The stagnant economy has yet to hurt most private colleges, according to a new report by Moody’s Investors Service, although average endowment values apparently decreased during the past year. The report questions how long the stability can last, particularly for colleges with small endowments and a heavy reliance on tuition for revenue.
The last 18 months have set a record in upgrades versus downgrades for the bond-rating agency, with upgrades of 22 colleges and universities, and downgrades of just five. The report predicts that upgrades will continue to outpace downgrades for the foreseeable future, but not by such a wide disparity.
Moody’s expects that the gap between rich and poor institutions will continue to grow, because private gifts continue to flow in greater amounts to colleges that already have the largest endowments. Large institutions that are rated Aaa, the highest rating, reported median gift revenue of $308.2-million in the 2000 fiscal year, while those that are rated Baa, the lowest of the investment-grade ratings, had median gifts that year of $6.9-million. Those with the largest endowments, in turn, have the most sophisticated investment managers, who are more likely to milk a better return from the marketplace.
The report predicts that the average private-college endowment will show a loss in value for the fiscal year that ended June 30. Based on “preliminary reports from university chief financial officers,” the report estimates that the average loss in value will be less than 10 percent. Some institutions will most likely report gains in endowment value, the report says, particularly those where investments are highly diversified and in hedge funds, and those that are weighted heavily toward fixed income.
Even with the losses, most college endowments are in good shape because of their “excellent investment and fund-raising success over the last decade,” the report states.
For some private colleges, though, there may be trouble ahead.
“Modestly endowed and relatively less-selective private colleges and universities are most likely to see some of their student market share shift toward public universities if family net worth continues to stagnate,” the report says. In 2000, household net worth declined in the United States for the first time in 55 years because of declines in the stock market, according to estimates made by the Federal Reserve.
Colleges that specialize in educating adults 25 and older will face growing competition from online degree programs, for-profit colleges, and public institutions, the report says. In addition, colleges with buildings, laboratories, or computer systems that are out of date will face increasing pressure to go into greater debt to finance new construction and technology upgrades.
Richard Ekman, president of the 480-member Council of Independent Colleges, said that while many of the report’s generalizations are accurate, there are many small colleges that are thriving.
“It is true that the higher cost of private colleges works against them, but the perception that the education is a higher quality works in their favor,” said Mr. Ekman. “Finding a niche that enhances enrollment is not impossible to do. A lot of colleges have done it.”
Colby-Sawyer College, in New Hampshire, had its bond rating upgraded in May by Moody’s, and now carries the first investment-grade rating in its history. The college has increased its endowment to $18-million now from $2.3-million 10 years ago, and expects this fall to have more than 940 students, 25 percent more than five years ago.
The college has succeeded by focusing relentlessly on its niche market, New England students with SAT scores generally below 1,150 who “haven’t realized yet just how smart they are,” said Douglas W. Lyon, the college’s treasurer. The college has also spent $23-million on new construction and updating of old buildings in the past 10 years, in addition to almost $2-million in the past four years rewiring the campus for new technology.
“We have to keep up with the cost of technology because students come in expecting it,” said Mr. Lyon. “What we have to focus on all the time is can we find a way to convince people that the price of what we do is worth it, considering what you get from it.”
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