Unfortunately, the Great Recession brought a new reality to financial endowments at schools. Not only did the principal value of most endowments drop precipitously, but the yield generated from the reduced principal was also severely reduced. Schools have had to face the choice of either near-zero yields to maintain a conservative portfolio or increasing the portfolio’s risk to generate traditional returns. This one–two financial punch has been devastating, particularly for schools that had come to rely on endowment income to cover critical programs and salaries.
The shocking drop in endowment values has left many schools wishing there were a better paradigm for investing that is less vulnerable to financial markets. In seeking an answer to this question, The Colorado Springs School (Colorado) has found that endowments can take many forms that can cushion a school from swings in financial markets. In our case, one of our solutions is a “solar endowment.”
In essence, a solar endowment is an investment in solar energy that offers a financial return for the school. This method of investing has been around a while, but it is now more cost-effective — and, thus, enticing — as a result of several factors, some of which are specific to our location in Colorado, but others that apply to schools in a number of regions. The State of Colorado recently passed a “community solar garden” law, which allows electricity produced in one place to be credited to another location. This law permits solar installers to create solar farms, which in turn create an economy of scale — allowing a lower cost per kilowatt than would be the case if solar panels were mounted on the roof of a school building. Add to this efficiency the current low cost of solar panels and the high levels of rebates from the federal government and local utilities, and the cost of using solar energy to provide electricity becomes a competitive investment.
The Colorado Springs School’s solar endowment is a collection of about 1,300 solar panels, most of which are off-campus. As of this writing, solar energy covers about 75 percent of the school’s electrical usage, or just over 300 kilowatts, to put it in terms of electrical output. The energy produced by these panels goes into the local electric grid, and is credited to the school on our utility bill. While this method of producing electricity helps the school meet many environmental, education, and community objectives, it is the financial benefits of this paradigm that ultimately led us to invest. Those benefits include the following.
Competitive Returns
It costs the school far less money to purchase or lease solar panels to cover our utility bill, than it would to invest in financial markets to cover the same bill. As a financial instrument, it is most like an annuity in which the school gets a total return composed of both a yield and a portion of the principal value (because the panels depreciate over time). Our total payout rate is currently just under 10 percent, which will increase in the future as fuel costs — and credits back to the school — increase. At the end of the lease, we can own the panels. At that point, considerable value still remains in the panels, since they would still be guaranteed to operate at 80 percent efficiency for the first 25 years.
Stability as a Result of Isolation from Financial Markets
If we were to use a traditional endowment to pay our utility bill, and the market dropped, it would require a greater amount of principal to pay the same bill. By covering the bill with solar credits, however, the bill is covered at the same level in the event of a drop in financial markets.
Inflation Hedge
The effective yield of our investment in solar panels increases as fuel costs increase, since we are spreading out our investment at a constant level over the life of the solar panels. While we may see a 5 percent return on our investment in the first year, the price of fossil fuels to produce electricity — and therefore the credit that we get from the utility — increases by an average of 4.6 percent each year. If we were using a traditional endowment to cover the utility bill, then the total principal would need to increase at a level that covers the increased cost of fossil fuels.
There have been other advantages of having a solar endowment replace a portion of our more traditional endowment based on financial markets. For example, some of our alumni and parent donors are much more motivated to give to a solar endowment than they are to a traditional endowment. By association, a solar endowment puts alumni and parents on the cutting edge. It also allows them to contribute to a clear social and environmental good.
Granted, the high altitude, low temperature and humidity, and frequent sunshine add to helpful legislation to make Colorado particularly suited for solar endowments. But other states (as of this writing, Massachusetts and Washington) have similar legislation, and a few others, along with the District of Columbia, are considering such legislation.
If a solar endowment is not right for your school, might there be other types of alternative “endowments” that uniquely fit your school? The times demand that we think creatively about finances. Does your school have the broadest possible view of what might compose an “endowment”? Is there some type of endowment that you might develop that does not depend on the volatile financial markets?