Coming off a bad year for investments, state nonprofits count their blessings

  • Article by: PATRICK KENNEDY and JOHN J. OSLUND , Star Tribune staff writers
  • Updated: December 23, 2009 - 8:16 AM

A negative 13.4 percent return on investment is hardly something to crow about.

But when your peers are faring much worse, you can breathe a little easier. Macalester College weathered such a return on its endowment fund last year by adhering to its investment policy: Manage for the long term but be mindful of excessive risk.

Craig Aase, Macalester's chief investment officer, said the school's investment philosophy is simple: "Try to keep up in the up markets, and protect and outperform in the down markets."

The same philosophy appears to be at work among many of Minnesota's biggest nonprofit organizations, which are clawing their way back from a brutal 2008. Health care, education, social services and arts-and-culture nonprofits all have felt the sting of the Great Recession. In many cases, demand for their services has increased even as funding from state, federal and private sources has fallen. Adding to the anxiety are steep investment losses that eroded endowments at some organizations and caused many private donors to scale back their contributions.

Yet overall, revenue rose slightly -- 2.2 percent -- in 2008 while expenses jumped 7.9 percent, according to the Star Tribune's annual Nonprofit 100 report. Our list is dominated by health care organizations, where slowing revenue and rising costs have prompted employers to control health care expenditures amid rapidly rising medical costs.

The nonprofit sector also added jobs in 2008. The state has more than 3,800 nonprofit employers, the Minnesota Council of Nonprofits reported Friday. They employed nearly 290,000 workers in 2008, a gain of 3.5 percent over 2007. The sector accounts for one in every nine jobs in the state.

Minnesota's 100 largest organizations posted $40.8 billion in revenue and $41.4 billion in expenses in 2008, compared with $39.9 billion in revenue and $38.4 billion in expenses in 2007. Revenue grew in all four major categories -- education, health care, social services and arts and culture.

But the education sector grew less than 1 percent. One reason revenue was flat among education nonprofits was the stock market, which plummeted in the second half of 2008 as the financial crisis spread around the globe.

Although Macalester endured a return of negative 13.4 percent, schools in its peer group averaged a negative 19.8 percent return while the Standard & Poor's 500 index, a popular benchmark for stock investors, dropped 26.2 percent in the 12 months ended June 30, 2009.


The mega endowments at Yale and Harvard fared far worse. Harvard's endowment shrank nearly 30 percent, from $36.9 billion to $26 billion. Yale's endowment shed 29 percent, shrinking from $22.6 billion to $16 billion. The two institutions had been held up as models whose large size and professional staffs allowed them to extend their investments into private equity partnerships, real estate and timber, venture capital and hedge funds.

The losses at Yale have contributed to the university's budget gap, layoffs and wage cuts. Harvard also had layoffs, suspended some faculty searches and delayed a major expansion. Although both had performed strongly in the prior 10 years, they felt the pain in 2008.

Proceeds from Mac's endowment help pay about $30 million, or one-third, of the college's annual operating budget. Aase's research tells him that's a higher percentage than a lot of his peers and is reflected in the school's conservative investment allocations. Aase and his two colleagues manage 40 to 45 investment managers -- each responsible for a portion of the portfolio, which contains approximately 45 percent equities, 40 percent alternative assets and 15 percent in fixed income.

Each year the endowment tries to earn a 6.5 percent real return, after inflation, or enough to cover the contributions to the operating budget and continue growing the endowment. In the boom years that target may seem modest. But given the recent economic environment, a 6.5 percent target seems monstrous.

Macalester's losses have caused some belt tightening, including hiring and wage freezes, but it has avoided the layoffs that other schools have made.

"Bonds and timber were the only asset classes that were up last year,'' Aase said.

Investment gains and losses typically skew results in the education category. Nonprofits must record their nonrealized investment gains and losses on their IRS Form 990. For organizations with large endowments, which include many of the education nonprofits, market trends and investment styles can lead to large year-to-year revenue swings.

