UnCommon Crisis
At the beginning of this month, it was believed that over 1,000 universities could be facing crises with payroll, staffing, and other expenditures over the next year. Their common plight: investing large sections of capital in a short-term fund with the Connecticut non-profit, Commonfund.
On September 29, Wachovia announced that it would resign as a trustee of Commonfund and limited colleges access to their funds to ten percent of each college’s contribution value. Fund availability would rapidly increase over the next week.
As reported in the New York Times on October 1, Wachovia’s decision to limit school’s access to over $9.3 billion in short-term investment funds would provide “at the least, a major financial inconvenience” to some large universities. NY Times reporters Sam Dillon and Katie Zezima wrote that “Still, Wachovia’s announcement sent shock waves through higher education, sending hundreds of college presidents rushing to check their financial vulnerability on every front.”
“Some smaller colleges that had not previously arranged lines of credit were feverishly seeking to negotiate those on Wednesday. And some large institutions said they were facing, at the least, a major financial inconvenience as a result of Wachovia’s action.”
Pointing to the University of Vermont, Boston University, the University of Akron, and Augsburg College as examples of how the credit crisis had hit universities, the reporters write that “Wachovia’s action was perhaps the most tangible signal yet that the credit crisis could have a powerful impact on higher education.”
Ironically, of these four schools, the most hard-hit institution, Boston University, had no investment in the Commonfund Short Term Fund. The remaining three did not say that the Commonfund freeze would destabilize their operations.
President and CEO of Commonfund, Verne Sedlacek, offered his reassurances about the fund’s future in an October 8th letter (pdf):
“By month-end we now expect available liquidity to reach approximately 50 percent based on maturities alone (i.e., assuming no additional asset sales), and by December 31st, approximately 62 percent (also assuming no asset sales).”
In the beginning of the month, the Fund had been at ten percent liquidity; just a week later it reported almost 40 percent liquidity, a significant improvement. The Federal Reserve approved Wells Fargo’s deal to buy Wachovia on October 15. Meanwhile, the Commonfund is still looking for another trustee.
“As we continue to building the liquidity in the fund, we are also actively seeking alternative sources of liquidity for our clients, particularly for those colleges, universities and private independent schools that face acute liquidity needs to fund payroll and other operating expenses,” reads the October 8th statement.
Selling or withdrawing funds prematurely may not be the most savvy answer for many colleges. In the Commonfund letter, Sedlacek counseled colleges to:
• avoid selling endowment assets at a loss, because “as long term investors, you [colleges] have the advantage of being able to ride out even the most turbulent of times;”
• remember that mark-to-market rules may be undervaluing assets in the short-term fund and that investors “should be able to recover their fully invested” balances, unless the market “considerably worsen[s];” and
• speak with their Commonfund Relationship Officer about their individual circumstances.
As news reports following Wachovia’s announcement demonstrate, college’s responses to the loss of liquidity have varied, but lack the drama of an outright crisis.
The University of Missouri’s President, Gary Forsee, wrote in a letter to faculty, students, and staff that the University of Missouri college system has had “minimal” exposure to the crisis, since they were not invested in the Common Fund. But, he wrote, “We are monitoring the impact of financial markets’ turmoil on Missouri’s economy. The economic downturn will ripple through the nation, and Missouri will not be immune from this impact.”
His message to students: “stay focused on your studies.” “You can continue to have confidence in the University endowment funds that support the individual scholarships many of you receive,” wrote Forsee, explaining that the schools’ scholarship funds are significantly diversified.
The University of Alabama system “is being forced to look for cash in alternate investments due to the Commonfund freeze,” reported the Associated Press on October 13th. The University had invested $175 million in Commonfund but, as of October 13th, could only retrieve $61 million of those funds. Despite this, the university has adequate funds for current operating expenses, as asserted by University spokeswoman Kellee Reinhart, reports the Associated Press.
Elyse Miller writes for News Channel 3 (KESQ) that California State University is “making ends meet.” “It’s close, but we will be okay,” Miller quotes CSU-San Bernardino Vice-President of Administration and Finance, David DeMauro. “We don’t expect to have a financial loss, so that’s the important thing.”
Whitworth University reports being “back on budget” despite the losses, according to Julie Wootton, news editor of the Whitworthian. “The freeze simply limits the accessibility of working capital [Vice-President for Finance and Administration Brian] Benzel said in a later interview,” reports Wootton.
Carrie Ghose reported on October 3 that Ohio schools such as Ohio State University, Ohio University, Ohio Dominican University, Capital University, and Otterbein College are weathering the Commonfund freeze without much trouble. Of these colleges, only OSU had significant funds invested in the non-profit; some had no money invested in Commonfund.
“Meredith College and Peace College are among 22 North Carolina education institutions that have funds tied up in a troubled Wachovia account, but the Raleigh schools say they aren’t facing any serious cash-flow problems,” reported James Gallagher for the Triangle Business Journal on October 2. “The University of North Carolina at Chapel Hill and Raleigh private schools St. Augustine’s College and Shaw University in Raleigh said they do not have money in the fund.”
“We’re confident that our money is safe,” Bush quotes Richard. “It isn’t as liquid as we would like it at this point.”
If only the many Americans losing their jobs and homes could say the same thing.
Indeed, the Chronicle of Higher Education reports that, despite the high cost of borrowing, academia may be one of the better-insulated industries during the credit crisis. Goldie Blumenstyk and Kelly Field write that “At the same time, bankers who do business with colleges and academic medical centers note that as a sector over all, higher education is faring better than other industries, even if colleges are finding they’re paying more for credit.”
Bethany Stotts is a staff writer at Accuracy in Academia.
Bethany Stotts
