September 2015

U.S. Public Universities May Need To Turn To Funding Models That Resemble Their Private Counterparts

Many U.S. Public Universities Grapple with Widening Funding Gaps; Coordinated and Centralized Endowments and Fundraising Operations Can Offer Solutions

Boston (September 30, 2015) – Many U.S. public universities are in dire straits when it comes to funding. State appropriations for education are down 17.5% since the recession, and average state spending per student is down 23% compared to pre-recession levels. At the same time, net tuition growth has decelerated steadily since 2012, according to the Center on Budget and Policy Priorities.

This confluence of financial pressures has shifted the public university model – and created significant concerns – in a short time. To address the problem, these schools may need to turn to a funding model that looks more like their private counterparts’. That’s according to a new report, “Fundraising and Endowment Oversight for Public Universities,” from Cambridge Associates, investment advisor to college and university endowments and other institutional and private investors.

The report urges public institutions to grow, consolidate and strategically manage their endowments – and to up the ante on focusing and coordinating fundraising on the school’s overall mission and steer it away from smaller programs or pockets of interest.

“Endowments and fundraising have long been afterthoughts at most public universities – intended mostly for mission expansion, not sustainability – and remain underdeveloped at many of these schools,” says Tracy Filosa, co-head of the Enterprise Advisory Practice at Cambridge Associates and co-author of the report. In 2014, endowment portfolios accounted for just 2.8% of overall revenue at U.S. public universities, compared to 15.5% at their private counterparts, the report says.

Public universities can make important headway by addressing two issues:

  • Too many small and uncoordinated endowments. Many public universities have multiple endowment portfolios managed by separate entities. This can be problematic because smaller, separately managed endowments often face significant limitations and inefficiencies, compared with a single, large pool of assets. “An institution with a decentralized system containing several endowments can miss out on valuable investment opportunities that may have been available to a larger pool of assets,” says Filosa.
  • Unfocused and decentralized fundraising arms. Some schools’ fundraising operations are distributed among multiple fundraising entities that tend not to coordinate on larger, institutional priorities – and in some cases are completely separate. “Fundraising that is decentralized to any degree can lead to problems, such as donor fatigue – when an institution’s various fundraising arms contact the same donors multiple times – and missed opportunities for coordinated outreach that help align university needs and donors’ interests,” she adds.

Filosa describes a university that had over two dozen different foundations, each representing different campuses, alumni associations and other groups, and each raising funds for its own separate endowment – some as small as $1 million in assets.

To get past these barriers, public universities should recognize that centralized endowments that combine disparate pools of assets may represent the best strategy, especially for struggling public universities. Larger portfolios have the scale to invest across a wider range of asset classes – often at lower fees. “The most sophisticated investment portfolios have a long-term horizon, and align with long-term institutional missions and needs,” says Filosa.

Struggling universities will also benefit from coordinating and focusing their fundraising on institution-wide priorities, as opposed to disparate fundraising arms run by specific deans or departments and reflective only of their particular needs. The most successful university fundraising operations provide clear opportunities for donors to connect to their universities and support larger institutional priorities. Filosa adds, “with coordinated fundraising efforts, a university can proactively point donors toward the areas where support will fulfill the greatest needs, and even show them how their donations will fit into a comprehensive plan.”

The report says that for universities under pressure, it’s crunch time. “While closing the revenue gap will not happen overnight, it is essential that struggling public universities start working toward it now if they want to continue as institutions,” Filosa warns. “As these schools transition to the ‘new normal’ of lower revenues from public funding and slower net tuition growth, getting their houses in order when it comes to fundraising and endowment management is not a nice-to-do – it’s a need-to-do.”