Playing a word association game with Tufts students, the most common response to the trigger "money" would likely be "not enough."
But though the University frequently suffers from a lack of funds, the little money we have is quite well-managed. The cost of running a university is exorbitant, and not all of this can be paid for with tuition. In fact, even a student paying the full $40,000 only actually covers about 80 percent of his or her cost. The remaining fifth is covered by the endowment, as well as through borrowing.
This type of financing is necessary for the University to maintain its status as a top-tier institution. In fact, Tufts manages to outperform many of its high caliber peers in the investment management category.
After the bursting of the tech bubble in 2001, and the following economic downturn, many institutions saw large red numbers on their quarterly statements. According to the Chronicle of Higher Education, 74 percent of the universities surveyed by the publication ended the 2001 fiscal year with negative returns.
One of the major fallacies of investing is that smart people can avoid losses. This has clearly been disproved, as half the universities surveyed were those with the largest endowments. In finance, the rewards are reaped by those who are able to remain patient and keep their calm while everyone around them is in a frenzy.
Tufts managed to post positive gains in 2001, and over the three years following the meltdown, the University's endowment averaged 4.7 percent. It is thanks to this investment performance, as well as additional contributions, that the Tufts endowment has reached its current level of slightly under $800 million.
In addition to endowment appreciation, Tufts uses debt financing to support the cost of large projects, such as the current round of construction on campus, for which 50 percent of the cost was raised through bond issuance.
Though it may seem shocking that the University is actually $363 million in debt, this is one of the best ways for Tufts to expand. Major corporations have issued debt for centuries, and most of the industrial giants of today were built on credit.
Yet Tufts is in an even better position than those businesses, as it has the ability to issue tax-exempt bonds. This ability to pay lower interest rates to creditors makes debt financing even more attractive.
Rates are also low because Tufts enjoys an AA bond rating. One of the reasons keeping Tufts from achieving the highest debt rating is its endowment/capita ratio. It is strongly in the interest of the University to maintain this investment grade rating.
As Tufts constantly pushes to break into the circle of the hyper-elite institutions, a firmly grounded financial status can only help. Not only will the University be able to borrow at lower costs to finance its expansion, but it will not put itself at risk for large losses. Additionally, Tufts will hopefully be able to maintain a more gradual pace of tuition inflation, and will not be forced to hike prices because of poor investment performance as Dartmouth was forced to do in 2001.
In a world of percentages, the most successful is the rational, patient investor. Tufts should continue to expand at a measured pace, as it would be counterproductive to the University's mission to become myopically focused on potential short term gain from risky strategies. Successful financial management builds one step at a time, not in leaps and bounds.
