The year was 2008 and Cornell was prospering. With the University safely past the halfway point in its $4 billion capital campaign and reporting double-digit returns on its endowment, top administrators were terming the era a “golden age” in higher education.

Little did Cornell — and the rest of the world — know what was in store next.

After a 26 percent decline in its endowment last fiscal year, Cornell has a lot of lost ground to recover. In the first two months of the current fiscal year, the University has been making substantial strides to even out its balance sheet, announcing a 6.2 percent rise in its overall investment performance.

Since reporting a 27 percent loss during the second half of 2008, the endowment rose 2 percent from January through June.

The endowment makes up $4 billion in the University’s $5.1 billion total investment at the end of the last fiscal year, which ended June 30. While the improvement in investment performance has brought more assets to the University, Cornell has taken substantial funds from the endowment in order to pay for operational costs.

This story was originally published on March 16.

Addressing Cornell’s approximately $230 million deficit, President David Skorton summarized the University’s current financial situation and answered pointed questions from an audience of at least 200 this afternoon in an open forum aimed for faculty and staff in Statler Auditorium.

Most of the questions raised were centered on the subject of workforce reduction. Skorton said several times during the question-and-answer session that there would be more layoffs in the future.

The Board of Trustees arrived in Ithaca last night for what will be a series of long and daunting days marked by uncertainty. No one knows when world markets will stabilize or when the job outlook will become sustainable. As the trustees grapple with all of this, we cannot offer any comprehensive solutions. What we can do, however, is posit some advice.

Serving as Cornell’s governing board, the trustees have two overarching responsibilities. First, it is in their power to determine the University’s financial policies, while making decisions pertaining to construction, financial aid and academics. But second, the Board of Trustees must also keep in mind the moral and social responsibilities as managers of a multi-billion dollar investment portfolio.

On Saturday, the Board of Trustees approved cuts to the University’s operating budget, increased the cost of tuition for the next academic year and further extended an external hiring pause and construction pause that were first implemented last October. The move comes as the University reels from a 27-percent decline in its endowment, drastic cuts in state funding and a decrease in philanthropic contributions.

While Cornell was able to largely avoid the Bernard Madoff ponzi scheme that cost other universities millions of dollars in losses, Cornell’s finances were not invulnerable to the economic meltdown that has gripped the country. According to The Cornell Alumni Magazine, Cornell’s endowment, which was valued at $6.1 billion on June 30, 2008, fell 27 percent during the second half of 2008.

Executive Vice President for Finance and Administration Stephen Golding in an interview on CNBC, considered the current economic status “the perfect financial storm.” He explained the complexities and the uniqueness of the current situation by adding, “This is a much broader problem with many more components at one time than what many of us have historically seen.”

Although Bernard L. Madoff’s $50 billion ponzi scheme has burdened many institutions of higher education with unforeseen losses in their endowments, Cornell has yet to report any losses incurred by the scandal.

Federal Bureau of Investigation agents arrested Madoff on Dec. 11 and federal prosecutors charged the 70-year-old man with securities fraud. While Madoff’s investors include wealthy individuals like New York Met’s owner Jeff Wilpon and banks around the world like HSBC and Royal Bank of Scotland, Bloomberg reports that Madoff “had directly affected 400 U.S. nonprofits.”

James Walsh, chief investment officer for Cornell, said in an e-mail, “I am glad to say we had zero exposure to Madoff and strongly believe it would never have found its way into our portfolio.”

This is the second part of a series delving deeper into the economic crisis and its effects on higher education, particularly at Cornell.

Despite having an “all-weather portfolio,” Cornell’s $6 billion endowment is not immune from the financial storm that is sweeping across the nation.

The endowment acts as a stable source of funds for the University, and nearly all of the money is invested long term. Cornell’s endowment makes up about 11 percent of the University’s revenue.

With recent debates in Washington over whether universities should be legally forced to spend more of their endowments, one cannot help but wonder how Cornell utilizes its $5.4 billion endowment, the 18th largest in the nation.

Under law, Cornell is not allowed to spend the principal value of the endowment, but can spend a portion of investment returns.

Nearly all of the $5.4 billion is invested, and after adjusting for inflation, a portion of investment returns are spent. This amount, called the payout, has been 5.1 percent of the value of the endowment on average over the past 10 years.

This figure is slightly higher than the five-percent minimum payout rate that legislation proposed last February by Rep. Peter Welch (D-Vt.).

The University’s endowment payout is responsible for many day-to-day activities. However, after taking a hit during last year’s recession, Cornell reported losses to its endowment of 27 percent in January. Now, University administrators are taking steps to rebuild such financial infrastructure, and in so doing, rebuild confidence in the University.

“We earned 2 percent on our endowment from January through June 2009,” said Joanne DeStefano, vice president for finance and CFO of the University.