Endowment Draw Reduced to Record-Low 5 Percent

Andover’s endowment draw will be reduced to below 5 percent within the year, even lower than its original 5.65 percent projection, said Stephen Carter, Chief Operating and Financial Officer. Over the past several years, the draw has remained fairly constant. In fiscal year 2011, the draw was 5.68 percent. In 2012, the draw rose to 5.83 percent, and in 2013, the draw settled to 5.73 percent. The draw is the amount taken from the endowment to fund operating expenses divided by the endowment value at the beginning of the fiscal year. Andover’s endowment draw is expected to fall below 5 percent this year as a result of restructuring the school’s debt. A major part of this restructuring involved issuing 30-year bonds. “We’ve issued some bonds, tax-exempt and taxable bonds to the public…and we’re going to use that money, which was approximately $50 million, to pay for capital projects,” said Carter. As a result of the bonds, Andover hopes to complete several capital projects over the next couple of years, including installing card-access systems in academic buildings, dormitories and administrative buildings and replacing the running track, according to an email sent to The Phillipian by Elizabeth Davis, Associate Director of Facilities. Other projects slated to occur include an interior renovation to Samuel Phillips Hall, which entails “upgrades to HVAC (Heating, Ventilation, and Air Conditioning), electrical, lighting and technology systems,” and an athletics master plan, which involves an analysis of the needs of the athletic department and the creation of a “conceptual plan that addresses these needs,” said Davis. To illustrate how the bonds help pay for capital projects, Carter described the renewal of Bishop Hall. “The bonds paid for the renewal retroactively. Once we issued the bonds, we were actually able to submit the receipts from the project and get the money back,” said Carter. The school benefits as long as the endowment earns more than the interest rate on the bonds. “Say the endowment is earning 8 percent, and we’re paying 4.8 percent [interest on the bonds], we’re actually earning 3.2 percent,” said Carter. Both the tax-exempt and taxable bonds have a fixed interest rate, meaning that the interest rate on the bonds does not change. For the tax-exempt bonds, the interest rate is 4.7 percent, and for the taxable bonds, the interest rate is 4.9 percent, according to Carter. Despite the fact that the draw should be below 5 percent by the end of the year, it will be several years before the draw is below 5 percent without the aid of the bonds. “If we maintain financial discipline, we could be below 5 percent in about four or five years,” said Carter. Andover’s endowment draw is currently higher than that of its peer schools, whose draws are typically below 5 percent. Carter said that Andover’s struggles to lower the endowment draw, however, are not an indication of a struggle to afford need-blind admissions. “There are lots of different priorities in the budget that cost money in addition to need-blind,” said Carter. “There’s also faculty salaries, which are a big component of the budget. There are faculty and staff benefits. There’s renewal of the facilities. There’s energy cost. There’s food at Paresky Commons.There’s all that stuff that goes into making up the budget, and financial aid is just one component of the budget.” Carter said that Andover has maintained a steady draw rate since before the introduction of need-blind admissions. Carter said that Andover has more “aspirations” than its peer schools, which also makes the draw higher. “We have outreach programs that we run. We have higher salaries than other schools. We are trying to do a better job of keeping up the facilities than other schools.…We’ve been trying to do a lot of stuff at the same time, and I think that’s what causes us to fall behind.” Andover currently has two “tranches” of bonds, according to Carter. “We have $60 million of bonds that we issued in 2003.…Then we have [$81 million of] bonds that we issued just this past February,” said Carter. The bonds do not have to be repaid until 2025, which is when the first payments are due on the bonds that were sold in 2003. “We start paying back the bonds in 2025. 2003 bonds start to be paid back in 2025 to 2034. Then, in 2035, we start to pay back the 2014 bonds, the ones we just did, and those go from 2035-2044,” said Carter.