Finances fairly safe from market shocks

If a recession is on the horizon for the economy, Penn officials and finance experts say the University should not be too worried.

In the last quarter of 2007, the U.S. economy saw a staggeringly low growth rate of 0.6 percent. While growth was not negative, as it would be during a recession, it might be a signal that the nation is headed there in the coming years.

But Penn's finances generally seem to be safe from market shocks, University administrators said.

A 2001 study conducted by the Treasurer's Office, which compared the country's economic growth during past recessions with Penn's own financial health, showed that the University is only moderately sensitive to recessionary swings.

In layman's terms, this means some financial areas may suffer, while others avoid drops or even improve in the face of hard times affecting the entire nation.

Executive Vice President Craig Carnaroli wrote in an e-mail that tuition revenue is less sensitive to dips, while revenues at campus retail outlets like restaurants and hotels are more likely to waver.

"Higher-education theory holds that demand for quality education is generally recession-proof," Carnaroli wrote. "People either have the time or are more willing to make the investment in education to provide them greater future economic opportunity."

Though enrollment numbers may not suffer, other University finance areas - like the endowment - might.

"I think the economy will play some factor in [endowment growth]," Vice President of Development and Alumni Relations John Zeller said. "In any given cycle over a seven-year period, there will always be peaks and valleys."

Carnaroli agreed that equity returns will drop in the short run but said smart choices made by University officials in the past may help avoid startling changes.

"We have been light on U.S. [investments] and, therefore, have avoided the serious downdraft in that sector," he wrote.

Henry Higdon, Managing Partner at asset-management firm Higdon Partners, said Penn's endowment may be affected by market swings because some endowment money is typically invested in markets - but only mildly.

"If you look back over the years, Penn's endowment has done pretty well during ups and downs," Higdon said. "I would not be fearful."

The endowment's drop is mitigated by the fact that the endowment money is put into more long-term investments and thus, the endowment might not suffer at all.

"Endowments by nature have a long-term view of the world," Higdon said. "[They] are invested on a fairly conservative basis."

He also said due credit for smart choices should be given to Chief Investment Officer Kristin Gilbertson and the Investment committee.

"Their job is to outperform the markets, be smart and to protect the financial future of the University," he said.

Although the larger contributions to the capital campaign may be less vulnerable to an economic swing, Carnaroli said that non-campaign related annual contributions made by regular donors and alumni are more likely to drop with a recession.

However, despite economic uncertainty this year, not even that area took a hit - the Treasurer's office reported positive increases in all contribution types.

Even Zeller said he was not worried about how a recession might affect the campaign.

"We have four and half years," he said. "We'll continue to work right through [that uncertainty], and I'm confident we will be very successful in the end."

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