I am a strong supporter for education and had always taken the view that making en endowment to a worthy school would help in its finances. I failed to realise that even in the US, endowments are not common. Except for the worthy few like Harvard or Yale (maybe due to their ivy league status), the benefit of having an endowment is not as significant as it is viewed to be.
College Endowments: Why Even Harvard Isn’t as Rich as You Think
It seems everyone has an opinion about what colleges and universities should do with their endowments. Use them to lower tuition! Let students attend for free! Improve facilities! Hire more professors! When the National Association of College and University Business Officers (NACUBO) released its annual report on endowments last week, the big numbers grabbed headlines — Harvard’s endowment, the nation’s largest, grew 15%, to $31.7 billion. Less attention was directed to Southern Virginia University’s endowment of $574,000, which won’t provide too many scholarships at a place that costs more than $18,000 a year. A few weeks ago I had lunch with a college president whose school has an endowment of about $20 million. It may sound like a lot of money, but he was consumed with fundraising efforts just to make ends meet. So the next time you hear someone pitching an idea for what a college should do with its endowment, think about these five reasons that the reality of how college endowments work is different from the rhetoric.
1. Most schools don’t have them. There are 2,719 four-year colleges in the U.S. (and another 1,690 two-year colleges), according to the most recent Department of Education figures. Most higher-education institutions have no endowment, says William Jarvis, managing director and head of research at the CommonFund Institute, which helps NACUBO with its endowment surveys. But as with everything else around higher education, it’s the elite schools — which tend to be the ones that have large endowments — that drive the conversation. Endowments just aren’t a big factor at most of the institutions of higher education in this country.
2. Many endowments are not that big. The endowments at schools like Harvard or Yale (No. 2, with $19.3 billion) or even public universities like the University of Texas (No. 3, at $17.1 billion) get the attention. But of the 823 U.S. colleges and universities that responded to a NACUBO survey (which also included Canadian schools), only 73 had endowments that topped $1 billion; 137 had less than $25 million. Of the U.S. schools in the NACUBO survey, the median endowment size is $90 million. Not too shabby, but at the standard expenditure rate, an endowment that size generates only about $4.5 million in spendable dollars per year. That’s a decent chunk of change, but hardly enough to eliminate student debt and rely on investment returns instead. Even Cooper Union, the famously no-tuition college in New York City (No. 126, at $607 million), is struggling financially, and indicated this past fall that it is considering charging tuition for the first time in a century.
3. The recession is still taking a toll. Endowments on average earned 19% returns on their investments in the last fiscal year, according to NACUBO. Who wouldn’t like earnings like that? But they lost about the same amount in 2009. Many schools have not fully rebounded from the downturn: 47% of endowments have less than they did in 2008, according to NACUBO.
4. Donors don’t always write blank checks. When your alma mater calls you and asks for a donation, it’s really hoping you’ll give to its general fund, where the use of your donation is unrestricted. Donations you give for scholarships or specific degrees, programs or activities can be used only for those purposes. It’s the same with large donations, and large donations frequently come with donor restrictions — for instance, a specifically endowed chair for a professor or a particular area of research. Sometimes a school can renegotiate with a donor to increase flexibility, such as using proceeds from an endowed chair for another purpose until a suitable hire can be found. Such revisions get complicated when the donors are no longer living. Bottom line: a lot of the money in those big endowments has claims on it, including at Harvard (where, by the way, I am a member of the visiting committee at the Graduate School of Education.)
5. Endowments are not all cash. Remember the various exotic investments that helped trigger the financial meltdown? Just like other big-time investors, endowments were attracted to private-equity deals, real estate, hedge funds, commodities and the like. NACUBO estimates that 54% of endowments are tied up in these alternative and illiquid investments.
This style of endowment investing was pioneered by Yale’s David Swenson and subsequently became known as the “Harvard-Yale” model. A few years ago, when the downturn began, the endowments of those two schools — and all the others that had followed their example — got hammered. Back then, everyone wanted to be like Harvard and Yale — and they got their wish. When Ken Redd, NACUBO’s director of research and policy analysis, asked endowment leaders what they’re most worried about, they said another fiscal crisis that could trigger a shortage of cash. In that way, endowments are just like many Americans: overextended, with big dreams and not enough cash on hand.