Economy continues to batter higher Ed: schools modify investments, slash budgets--and seize opportunities. (Update).

Earlier this year, higher ed's economic woes--state budget cuts, tuition hikes, endowment losses--were reported as coming fast and furious ["It's Still the Economy, Stupid," University Business, March 2002], and not much has changed. Stanford University (CA) recently reported that it will force employees to take off Christmas week, in an effort to to gain operational savings through office closings, and close an anticipated $40 million budget shortfall. And in a Commonfund Benchmarks mid-2002 survey of 100 educational institutions (endowment assets ranging from less than $10 million to more than $1 billion), respondents reported that, on average, endowment values had returned -5.4 percent for FY 2002, compared with an average -3 percent return the previous year.

Endowments suffer. Many of the nation's wealthiest colleges continue to be hard hit. The New York Times has reported MIT's 2001 loss as 13 percent of its $6.1 billion endowment--or about $775 million. And Emory University (GA), which in 2001 reported a 14 percent decline in its then $5 billion endowment, has reported another 4 percent drop against $4.3 billion in 2002.

Reallocation on the rise. In an effort to stanch the bleeding, endowment managers have been reallocating investments. Twenty-nine percent of respondents to the interim Benchmarks study report modifications of asset allocation. As a percent of assets, equity allocations declined to 47 percent from 50 percent in the previous year. Fixed income remained unchanged at Z8 percent of assets. International equities declined slightly to from 11 to 10 percent of assets.

But alternative investments grew from 11 to 15 percent over the same time period. Within those alternative allocations, hedge funds rose to 35 percent from 22 percent, as fund managers seek to reduce risk and protect assets. Allocations to venture capital were unchanged at 12 percent of assets, while private equity declined to 11 percent from 14 percent, and equity real estate declined to 6 percent from 7 percent the previous year.

Tuition hikes/budget cuts. Colleges continue to use tuition hikes to counterbalance endowment losses. As they hit the tuition-hike wall, however, they're forced to tighten budgets. According to the Times, Duke University (NC) expects to cut 20 faculty positions in arts and sciences; MIT halted construction on its expanded Media Lab; and Emory administrators put off a planned expansion of theology and business schools, and told departments that the general fund won't pay for merit raises this year.

Swimming against the tide. Interestingly, there are schools taking this opportunity to grab the competitive edge. In Forest City, IA, Waldorf College is towering tuition by 15 percent for fall 2003, in an ongoing effort to create a new identity for itself. The almost 100-year-old institution--historically an academy or two-year college--became a baccalaureate college in the fall of 2001.

"Iowa has 29 private colleges," explains Thomas Jolivette, Waldorf's president. "By pricing ourselves lower, we believe we are the lowest-price private university in the state." The college has also frozen tuition and fees and towered room and board for its current students, to help increase retention rates into junior and senior year. Jolivette claims Waldorf will make up the difference in volume. "In a normal year, we'd have about 250 freshman. We'd like at least 300. This will give us the opportunity for growth."