University administrators say they’re cautiously optimistic about the University’s current financial status.

The University’s endowment grew from $6.5 billion last year to $7.8 billion this year — the highest in its history. Investment returns are at 24.3 percent, according to the the University’s 2011 financial report released earlier this month.

Timothy Slottow, the University’s executive vice president and chief financial officer, said in an interview last week that the success of this year’s endowment is the result of years of planning. However, he added that a bit of luck is at play since investment returns vary from year to year, and state funds fluctuate depending on the economy.

“We expect there to be volatility,” Slottow said.

Slottow and his team at the University’s Office of Investments have seen a decade of year-over-year investment performances. High performance this year is partially due to 49 percent returns on venture capital and private equity investments, Slottow said.

Last year, the University had the seventh-highest endowment of all postsecondary institutions. Data comparing multiple universities’ endowments is not yet available for this year.

University President Mary Sue Coleman said in an interview with The Michigan Daily that she is pleased to enter her second decade leading the University with the institution in a strong financial position.

“My whole experience here has been making tough choices, making sure that we continue to invest in new opportunities for students because if you stop investing, then you’re just, you’re dead,” Coleman said. “You’re going to lose that special feature I think we offer students coming to Michigan.”

But Slottow acknowledged that next year’s market returns are unpredictable.

“I don’t expect this high level of return … to be the same next year,” Slottow said.

In planning its budget, the University accounts for factors outside of the investment office’s control — like the $47.5 million reduction in state funding for the University this academic year. Slottow said the University was able to withstand state budget cuts because it made a conscious effort to cut costs and increase fundraising efforts over the last 10 years.

“The overall financial health of the University at this moment is quite strong,” Slottow said. “That having been said, it’s a very, very challenging environment because of the state appropriation dropping so precipitously.”

Since 2010, the University’s operation costs have been cut by about $100 million, according to University Provost Philip Hanlon. Between 2003 and 2009, the University saw about $135 million in operation cost reductions.

“This is almost a decade-long real focus,” Hanlon said.

Faculty salaries, financial aid, facility operations and maintenance are among the University’s highest costs, according to Slottow. The University’s main sources of revenue are tuition, state funding and private donations.

The University of Michigan Health System and federal grants are other sources of revenue, Hanlon said. He added that the University wants to avoid increasing enrollment as a way to raise money — a decision other universities have made in recent years. However, the University’s Board of Regents have voted to increase tuition in the last few years.

The University raised tuition by 6.7 percent for in-state students and 4.9 percent for out-of-state students for the 2011-2012 academic year. Despite the size of the endowment, in upcoming years tuition will likely increase gradually — but not spike at once like other universities including the University of California system, Slottow said.

Coleman said she and other University of Michigan officers have had to make difficult choices to keep the University in the top quartile in investment returns among universities across the country.

“I’m extremely pleased that we continue to be very solid financially,” Coleman said. “That represents a lot of work by a lot of people over a long period of time.”

Coleman and Hanlon recently announced a new University initiative, the Michigan Investment in New Technology Startups. Through MINTS, the University will invest up to $25 million — money from the University’s endowment — in faculty start-up companies in the next 10 years.

Hanlon said MINTS is part of the University’s focus on diversifying revenue streams, along with cutting costs, as a way to maintain financial health. The initiative is the result of an investigation into the University’s investment strategies over the last 20 years, which revealed the University would have had a comparable return on investments if the funds went into University start-ups.

“I think that we will continue to focus on cost cutting, and no doubt we will continue to focus on multiple revenue streams,” Hanlon said.

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