The US economy is depressed, the University of California system is reeling as the state tries to dig itself out of a multi-billion dollar deficit, but the balance sheet at the Haas School of Business at UC Berkeley is as robust as ever.
“We’ve never been as strong as we are now,” says Rich Lyons, dean of Haas.
“For a long time public [state] schools have been playing catch-up in terms of pricing and revenue streams, but this year [due to a rise in revenues at Haas from increased tuition and growth in executive education programmes] we ran a surplus of 5 per cent of our budget.”
Haas is not the only public business school that is holding its own in the economic downturn. The global credit crisis has taken a heavy toll on graduate business education. But, while the recession has forced public business schools, faced with dwindling state support, to tighten their belts, most have not had to cut as deeply as their private counterparts.
Private business schools that rely heavily on endowments to fund their operating budgets have been hit especially hard. Many of the wealthiest schools have cut staff, slashed research budgets and delayed capital investments for items such as research centres.
Large investment losses expected
The stock markets have shown some signs of improvement this year but most US institutions with significant endowments are likely to report steep declines in their portfolios.
According to a report last month by Moody’s Investor Services, university and non-profit endowments will fall by an average of 20 to 30 per cent this fiscal year, which ends this month.
“The current scale of investment losses is unprecedented in recent times,” says the report. “The reliability of operating revenues, the strength of management and the prospects for rebuilding liquidity – measured by excess cash flow and fundraising – will become increasingly important.”
Higher education institutions, such as business schools, use endowments to fund their operating and educational expenses.
The health and size of a school’s endowment is an indicator of an institution’s long-term financial stability.
But public school officials say the crisis has had a positive impact on their ability to attract talented students, recruit rising stars in academia and make further links with industry. The result, say higher education experts, is a more level playing field for business schools.
“The unexpected severity of the declines in their endowments has caught [private business schools] off stride,” says John Nelson, managing director of the higher education team at Moody’s, the ratings agency. “They haven’t had time to plan and they’re scrambling now to make cuts.
“This is an opportunity for public institutions to move up: to improve their word-of-mouth reputations, make more connections with industry and to hire new talent.”
The top 50 public institutions with business schools, medical schools and law schools on average derive 5 per cent of their operating budgets from their endowments, according to Moody’s. But the top private institutions with business schools derive about 20-40 per cent of their budgets from the endowments.
Endowment returns have plummeted along with the stock market. According to a report by Moody’s, endowments have fallen 25-35 per cent since the end of June last year.
Haas derives about 15 per cent of its operating budget from its $200m (£121m) endowment. The endowment at the University of North Carolina, Kenan-Flagler Business School is worth about $120m and 5 per cent of that is used to run its day-to-day operations. The Mason School of Business at the College of William and Mary, a public institution in Virginia, has an endowment of about $30m-$50m, of which it draws about 5 per cent for its operating costs.
“I tell my faculty we are blessed at this time not to have a large endowment,” says Larry Pulley, dean of Mason.
“There has been a modest levelling of the playing field,” he says. “We’re used to... always being on a tight budget. Some schools that are used to living extravagantly have to make do with less. They are not used to living in an environment where their basic needs and what they want to do as a business school is bumping up against financial constraints.”
Schools see fall in philanthropy
Adding to the strain of lower investment returns and a drop in state budgets, business schools have seen a fall in individual charitable contributions and a potential decrease in corporate giving.
According to Giving USA Foundation, a research organisation backed by the fundraising industry, donations to educational institutions fell
9 per cent on an inflation- adjusted basis to $40.94bn last year. Giving USA also reported in June that individuals and institutions made total gifts and pledges of $307.6bn, a fall of 5.7 per cent on an inflation-adjusted basis over the $314bn given in 2007.
Development officials say the fundraising environment this year is very difficult. Unlike other countries where universities and graduate schools are heavily subsidised by the government, US schools rely more on donations. Alumni tend to be generous in good economic times, but in a weaker stock market are more reluctant to write big cheques.
However, during a down economy, giving to higher education institutions typically remains more robust than giving to other non-profit organisations. In the 2001 downturn, for example, total charitable giving fell 2.3 per cent to $212bn, when adjusted for inflation, according to the American Association of Fundraising Council Trust for Philanthropy. Giving to educational institutions fell about 1 per cent that year.
Stanford Graduate School of Business, one of the wealthiest private business schools in the US, has taken drastic measures – including cutting staff in order to plug a $10m shortfall for this school year. And Dartmouth university’s Tuck School of Business, another private school, is scaling back plans to add more services for students.
Public schools say the quality of applicants this year has improved. Students applying to state schools have tended to have higher grade point averages and richer work experience, admissions officials say.
The credit squeeze has made financial aid harder to come by and students are becoming increasingly cost sensitive. In wealthier times, applicants may feel that the extra investment in the most reputable, more prestigious – and higher cost – private schools is worthwhile, but in tougher times, costs play a bigger role in decision-making.
Tuition costs at private business schools are usually in the region of about $45,000 a year, while in-state tuition at public schools is about half that figure.
Mays Business School at Texas A&M University costs $27,000 a year. “We have candidates who had already committed to a private school but have decided to come here instead because they got more scholarship support and the bottom-line cost was lower,” says Wendy Flynn, director of MBA admissions.
“In normal circumstances, there is very little price sensitivity of demand for top schools,” says Prof Lyons. “But this year we may see some more price elasticity as access to financial aid and borrowing is a concern.”
The economic crisis has also affected faculty recruitment. Many private business schools – including the Yale School of Management – have imposed hiring freezes. This has enabled public schools to draw stars to their campuses in a marketplace that has considerably less competition than in past years.
Haas has hired 11 faculty and the Darden School of Business at the University of Virginia has also made high-profile hires.
“There is a big supply so we’re finding some very attractive faculty that in the past we would not have been able to get because our competitors would have outspent us,” says Robert Carraway, associate dean for degree programmes at Darden.