Schools Survive Tough Times Better than Other Nonprofits
Charity Debts Grow Rapidly as Market Values Stagnate
by Kyle Waide
April 14, 2003
Private colleges and universities, which hold endowments, land and property that dwarf the holdings of the rest of America's charities, have survived the economic downturn and bear market conditions far better than other groups. Their holdings have grown faster while their debts have risen slower, and their investment portfolios have dramatically outperformed those of other charities.
It's a familiar story. The largest investors, a tiny fraction of the total population, hold the vast majority of all wealth. Their wealth grants them access to the best money managers and investments, and they suffer far less than smaller investors during bear markets. Meanwhile, as smaller investors see their incomes and assets stagnate or decline, they are forced to cut spending and accumulate greater debts.
Charity Navigator has evaluated nearly 2400 charities. Of those charities, only 156, or 6.5%, are private colleges or universities. Yet these schools received 30.6% of the $59.4 billion contributed to those charities in their most recent fiscal year. More astoundingly, they account for 63.2% of the $379.9 billion in total assets held by the charities we evaluated, and 65.6% of the $72.0 billion in liabilities. Finally, they hold 63.7% of all the marketable assets, which include stocks and bonds, mutual funds, money market funds, and other securities and marketable investments. This is an astonishing concentration of financial resources among a relatively small number of organizations.
|
Schools |
Other Charities | |
| Contributions |
$18.20 |
$41.20 |
| Total Assets |
$240.20 |
$139.70 |
| Liabilities |
$47.20 |
$24.80 |
| Marketable Assets |
$142.60 |
$81.40 |
(all amounts in billions)
Not only can private colleges and universities claim the vast majority of all assets held by America's charities1, they have also increased those holdings faster than other organizations and have required less debt financing to do so. Since 1999, colleges and universities have increased their investment holdings by 16.7%, nearly three times the growth rate of 6.5% enjoyed by other charities. In addition, they expanded their total assets by 20.8%, compared to an increase of 13.8% among other charities. While schools expanded their debt by 24.5% to finance their growth in assets, other charities increased their debts by 35.5%, suggesting much greater volatility in their balance sheets.
These numbers lead to three conclusions. First, schools have generally managed their investments in the debt and equity markets more successfully than have other charities, which essentially broke even in the market since 1999. Couple this successful financial management with an extraordinary wealth of resources, and it's clear that private colleges and universities are emerging from the economic slowdown in far better shape than other charities.
Second, while schools certainly acquired greater debts, other charities have increased their debts dramatically, at more than five times the rate of growth of their marketable assets. This suggests that during the late 1990's, they greatly expanded their operations or made significant investments in technology and new facilities. In part, these expansions and acquisitions were leveraged through debt financing. In other words, just like the rest of America, with balance sheets beefed up from the surge in charitable giving during the late 1990's, charities used that strength to acquire more debt.
Third, while the average asset to liability ratio among charities remains better than 5 to 1, many charities are now dealing with significant mortgage payments and other debt expenses, at precisely the same time that their revenues are stagnating or even declining. Regrettably, with increased debts weighing on their operations, nonprofits generally will not be able to expand their current capacity until economic conditions improve significantly. All of this amounts to a terribly unfortunate case of bad timing, since the need for charitable programs increased dramatically just as the economy slowed down and charities stopped growing.
Ultimately, these numbers show that the economic downturn has affected all segments of the nonprofit sector, but it has affected private colleges and universities far less than other nonprofits. While schools have essentially encountered what amounts to a bump in the road, other nonprofits are struggling to align the scope of their operations with the scale of their resources. Where schools diversified holdings and grew conservatively, other nonprofits acquired assets they weren't prepared to manage and grew at rates they couldn't sustain.
Of course, part of this disparity is attributable to the basic fact that colleges and universities have access to more resources and better financial advisors. That said, these "other nonprofits" are not limited to small, community-based charities. They also include the nation's most prestigious museums, public broadcasting networks, voluntary health organizations and other large, sophisticated charities. For the sector to survive volatile economic periods, these charities must more effectively anticipate the inevitable economic slowdowns that follow periods of rapid growth, and they must align their organizational capacity to projections of needs, not to projections of resources.
As we have said all along, America's charities are vitally important to the health of our country and our democracy. To fulfill their promise, they must be managed effectively, and recent history suggests they have not reached that level of sophistication.
1 Charity Navigator does not evaluate hospitals and certain other entities that are classified as nonprofits but that receive relatively insignificant percentages of their income from public contributions. As such, we are not including the assets held by these entities in the totals we present in this article. However, these entities are also very large and possess land, buildings and other holdings that also dwarf the holdings of the average nonprofit. Including their holdings in the statistics described in this article would show that nonprofit wealth is even more concentrated than what we present here.
