After Turning Down Stimulus, Northwestern Taps Endowment

After turning down an $8.5 million federal relief package last month, Northwestern University said it will instead attack its $90 million budget shortfall this year by tapping into its endowment.

The university, which has a roughly $11.1 billion endowment, said it will temporarily increase the payout rate to deal with losses from the COVID-19 pandemic, according to a financial update the university president sent out Monday.

A payout rate is yet to be determined, a spokesperson said. But last fiscal year, the payout rate from the endowment was 5.25%, a figure that included administrative and management fees, according to the university website.

“We expect to see repercussions from the pandemic for some time,” the letter read.

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Last month, a number of top universities, including Harvard, Yale, and the University of Pennsylvania, turned down federal stimulus checks after facing backlash from lawmakers, who argued that coronavirus relief should first go to smaller institutions without wealthy endowments.

The Chicago-area university is taking other measures to draw back on spending, including furloughing some 250 employees likely through the summer. Northwestern said state unemployment benefits, plus the federal stimulus, will likely replace most wages for some workers.

Other staff members are taking steep pay cuts, including the president, interim provost, and senior vice president, who said they would take 20% pay reductions. University deans will take a 10% cut. Other university leaders are expected to take similar reductions.

Starting in June, the university will cut contributions for the school’s 403(b) retirement plans for the rest of the year. The decision to cut the 5% automatic and 5% match contribution is expected to save the school “tens of millions of dollars.”

Despite these changes, which halved the budget shortfall, the university said the financial repercussions of the coronavirus are expected to last for some time.

“We are likely to see a significant shortfall in the 2021 fiscal year as well, perhaps as great as or greater than what we are experiencing this year,” according to the letter.

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Tags: college, Financial Endowment, Investment Fund, Northwestern University, University

The California State Teachers’ Retirement System (CalSTRS) approved an increase in the state’s contribution rate by the maximum amount available under the law, as well as the state’s employer contribution rates to the fund, in an effort to eliminate its portion of the fund’s deficit by 2046.

The system’s recently published 2019 valuation report noted that its unfunded actuarial obligation decreased from $107.2 billion at the June 30, 2018, valuation, to $105.7 billion as of June 30, 2019. As a result, the funded ratio increased from 64% to 66%.

In a board report, the pension noted that additional increases in the state’s contribution rate are expected for at least two more years to help reach its goals.

Part of the reasoning is the sour market environment the fund, and the entire world, have found themselves in. “The state contribution rate will likely be adversely impacted by the decline in investment markets that have occurred in the first half of the 2020 calendar year,” the report said.

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The retirement system hired Milliman to review its situation. Milliman said that the market activity following the June 2019 valuation “will almost certainly have an adverse impact on defined benefit program funding. It is expected that the 2020 program valuation will show a greater increase in the projected state contribution rate (and possibly the employer rate) and a possible decline in the funded ratio.”

The retirement system said that the recent adoption of a new funding plan by the California legislature puts it in a position that is better able to handle the market turmoil relative to its stance in the 2008 financial crisis.

“With the funding plan, the board can now adjust contribution rates for the state and employers … to strive for reaching full funding by 2046. Even if the severity of the decline was such that it prevented CalSTRS for reaching full funding by 2046, the funding plan would allow for funding levels to improve following a decline,” the system said.

The state contribution rate will rise from its fiscal 2019-20 rate of 10.328% of payroll to 10.828%, an increase of 0.5%, the maximum allowed under current law. The employer contribution rate will also increase from 17.10% to 18.40%.

“At this time, it is too early to tell how exactly contribution rates and funding levels will be impacted by the recent decline,” the retirement system said.

The news comes in tandem with an announcement from the retirement system that a high school teacher, Harry Keiley, was elected to serve as chair to the board. Keiley was elected to the board in 2007 and will also serve as vice chair of the retirement system’s investment and compensation committees.

Serving as the new vice chair of the board is Sharon Hendricks, a communication studies instructor.