'Why I Lost My Secretary'

In the past year, many faculty members and students who never paid much attention to the concept of "endowment payout rates" and their rolling averages have had reason to learn about them. In short, the idea is that colleges and universities shouldn't decide each year what share of their endowments to spend, but should have a standing philosophy on the appropriate payout rate, and should average that rate out over several years to avoid spending too much or too little based on a particularly good or bad financial year.

Of course, that theory sounds much nicer when you are averaging out gains of various sizes than it does for the recent reality of deep losses.

"Why I Lost My Secretary," a study released Monday by the National Bureau of Economic Research, finds that when doctoral universities face negative endowment "shocks" they react in similar ways, not all of them dictated by their endowment payout policies. Many universities appear to make deeper cuts than their endowment payout strategies would call for, the study finds. And there are common patterns in how they adjust spending that may explain (but may or may not justify) why some of the wealthiest universities in the world have been in the uncomfortable position lately of laying off support staff.

The study was based on the endowment data of doctoral universities that participate in the annual endowment study of the National Association of College and University Business Officers. The period covered was 1988-2008, a span that included the major financial shock to endowments in 2001-2 (the collapse of the technology bubble). The researchers -- while acknowledging that data from the stock collapse of the last 18 months is still incomplete -- used other surveys and anecdotal reporting from this more recent downturn to add to their analysis.

They found the following:

• While a severe drop in investment earnings would result in a reduced payout, doctoral universities go further than would be predicted. "Our finding that university endowments reduce payout rates below expected levels following a negative shock suggests that endowments do not fully smooth payouts over time. Rather than using endowments as insurance against the bad states of the world the university may face ... some endowment managers may instead behave in a manner consistent with an objective of maintaining the value of the endowment."
• Universities cut spending on support staff -- secretarial and maintenance positions alike -- while not eliminating administrators' jobs.
• Universities that are less selective tend to cut spending on tenure-track faculty slots while increasing the average salaries of adjuncts.
• Universities whose endowment portfolios are less liquid (generally the wealthier institutions that have riskier investments) make larger cuts to both tenure-track faculty spending and secretarial support than do institutions with portfolios that are more liquid.
• Universities appear to seize a competitive advantage when a peer institution suffers an endowment shock but they don't, and they increase hiring during such periods.

The study concludes without offering any magic bullets -- beyond knowledge -- for managing economic downturns. "Taken as a whole, our results provide strong evidence that endowment shocks and endowment investment decisions have an important and significant effect on the real operations of the universities that these endowments are meant to support," the study says. "In light of these results, understanding the decision-making process within the endowment board that sets these investment policies, and the interplay between the endowment board and the university, is a natural topic for future research."

The authors of the study are Jeffrey Brown of the University of Illinois at Urbana-Champaign; Stephen G. Dimmock of Michigan State University; Jun-Koo Kang of Nanyang Technological University, in Singapore; and Scott Weisbenner of the University of Illinois at Urbana-Champaign.