Decline in Endowments May Affect Best Colleges Rankings

The value of college endowments, which had rebounded following the recession, declined slightly despite a recovering stock market. This finding comes from the newly released 2012 NACUBO-Commonfund Study of Endowments, produced by the National Association of College and University Business Officers.

It turns out that 2012 was a sub-par year for the performance of college endowments. According to the study, the endowments of the 831 institutions surveyed had an average decline of 0.3 percent in the year ending June 30, 2012. This is down sharply from the previous year's average gain of 19.2 percent and well below 2010's gain of 11.9 percent, but better than the 18.7 percent decline for endowments that occurred during the recession in 2009.

In terms of the methodology used to calculate the U.S. News Best Colleges rankings, the absolute size and annual performance of a college's endowment are not direct factors in the rankings.

However, this is not the full story. A decline in a college's endowment can have a negative impact on the school's ability to fund its yearly operating budget, since institutions use income from their endowment to supplement tuition from students and other sources as a way to fund ongoing operations. Schools in the study spent an average of 4.2 percent of their endowments on their yearly operating budgets in 2012.

One of the factors in the Best Colleges methodology is financial resources per student, which has a weight of 10 percent in the overall rankings. This factor measures the average spending per student on instruction, student services, academic support, research, and related educational expenditures.

U.S. News believes that generous per-student spending indicates that the college can offer a wide variety of academic programs and services. Colleges with large endowments, which tend to be private universities, can spend more per student on educational services than schools without endowments or with very small ones. So if a school's endowment shrinks, it may have less money to spend on the education of its students.

Schools with large endowments therefore tend to do better in the rankings' financial resources indicator than schools without any endowment or very small ones.

Many public universities, which in general don't have large endowments, face tight or decreasing state appropriations due to the lingering impact that the recession and slow recovery has had on the willingness of some states to fund higher education. That can have a bigger impact on public universities than shrinking or slow growing endowments have had on private colleges.

As a result, some public universities have implemented significant tuition increases or have increased the proportion of out-of-state students who pay higher tuitions to try to offset annual funding cuts. Budget cuts in some cases have led to the discontinuance of academic programs, larger class sizes, and reduced spending per student.

Download the list of the universities with the largest college endowments and changes to their market value between 2011 and 2012, available through the organization's website.

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