While some endowments across the country with more-aggressive portfolios were forced to sell assets in order to meet their capital commitments, Macalester didn't have to and as a result, when the equity markets finally started to rally in March, the endowment was still fully funded in stocks.

At about $580 million, Macalester has the second-largest endowment among Minnesota colleges and universities, behind the University of Minnesota funds. The University of Minnesota Foundation endowment, the largest at the U, had total return of negative 18.1 percent and $1.06 billion in assets for the year ended June 30, 2009. It performed better than its benchmark, which was down 19.3 percent.

At Carleton College, the endowment fell 16.5 percent for the year ended June 30, 2009. Carleton's endowment had $517 million in assets as of June 30 but has been rising -- on Nov. 30 its value had risen to an estimated $564 million.

Carleton also is very dependent on its endowment, which contributes approximately 23 percent of its operating budget. Said Jason Matz, director of investments for Carleton: "We made decisions over the last five years to weather something like this."

The University of St. Thomas reports that its endowment was down about 23 percent for the year ended June 30 and assets were about $251 million, said Mike Sullivan, chief investment officer and a professor. St. Thomas is much larger than Macalester, but its endowment is much smaller and, as result, it's less dependent on the endowment to fund operations. The endowment contributes about 4 to 5 percent to the annual budget.

"The real issues were liquidity," said Sullivan, who added that St. Thomas avoided the need to sell assets at distressed prices to meet capital commitments.

Endowment numbers for Macalester, Carleton and St. Thomas are from June 30, 2009, the most recent figures available. In most cases, the overall financial reports used to rank the Nonprofit 100 are for the organization's fiscal year 2008.


Because of state law and regulatory policies, HMOs and most hospitals in Minnesota are incorporated as nonprofits. As a result, health care nonprofits dominate the Nonprofit 100 survey, accounting for 54 of the top 100 organizations on our list and nearly 94 percent of the revenue.

As employers struggle to contain health care costs, revenue growth has slowed at hospitals, clinics and health insurance providers. In 2008, revenue grew just 2.3 percent for this group compared with 7.9 percent in 2007 and 8.4 percent in 2006. Meanwhile, 2008 expenses rose 8.3 percent. As a group, Minnesota's largest health care nonprofits spent slightly more in expenses than they generated in revenue.

According to the Minnesota Council of Nonprofits, the health care industry is the largest component of the nonprofit sector in the state, accounting for 66 percent of the nonprofit workforce and 74 percent of nonprofit wages.

At health insurance provider Blue Cross and Blue Shield of Minnesota, the largest nonprofit on the list, revenue grew 5.6 percent to $8.846 billion. Expenses of $8.851 billion exceeded revenue by $15.7 million.

At the Mayo Clinic, the largest health care services provider on our list, revenue dropped 10.6 percent to $6.55 billion in 2008. The revenue drop follows jumps of 9.1 percent in 2007 and 9.7 in 2006.

Mayo, which has a sizable endowment, also suffered negative returns. Harry Hoffman, Mayo's treasurer and chief investment officer, said its long-term fund had about $2.7 billion at the beginning of 2008 and finished the year at around $2.2 billion, a negative return of nearly 18 percent.

Still, Mayo's return ranked it in the top 10 percent of its peer group -- nonprofits and foundations with at least $1 billion in assets.

"We had no liquidity issues, and that was one of the main reasons we did better than our peers," Hoffman said. "We manage the liquidity of our funds very well.'' That focus on liquidity helped Mayo avoid being a forced seller during the steep market decline.

Mayo's investment goal is to lose less than the market in down cycles and in return do well in good times but don't try to outshoot bull markets. "Losing less in the bad markets is the best way to compound capital," Hoffman said. "In 2009 we've done pretty well, we've had a nice recovery. Relative to our peers we are moving up."

