KINDELSPERGER: Historical advantages of endowments dive with market

In the world of higher education, especially at private institutions, the conventional wisdom was always, "The best
and financially strongest institutions are those with the largest endowments."

Strong fund raising over the past 20 years helped
many institutions build large endowments, which became major sources of annual income. Large endowments
also were viewed as "insurance" against vagaries of economic downturns, protection against
swings in enrollment, and a safety net from unforeseen financial emergencies or budget cuts by state
legislatures.

But life
has changed in higher education and changed very rapidly. The value of most endowments, just like our portfolios
and 401(k)s, has plummeted and, along with them, many of their historical advantages.

Today, institutions with the strongest "bottom lines" are likely to be those with strong
management and business plans that work in today’s economy, not necessarily those with the strongest
endowments.

Historically,
private colleges and universities have been grossly grouped into one of two categories&3151;the well-endowed, and
those that were "tuition-driven."

Well-endowed institutions boasted endowed professorships and scholarships, facilities maintenance endowments, and often large
unrestricted endowments.

Tuition-driven schools, however, depended on student enrollments to generate the majority of their income—hopefully recruited
at the lowest "discount rate" (a euphemism for how much the institution needed to lower or discount their published
tuition to match the pocketbooks of applicants or, more specifically, their parents).

Nearly all institutional endowments enjoyed
dramatic run-ups in their size and earning power in the ’90s, and private philanthropy fueled steady
annual increases in fund raising. Those with the largest endowments and strongest fund raising often grew exponentially—further
separating the "haves" from the "have-nots."

The market crash in some ways has become a great equalizer. And because of this, "tuition-driven"
isn’t necessarily the weaker position today. Institutions, both public and private, that rely on endowments
for operating support have been forced to curtail the practice or even put it on hold temporarily.

Similarly, falling tax revenues have forced
significant cuts in appropriations for state institutions and student aid appropriations for students at all types of institutions.
There is also evidence of even deeper tuition discounting to ensure enrollments do not dip, which adds
pressure to the bottom line.

Which brings us to the simple point&$151;the economics of higher education may have changed for the foreseeable future. Who
will be the eventual "winners" in this topsy-turvy time for higher education? For now, you
might put your money on community colleges.

In Indiana, Ivy Tech Community College reported a spring term 2009 enrollment increase of 10.4
percent, and recent media stories point out that many campuses actually have too many students—a
problem many institutions would welcome right now.

Only time will tell if well-endowed institutions will regain the value of their investments. And
tuition-driven institutions that raised discount rates this year to hit their enrollment goals may find
they gave away the store.

The likely winners, both short-term and long-term, will be those institutions that historically placed a high premium on strong
fiscal management—an issue that received relatively little attention or accolades during strong economic times.

Such institutions are built to survive this
downturn. You might recognize them as institutions that have programs that are attractive to students,
have held true to their mission, have tuition rates that address value as much as price, and have strong
cost containment in place. They are also institutions with strong leadership from both senior staff and trustees.

These institutions are not panicking in these
times, because their fundamentals remain strong. Whether an institution is well-endowed, tuition-driven,
state-supported, private, large or small, what will likely keep it strong is leadership and solid fundamentals.

No one will likely look back on 2008 and 2009
as the "good old days," but-much like banking, housing and maybe the auto industry—the
economic downturn has leveled the playing field. It has leveled it in a way that well-run and strongly led higher education
institutions will not only weather the downturn, but come out the winners.•

Kindelsperger is senior executive consultant at Johnson Grossnickle and Associates, a philanthropic
consulting firm. Views expressed here are the writer’s.