Spelman College in Atlanta ranked second with an endowment of $340 million. In its last report Hampton University in Virginia had an endowment of $257 million.

In the past, the vast majority of the black colleges have tended to be risk-averse in their investment policies. As a result, the black college endowments usually have underperformed the endowment growth of the wealthiest predominantly white educational institutions. But in the July 1, 2006 to June 30, 2007 period, when the Standard & Poor’s stock index rose by more than 20 percent, many of the black colleges with the largest endowments actually outperformed the funds of some of the nation’s wealthiest higher education institutions.

JBHE has contacted several black colleges with large endowments asking them to disclose their recent endowment performance data. The only response we received was from Robert D. Flanigan Jr., treasurer and vice president for business and financial affairs at Spelman College in Atlanta. As stated, as of June 30, 2007, Spelman had the second-largest endowment among the black colleges with a total value of $340 million. Flanigan advised JBHE that “Spelman’s endowment loss has been in line with those reported by the nation’s wealthiest institutions.” JBHE therefore assumes a loss of about 25 percent, or $85 million.

The vast majority of black colleges and universities have small endowments. They generate very little income to cover college operations. But the good news is that there is a good chance that most of the black colleges will have smaller endowment losses on a percentage basis than the nation’s wealthiest universities and colleges. As mentioned, black college funds are likely to be invested in low-risk government notes, high-yielding stocks, and bonds rather than so-called growth stocks — securities that have been hit especially hard in the latest economic crunch. Also, the black colleges are unlikely to have invested in real estate, commodities, and other so-called exotic investments where losses have been more severe than in stocks that are regularly traded on the market. Among the HBCUs, this conservative investment philosophy is still common because the black colleges depend on a sure source of income which they use to fund current operations.

We hope, but do not know, that in percentage terms, the black colleges may have taken a hit that is less severe than most of the predominantly white colleges and universities.

Black Colleges Will Struggle in the Current Economic Climate

We caution that even though the black college endowments may have a smaller percentage drop in value than many of the nation’s wealthier educational institutions, this does not mean that the black colleges will be better able to withstand the current economic crisis. Precisely the opposite is true.

Enrollments at many black colleges are likely to drop due to financial constraints faced by the families of current students. A significant percentage of black families have unemployed workers, smaller savings, and less money to pay for college. With tight credit markets, black students will have difficulty obtaining student loans. This may put further pressures on enrollments at the black colleges. Smaller enrollments will mean that revenues from tuition and fees will decline. 

It is probable, too, that the historically black colleges are likely to see a drop in state aid due to budget constraints at the state government level. Also, alumni donations are likely to diminish, placing even more financial pressure on these institutions.

Several small colleges including Cascade College in Portland, Oregon, and Pillsbury Baptist College in Owatoma, Minnesota, have announced that they will close because of financial complications brought on by the nation’s current economic woes. Several small private black colleges may also be in danger of closing. Many were on shaky financial ground even before the present crisis.

As a result of the severe economic crisis, many black colleges may be forced to lay off employees and faculty, increase class sizes, reduce research and athletic programs, eliminate cultural events, musical and theatrical productions, and institute pay cuts for employees.

In Georgia, legislators are currently considering merging at least one historically black state-operated university into a nearby predominantly white institution. More consolidations may be forthcoming as a way to save money and reduce operating costs. Legislators find this option particularly attractive in areas where state-operated historically black colleges and universities operate side by side with public, predominantly white universities.