In 2008, Minnesota Masonic Charities made a $65 million gift to establish the Masonic Cancer Center at the University of Minnesota. The group reported the present value of that gift as a $41 million expense, which contributed to the organization's 62.2 percent increase in expenses for 2008. But total revenue also was down 35.4 percent to $55.1 million, and $10.4 million in investment losses contributed to that decline.

Twenty-three health care nonprofits in our survey spent more in 2008 than they generated in revenue. In 2007, the figure was 15 and in 2006 it was nine.


Revenue at the 32 Minnesota social services organizations surveyed rose 5.8 percent in 2008, a bit faster that the 3.9 percent rate in 2007. But expenses rose a hefty 8.2 percent last year compared with a 3.2 percent increase in 2007.

Revenue fell year-over-year at eight organizations, compared with nine in 2007. Meanwhile, 13 social services nonprofits spent more than they generated in revenue last year, compared with 11 in 2007.

At the Greater Twin Cities United Way, Minnesota's largest social services nonprofit and a key provider of grants to smaller nonprofits, revenue rose 1.4 percent in 2008 compared with 5.4 percent in 2007.

Nine social services nonprofits recorded double-digit revenue gains, led by Hope for the City (up 47.7 percent) and Goodwill Industries Inc. / Easter Seals (up 37.8 percent). At Hunger Solutions Minnesota, revenue grew 25.7 percent, to $37.8 million. It was the second consecutive big revenue gain at the hunger relief organization; in 2007, revenue jumped 45 percent.

At the YMCA of Metropolitan Minneapolis, revenue rose 14.9 percent to $67.2 million, while across the river in St. Paul, YMCA revenue dropped 11.2 percent to $43.3 million.

Revenue at Second Harvest Heartland jumped 10.4 percent to $51.1 million in 2008. Second Harvest has partnerships with Cub Foods, Sam's Club, Wal-Mart and Target to deliver food to the needy.


Northstar Education Finance Inc., a hybrid nonprofit that specializes in loans for graduate students including doctors and lawyers, tops our list of education nonprofits for the third consecutive year.

St. Paul-based Northstar reported revenue of $367 million, down 10.2 percent. In 2007, revenue jumped 29 percent to $408.6 million. The nonprofit entity makes the loans while a for-profit subsidiary of Northstar services the loans and pays employees. CEO Taige Thornton's total compensation of $711,444 makes him the highest-paid top officer in the education category, although he took an 8.7 percent pay cut from his 2007 total compensation of $779,520.

The University of St. Thomas remains the state's largest private college, with $312.8 million in 2008 revenue, up 8.5 percent from 2007.

Of 32 colleges, universities or preparatory schools in the education category, 18 recorded revenue gains, while 14 posted revenue declines. Eight education nonprofits had expenses greater than revenue in 2008, up from three in 2007. Revenue for the 32 education nonprofits rose just 0.6 percent while expenses climbed 2.2 percent.


Hard economic times have been widely reported in the arts community. The survey here confirms that anecdotal evidence. At the Guthrie Theater, expenses of $33.9 million exceeded revenue of $27.5 million.

American Public Media Group (APMG), corporate parent of Minnesota Public Radio, also reported expenses that exceeded revenue. Total revenue for Minnesota Public Radio, APMG's largest operation, was $79.9 million out of the $108.8 million in total.

Endowment performance was a significant cause of the problem for these groups. Even with the recent rebound, the practice of using 12-month rolling averages means the valleys of a year or more ago will likely plague the arts nonprofit sector next year.

Revenue for the arts and culture group rose 2.8 percent while expenses rose 2.4 percent. The Guthrie Theater's Joe Dowling took home the biggest pay package in the group with $656,123 in total compensation, down about 4 percent from 2007. Second on the compensation list was Bill Kling of American Public Media Group, whose 2008 pay was $606,753, down about 3 percent from 2007.

Staff writer Graydon Royce contributed to this report.

Patrick Kennedy • 612-673-792,

John J. Oslund • 612-673-7206,

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