Is your endowment spend at or more than 5%? The official rebuttable presumption under UPMIFA is generally 7%. But spending at this rate doesn’t always preserve purchasing power – and it generally indicates a larger problem on the horizon.
Is your endowment spend up?
21% of private institutions who responded to the 2023 NACUBO Commonfund Study of Endowments had an average spend rate of 8.1% in FY23. That’s up 2.6% from the year before. These are generally smaller institutions with average student FTEs (full-time equivalent) of 3,000 or less. These are not small endowments; at this spending rate, the average spend is $23,000 per student. I was blown away to see this result for 21% of private institutions responding to this survey. Only 11% of responding institutionally related foundations and 5% of publics had spending rates exceeding 5%.
Solving deficit challenges
Many CFOs I speak to are trying to solve significant budget deficits, many with deficits in FY25 as high as 20% of expenses. Often, presidents are looking to the finance department to solve the deficit challenges. They don’t realize that finance is a lagging indicator and the only way to solve the structural deficit is to stop doing some things or do them differently. One of the easy places to look is to take a larger draw on your endowment. While this may be an appropriate short-term option, spending at rates above 5% for the long term is not sustainable and will erode long-term purchasing power.
Are quick fixes the answer?
I spend a lot of time at institutions that have tried to solve this problem with quick fixes. They tried short-term bumps in their spending rates, a one-time sale of property, seeking more donations, and making small staffing changes. More than two years later, most concede that they’re still running significant deficits, and their cash runway is getting shorter.
65% or more of our expenses are people, and 20% or more are facilities. Since facilities are largely fixed, the only way you will decrease a 10-20% budget deficit is to eliminate positions. Let me say this again: eliminate positions! That’s why we need to consider what we can stop doing or do differently. We will not be able to eliminate positions and continue doing what we have done in the past.
Eliminating 20% of your positions takes serious work. Let me share examples of how to do it.
Class sizes
We’ve added new majors over the last 10 years, and the number of students has declined or remained flat. This means that your class sizes are smaller. The pending decline in students will worsen this problem. It’s time to examine your class sizes, not just by major, but by also looking at “butts in seats” – the number of students in each section. Using a 3-year trend analysis, you can determine your average class size. You can also see how that differs by department and what classes run below average.
I often hear, “We cancel low-enrolled classes.” But what is the definition of low-enrolled? Which required classes are never cancelled, even if their numbers are low?
Next, if you examine class sizes for each department by level 1000 and 2000 versus 3000 and 4000, are class sizes lower for upper-level courses? This should cause you to consider whether the major is sustainable.
This is not what the president or provost like to hear, but once you look at this data and the number of students graduating by major, you see the need to restructure majors. That, or examine your marketing for that program if your research tells you the numbers should be higher.
Underloads
When we cancel low-enrolled classes, we have more underloads (faculty members working less than their contract load). That enables us to better deploy faculty and adjunct credits.
Many institutions are doing academic program reviews, but only 30-40% of expenses are in instruction and academic administration. So, you need to examine each functional area in a similar way!
Athletics
Divide the direct cost per sport by the number of athletes on each roster, and you will see big differences. Look for ways to increase enrollment through recruiting or leveraging coaches in your retention efforts. You can also decrease expenses by requiring coaching staff to coach sports that run in opposite seasons or shorten coaching contracts to 10 months. Some institutions may have to eliminate some sports.
Admissions
Divide the direct cost of admissions and enrollment by the number of new FTE students to understand the cost of a new student. Then examine this over a 3-year period to determine what you spend each year. Many of us spend money buying leads and sending catalogs to students who do not convert. When examining your 3-year enrollment funnel conversion from lead to applicant – applicant to accepted – accepted to deposited or enrolled, you may see some inefficiency. Do you spend time working leads that are not converting to enrolled students? Would your results improve by spending more time focused on students who are more likely to enroll?
Student life
This is a difficult area because students need activities and counseling to succeed. When you examine the cost per student participating (not total students at the institution), are those costs growing? Are there some clubs or activities that you should consider eliminating? Can you partner with a local clinic to provide counseling to your students and allow them to bill insurance?
If you compare these metrics over a 3-year period, you will likely gain valuable insights.
No single solution will solve your financial challenges. But increasing your endowment spend when you are already at or near 5% is hiding a larger problem. It’s wise to examine it while you can still reverse it. If you need help with this exercise, contact us for a free consultation.
Photo by National Cancer Institute on Unsplash