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November 26, 2001

U.S. economy's effects on Emory

Edith Murphree is associate vice president for administration and Mary Cahill is chief investment officer.

As most people are aware, it has been a difficult year for the U.S. economy and the stock market. As a participant in the investment markets, Emory’s endowment has experienced the decline and volatility felt by most investors.

The overall market value of Emory’s endowment declined from $4.8 billion on Aug. 31, 2000, to $4.3 billion on Aug. 31 of this year. Though this decline reflects a loss of 10 percent from investment performance, the performance of Emory’s endowment compares favorably to market losses of 24.4 percent for the Standard & Poor 500 for the same period.

Emory’s endowment held up favorably during a difficult market environment due to its diversification among asset classes. The endowment investments are managed by more than 50 investment management firms in a diversified portfolio of domestic and international equities, fixed income instruments and alternative assets.

The goal of Emory’s endowment is to seek maximum investment returns, balanced against prudent levels of risk, in order to support University spending for current operations and the growth of the endowment, providing for the long-term financial integrity of the institution.

Annual endowment spending at Emory is set at a rate of 4 percent of a three-year moving average of the endowment’s market value. Like most colleges and universities, Emory’s spending policy is designed to reduce fluctuations in spending from the endowment each year and to provide income that will meet, at a minimum, inflationary increases in costs. The spending policy also protects the endowment’s value against inflation so that it can be invested for long-term growth.

Based on current projections, the growth in endowment spending from fiscal year 2002 to fiscal year 2003 is projected to be 0.3 percent. In the current year, the comparable figure for growth in spending was 6.44 percent, which yielded an estimated $5 million in incremental revenue for the Basic Education and General Budget. Although Emory will still experience a slight increase from endowment spending for 2003, the increase will be much less than what it has experienced in recent years.

The Capital Matching program, a portion of the authorized spending from endowment, is used to facilitate funding for new building construction and the renovation of existing buildings. Emory has committed this program to current capital projects through fiscal year 2004, but this commitment for existing projects may need to be extended beyond that time if the market value of Emory’s endowment does not rebound. Likewise, Emory may not be in a position to issue additional debt of any significance until it sees an improvement in the endowment market value.

Endowment income accounts for approximately 20 percent of Emory’s Educational and General Budget and 9 percent of all operating revenue. Other sources of income include tuition and fees, indirect cost recovery from research funding, gifts and grants, and patient service revenue.

Endowment income is one of many factors that determine the University’s available resources. Emory will look to other sources of revenue growth and the reallocation of existing resources in order to maintain scholarship programs, fund competitive salary programs for faculty and staff, maintain the fringe benefit program, and fund other costs subject to inflationary pressures.

Throughout the 1990s, Emory benefited a great deal from high returns on our endowment investments; in fact, for several years Emory had the top-performing endowment fund in the country. The University’s endowment has grown from $1.1 billion in 1990 to approximately $4.3 billion at present.

Emory’s student application pools continue to be strong both in terms of size and quality. In addition, funded faculty research continues to grow in extraordinary ways: More than 20 years ago, then-President James Laney set a strategic goal of $100 million in sponsored research by the year 2000. Emory passed that mark in 1993 and reached almost $250 million in FY01. The University also has untapped potential in other areas of extramural funding.

Emory sees its coming three-year planning cycle as one that should be thoughtfully planned rather than one of retrenchment. The University will continue to develop and build other revenue streams, contain costs, reallocate current resources to its highest priorities and continue on its path of intellectual growth.


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