Wealth

Even with a $27 billion endowment, Stanford University expects layoffs will be ‘unavoidable’

On Wednesday, Stanford University president Marc Tessier-Lavigne announced in a letter to the Stanford community that the school was facing financial challenges related to the coronavirus pandemic and that some reduction in the school’s workforce would likely be “unavoidable.” 

“We don’t yet know the scale of job reductions. We hope they will be limited, but they will be driven by the program needs and budget capacity of individual units. Our expectation is that some of these reductions will be temporary layoffs (furloughs) until we are able to resume services and bring employees back, and that other reductions will be permanent layoffs,” wrote Tessier-Lavigne. “At this time, we expect to be able to communicate more detailed decisions about layoffs in late July.”

Specifically, Tessier-Lavigne said that the school is forecasting $267 million in financial losses from March 1st to August 31st and potentially greater losses in the following fiscal year. 

“I know this is difficult news to hear, and it is difficult for me to share, knowing the dedication and contributions of the people across our Stanford workforce,” he added. “To be clear, we will provide pay continuation through August 31 in all cases, and we will be providing more information about assistance the university will provide for anyone we’re unable to retain.”

Stanford has not made any final decisions about how classes will be conducted in the coming academic year.

The news that an institution as prestigious as Stanford would be forced to layoff employees came as a surprise to many — especially given Stanford’s status as one of the wealthiest schools in the world. 

In October of 2019, Stanford reported that its endowment was worth $27.7 billion, making it the fourth largest endowment in the country behind Harvard University ($39 billion), the University of Texas system ($31 billion) and Yale University ($30 billion).

“Many of our income streams will continue to be diminished: Housing revenue will be reduced due to fewer students living on campus; income-producing events and programs will continue to be limited; and clinical, research and philanthropic income streams will be challenged,” he explained in the letter. “At the same time, expenses in some areas, such as student financial aid, will increase. The market volatility affecting our endowment also can be expected to continue, given the seismic disruptions occurring in the national and global economies.”

Across the country, colleges have faced tens of billions in endowment losses due to economic conditions and volatility in the stock market, where endowment funds are typically invested. 

During the 2019 Fiscal Year, Stanford withdrew $1.3 billion from the endowment (about 5% of the total value of the fund) to cover more than a fifth of the university’s total operating expenses.

But in Tessier-Lavigne’s letter, he wrote that upcoming budget plans will be based on a scenario in which there is a 15% reduction in funding from endowment payout and a 10% reduction in support from general funds, adding that “we sincerely hope that the reductions needed will be smaller than this, but for now we need to plan to these targets as a contingency.”

Indeed, colleges across the country are facing unprecedented financial strains — including Stanford — but in the context of the magnitude of Stanford’s endowment specifically, some see Stanford’s potential austerity measures as “stingy.”

“The purpose of an endowment is not just to generate income to supplement typical spending, it’s also to be a rainy day fund. And frankly, it’s pouring,” says Mark Kantrowitz, education expert and vice president of research for savingforcollege.com, who points out that a loss of $267 million is less than 1% of Stanford’s $27.7 billion endowment.

He adds that the overwhelming majority of schools do not have billion-dollar endowments. 

“Most colleges are tuition-dependent, which means that if they have a drop in tuition revenue and more demand for financial aid, they are going to be squeezed and may have to do staffing cuts. They may have no choice,” says Kantrowitz. “But a college with an endowment, especially a big endowment, should use it to weather the storm. Even if it means spending some principal, they should use that to be an ethical employer and continue their investment in their staffing.”

When CNBC Make It reached out to Stanford University for comment a representative said, “In anticipation of possible impacts on programs due to budget shortfalls, president Marc Tessier-Lavigne wanted to make the university community aware how it may affect staffing,” pointing back to the public letter. 

Overhead view of Stanford University

Easyturn | Getty Images

To be sure, Stanford’s endowment, like most others, has restrictions on how much can be withdrawn each year and what those funds can be used for, which means Stanford administrators do not have complete access to the full $27.7 billion. 

“The endowment consists of thousands of individual gifts from donors, with most gifts restricted to specific uses,” reads the school’s website. A 2019 report on the school’s endowment indicates about that 80% of the university’s endowment is made up of funds that are restricted. 

This is because when donors give money to an endowment, they often specify what they would like their funds to be used for, such as for scholarships for first-generation students, supporting study abroad programs or erecting a new building. 

Colleges can be sued for misappropriation of funds but Kantrowitz says colleges can also file a court order to get special permission to use endowment funds if they are needed to face “an existential threat.”

For instance, in 2016 representatives for Westminster College in Fulton, Missouri testified in court that the school was running out of options to avoid closure and was eventually permitted to use restricted endowment funds to keep the school afloat. 

Given the current situation, “the courts will probably be very flexible,” says Kantrowitz, arguing that Stanford likely has enough unrestricted funds to cover the forecasted $267 million in losses and would likely not need to go to court, even if the endowment has been negatively impacted by economic conditions. 

College administrators such as the president, provost and chief financial officer as well as the school’s board trustees are likely responsible for approving an increase in borrowing from the endowment.

President Tessier-Lavigne and Provost Persis Drell are expected to hold a “conversation with the Stanford community” on June 1. 

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