Officials say university’s $1.2 billion endowment loss will only affect 2010

Though the nationwide financial crisis has had little effect on the university’s operating costs for this year, the $1.2 billion loss endured by USC’s endowment over the last year will likely have an impact on the school’s spending for 2010, administrators say.

Until June 2007, the endowment, which pays for 5 percent of the university’s operations and accumulates interest through various investments, enjoyed steady growth leading to a high of $3.7 billion.

But it began a decline later that year, mirroring the first tremors of the worldwide market crash, falling from $3.6 billion in June 2008 to $2.4 billion by March 2009.

“All markets were down. International stock markets were down, US stock markets were down, so there was no place to hide,” said USC associate senior vice president and treasurer Ruth Wernig. “Everything pretty much went down. Plus, we’re in the middle of a credit crisis.”

USC aims for low risks and high returns by diversifying its investment portfolio, with substantial investments both in the United States and abroad, Wernig said. Endowment funds are also invested in real estate, energy investments, bonds, venture capital and hedge funds.

Though the information for the most recent financial quarter is still being compiled, Wernig said the endowment rose slightly to $2.5 billion in June, and showed improvement in July, August and September as well.

Despite a $1.2 billion loss over the course of a year, the administration minimized the importance of the endowment for the university.

“It’s a significant loss for the endowment, but a drop in the endowment does not have a big effect on the university like it does at other schools, so that’s a good thing,” Wernig said.

USC’s interim senior vice president and chief financial officer Robert Abeles said the loss over the past few months did not affect spending for this fiscal year, which ends June 30, 2010.

As with last year, $140 million, or 5 percent of the endowment, will be spent.

The reason the endowment payout — the amount the university uses on an annual basis — hasn’t decreased, Abeles said, is because USC calculates the payout based on an average of the endowment value over the past three years, rather than just the previous quarter.

This calculation, known as a rolling average, shields the university payout from year-to-year fluctuations of the market.

Lawrence Picus, a professor of education policy and finance at the Rossier School of Education, said he would be surprised if some schools don’t use a rolling average to help smooth out fluctuations.

“By having a rolling average, it gives us a soft landing when the value of the endowment goes down,” Picus said. “It’s a strategy to make sure that no one is badly hurt in bad times and that we wisely think about how to use the money in good [times].”

As a result, the endowment payout this year still factored in gains made in the stock market three years ago, nullifying some of the losses from over the last year, Abeles said.

“The endowment went down a billion, [but] no one has felt that effect yet because we’ve kept the payout constant,” Wernig said.

Next year, Abeles said, the endowment’s decrease will have more of an impact on spending because the worst months of the economic crisis will be calculated into the rolling average.

“The bottom line is [there will be] no effect on the university’s operations this year, but there’s a potential effect for fiscal year 2011. We’re getting into years now that weren’t so good for the endowment,” he said.

The Board of Trustees, which approves the payout percentage in the spring, will vote whether to increase it to match this year’s $140 million, or keep it consistent and less money.

Abeles said it would be difficult to project how much the payout might be cut next year, but said he expects it to be cut by less than 10 percent — meaning the overall operating budget would lose no more than half a percent of its funds from the payout.

At the same time, Abeles said, he has warned the administration to be cautious about its spending and hiring. It is also not committing to beginning construction on new buildings, he said.

Abeles said the university’s endowment losses over the last year are relatively small compared to other private universities, but affects the school less, because of its lack of dependence on the endowment for operating costs. He said the biggest problem USC would face financially is if people couldn’t afford to attend or if enrollment was dropping.

“We haven’t had that problem. We’ve probably been the least affected of the major universities by this decline, and we don’t expect it to be a major factor in the years ahead,” Abeles said.