Fall 2008
Dear Alumni, Parents, and Friends:
All of us are feeling the effects of the global economic crisis. I write to let you know how this crisis is affecting the University and how we are working to protect and sustain our operations. Because press (and blog) speculations about what the crisis is doing to universities, including us, have been both numerous and generally mistaken, I want also to respond to a few misstatements about the impact of the financial meltdown on our endowment.
The economic situation affects us in several ways. We see evidence of the crisis in state budget shortfalls. Last month, Governor Kaine released a plan to meet the state's 2009 fiscal shortfall of $973.6 million. The overall reduction for us is $10.6 million, or ca. 7 percent of our General Funds. The Governor has deferred a 2 percent salary increase scheduled to go into effect November 25. This delay applies to staff and faculty members. We have never used layoffs here as a means to balance budgets. Layoffs are not a strategy for us now. We are cutting expenditures in many areas throughout the University. Units that depend heavily on tax dollars are particularly stressed as we round out this quarter.
These cuts did not come as a surprise. Through press releases, the Governor alerted everyone earlier this fall of the strong possibility of budget cuts ranging from 5 to 15 percent. Since then, we have been preparing for reductions. Deans and vice presidents have been planning permanent reductions in spending. The instructions given to them have included prohibitions on affecting essential services to students and to patients who depend on us every day. In bad times, we protect our core work of teaching, conducting research, providing best-practice care for patients, and providing public service. We do not look for ways to panic those who count on us. We seek to provide these essential services without noticeable interruptions.
A second effect of the global economic crisis is evident in the University's endowment, which has seen a decrease in value coinciding with the fall-off in global equity markets. The long-term pool invested by the University of Virginia Investment Management Company (UVIMCO) decreased from $5.1 billion on June 30 to $4.2 billion on October 31—a decline consistent with the best results reported so far by similar endowments. This is a 20 percent decrease. The S&P 500 index dropped 24 percent over the same period of time.
UVIMCO is taking all available steps to assure the long-term health of the endowment. We expect to see gradual recuperation when global financial markets begin to stabilize. With this in mind, we are continuing to build the endowment. We have added $150 million to UVIMCO's long-term pool since July 1. Last June, the Rector and Visitors approved an increase in the annual distribution of the endowment from 4.5 percent of equity to 5 percent. That adjustment in spending translates to $161 million in fiscal year 2008-2009. Despite the current economic crisis and consistent with the Rector and Visitors' instructions, we are making this distribution as planned. As a result, our schools and departments will have more resources at their immediate disposal for the remainder of this year than they had before the state cuts.
Though the recent drop in the endowment's value is consistent with what is happening all around us, it is an aberration in a long story of success. UVIMCO's staff and its board of investment professionals have managed the University's assets uncommonly well during the last decade, bringing in a 10-year average annual return of 12 percent through the period that ended October 31, 2008, including a 25.2 percent return in fiscal year 2006-2007. The average return on the S&P 500 index for the same 10-year period was zero percent. Prudent investment strategies have allowed us to weather previous downturns. During the first Gulf War, the University's endowment reported a negative 10.2 percent for the third quarter but finished fiscal year 1991 at plus 8 percent. During the 1987 stock market crash, the endowment reported a negative 12.2 percent for the fourth quarter but closed out the fiscal year at no loss. Our endowment bounced back from those losses. It will bounce back from these current losses. Our colleagues at UVIMCO understand the nuances of the global markets. They invest for the long term, as they should, not simply for a single quarter or even a single year.
Ill-informed stories in the press and in blogs about the structure and status of the endowment have created at least some misunderstanding and misleading speculation. The long-term pool invested by UVIMCO consists of three major components: the core endowment overseen by the Rector and Visitors, the University's corporate entity ($2.6 billion as of October 31, 2008); University-related foundations' endowments ($1.0 billion); and other non-endowment assets ($0.6 billion). While the core endowment is important for supporting initiatives such as new academic programs and the growth of the Board's AccessUVa financial aid program, funds from the endowment make up just 4.8 percent of the overall operating budget, which is $2 billion this year. Other revenue sources—tuition, state funds, sponsored programs, sales, patient revenues, private gifts—stabilize the University in tough times.
For several reasons, we remain confident about both the near-term and the more distant future. All three of the major rating agencies confirmed our AAA-bond rating in conjunction with the issuance of $231 million in tax-exempt long-term bonds in May 2008. Since then, and as recently as last week, our bonds have sold promptly when issued and at the best rates in the market. This bond rating provides financial strength and stability to help us get through this period of economic turmoil. During the current crisis, we have had no problem issuing debt, in part because of this strong credit rating. We do not expect this crisis to end next week. Our planning and financial positioning assume a long, slow recovery and more than a few new realities as the nation and the world move from today's economy to whatever circumstances we may confront in the future.
Despite today's economic environment, we continue to make solid progress in the Campaign for the University of Virginia. Current and future support commitments totaled $1.783 billion as of the end of September. Generous gifts made during the first half of the campaign have given us momentum heading into the second half. We are continuing to invest in new capital construction and new academic programs to support our students and faculty—and to create jobs for persons who live in this region. We are working steadily to create centers of excellence in science, engineering, and biomedicine, while continuing to support core strengths in the humanities. In all important ways, we are moving forward.
We have weathered economic downturns before. Public universities are subject to the same exaggerated up-cycles and down-cycles that have affected almost all public entities during the last half-century. The downturns disrupt important work. They can prevent students from distressed families from pursuing the best available educations, and thus create harm that extends across generations. Today's situation requires us to make hard decisions. If we make these decisions wisely and with our values clearly defined, today's crisis can also teach us new fiscal disciplines and improved strategic thinking. In some cases, we are deciding now what we cannot do and also what we must do. The discipline and analysis that lie beneath these decisions will make us more efficient and more effective. Through all of this, we will sustain our commitment to access for all qualified students who apply, to uninterrupted excellence in teaching, research, and patient care, and to a stable work environment for the staff and faculty members whose work and accomplishments have made our University the world's standard of excellence in public higher education.
Expert fiscal managers who handle our resources wisely and with their eyes on our goals as a university and members of our University family all over the world make us stronger in this down-cycle than other universities are. Private philanthropy gave our University its beginning. Private giving has sustained it during tough times. All of us are making hard decisions at home in these days. I have been asked this week for advice about what kinds of year's-end gifts might make the biggest difference this year. My answers to these questions necessarily vary because each of us has her or his top priority. Betsy and I put most of our gifts into a fund that will eventually provide scholarships for children of staff and faculty members. This year, we are making an additional year's-end gift to AccessUVa. Our reason for giving more to AccessUVa is that we are personally concerned that the first and most serious damage done by this economic downturn may be to top students whose parents will not be able to afford to send them to college because of the ongoing national catastrophe in student financial-aid programs. Others may make any number of other decisions about their own gifts. If Bob Sweeney or your school's dean or Craig Littlepage or I can help as you decide your own purposes this year, please send an email to one of them or to me (jtc@virginia.edu). We will respond as quickly as we can.
Whatever you may decide to do (or not do) as this year approaches its end, I am grateful for your gifts and guidance and volunteer leadership in past years. You have helped make ours one of the top universities in the world. In this time of economic uncertainty, we will rely more than ever on you—on your time and talents and material gifts—to help us hold our ground and build new strengths for the future. For this, and for your unfaltering commitment to this bulwark of Mr. Jefferson's imagining and making, I am in every sense grateful.
John Casteen