1/25/2010 Trustees may dip into endowment

act Checker here.
With a warning that requires many checks. Please read carefully.
I want to comment most urgently on the proposed change in the endowment payout. This is very very dangerous.

What is meant by endowment payout? It is the amount of money we move from the principal of the endowment to the annual budget, the amount we are going to spend each year.

For a long long time, Duke has followed a very prudent policy, utilizing a complicated formula which I have greatly simplified.

The formula assumed we'd earn 8.5 percent per year over the long run, counting dividends, interest and capital gain, and that we'd divide that as follows:

-- we would spend 5.5 percent, transferring funds from the investment account into the annual budget.

-- and we'd set aside 3 percent, adding it to the principal to protect the purchasing power of the endowment over the long term.

Very very prudent. It won widespread praise, particularly from our chief money guru Tallman Trask. Plus the Fact Checker seal of approval.

Faced with red ink now because of the financial meltdown, the scramble is on to "find" more money, and thus the move to spend more from the endowment. Rather than a percentage, this is expressed as a certain amount of money to continue to flow every year.

Last year the Trustees made their first assault on the spending formula. Oh you weren't told about this by Mr. Brodhead or the Chronicle? Or the Trustee chair or a news release? Precisely why you need Fact Checker!!

The Trustees allowed Brodhead and Company to dip into that portion of the endowment dedicated to undergraduate financial aid at a rate greater than 5.5 percent. Thus, the administration could continue to bask in the myth that its Financial Aid Initiative was a great big success and to boast of a need-blind admissions policy. In fact, we made a move to live beyond our means.

With a secretive tweak of the formula affecting the endowment backing undergraduate financial aid, we are able to spend 28 percent more than we would have been the case if we did not resort to this gimmick.

That 28 percent increment comes straight from the money that we should be leaving to future generations, to insure the greatness of Duke in perpetuity.

Worse, the Trustees are now discussing tweaking all of our endowment -- not only that portion devoted to financial aid. We will gobble more, we will leave less to the future. It is a grave moral question, and I fear we are making a mistake in answering it.

✔There is a second factor at play here too, adding to the danger. As I outlined, Duke's financial matrix is built on the assumption that our endowment will earn 8.5 percent a year on average, year after year. But that's not happening, despite rosy statistics every once in a while from The Allen Building.

Indeed, last year we had a negative investment return of 24.5 percent. And the key word here is investment -- for the 24.5 percent does not include the percentage we routinely transfer to the annual budget, much less special appropriations needed to cover red ink caused by a sharp decline in donations. Each of these steps reduced the principle.

Administrators have only talked about the 24.5 percent and the endowment. Not one has mentioned applying this loss to the pension funds and to massive Duke Health surpluses. Or similar losses in university-related accounts, thousands of them, including The Chronicle's reserves which are invested in part through Duke Management Corporation.

Forget 24.5 percent. A better measure of what really happened during the financial meltdown is to look at the university's net assets -- amassed over more than 125 years. Our net worth tumbled 30 percent in one year. Kaboom!

Have you heard Brodhead talk about this? Have you seen a PR release? Has the Chronicle covered this even though it was tipped? No. No. No. This is why you need Fact Checker at your side.

To deflect our attention from the misery of losing 30 percent of everything, the Brodhead Administration has focused on the ten year average of our investment return, boasting it is 10.1 percent. We'll let slide that my own calculation differs a bit from that, not significantly. There are several problems with that statistic, the most important of which derives from the first year embraced in the ten year average.

In that year, 1999-2000, Duke rode the dot.com boom to an awesome 58.8 percent return on its investments. Fact Check: 58.8 percent. Not even Bernie Madoff offered that!

Next June 30th, the aberration of 58.8 percent drops out of the ten year average, and my calculation is our return will dip to an average in the 6 percent range.

Loyal readers, when you build your house anticipating 8.5 percent, and in the last decade you came up with only six percent, you are in deep shi..... well deep water.

We do not need financial gimmicks. We need hard and courageous decisions during the budget crisis.

✔Finally, every Duke financial report that I have ever studied embraces the academic year -- July 1 through June 30. Today we are given statistics for the calendar year. This precludes any analysis and comparison. So congratulations, Tallman, on obfuscating again.

✔Thank you for reading and supporting Fact Checker.

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