February 13, 2019

Keeping College Affordable

Arnerich Massena recently released a white paper that outlines solutions to funding public university operating budgets in light of lower public funding sources at the state and local levels. Increasing tuition has provided relief to budget funding, but this solution comes at a high, undesirable cost to society. In order to solve this significant challenge, the paper identifies the following key solutions:

Fundraising solutions  

Public universities generally have not previously focused on fundraising as a core strategy. One innovative solution at the fundraising level is corporate sponsorships. Creating a corporate sponsorship involves working closely with a local firm to develop a program or programs tailored to train students specifically for employment at that particular firm or in similar positions. The corporation benefits by reducing the learning curve of potential employees, while students benefit by learning relevant skills that add value upon graduation.

A university’s alumni base can be a significant asset. While alumni outreach for fundraising purposes is standard at private universities, public counterparts typically lag in sophistication.  Fundraising is not free, however, and universities can expect to face some costs. New programs may need time to ramp up before they become effective.

Investment Solutions

Fundraising can help make up some of the funding shortfall; the other crucial direction to turn is to your investment portfolio. The paper notes that with current, historically low interest rates and high equity valuations, meeting investment goals to fund obligations may be challenging.

An option for fiduciaries to consider is increasing the share of active management in the endowment portfolio.  Passive management allows investors to earn market returns by investing broadly across market segments to match index returns. Active investment managers seek to generate alpha, or a return over and above the index. While portfolio investment costs will be higher, manager selection is critical and can make all the difference in long-term outcomes.

The paper also recommends higher allocations to private equity investments. With a long time horizon, endowments are able to forgo some liquidity in their portfolio. Along with adding alternative sources of beta exposure, private equity returns are typically higher than public equity returns. Increasing the proportion of alternative investments in your portfolio can make a significant difference to your long-term return expectations.

Lastly and possibly most importantly, focus on the long term in your investment portfolio. Build a strategy that matches your institution’s tolerance for risk and long-term spending objectives. A succinct rebalancing policy to bring the portfolio back to allocation targets from time to time can help to mitigate long-term risk and lock in gains.

You can read the full white paper, Keeping College Affordable: How to Fund Public University Obligations in a Low-Return Environment here or listen to a podcast about the topic here.