10 Surprising Facts About University Endowments

by Staff Writers

Have you ever thought it might be nice to have a building at your alma mater named after you, that will stand long after you're gone? The dream can be yours for a few hundred million dollars. For most of us, that effectively closes the book on that fantasy. We may give in to a donations call from our old school and mail in a check, but for the most part college endowments are a vague part of academia that we don't concern ourselves with much. If that's true for you, check out these 10 facts about university endowments that might surprise you.

  1. Total college endowments in the U.S. reach the hundreds of billions of dollars: There is serious money in college endowments. In 2009, the total amount of endowments in this country was $326 billion. That amount was a 21% drop from the previous year's total of $413 billion. Today, 75 colleges have endowments in the billions, with Harvard far and away the leader with an endowment of $32 billion, followed by Yale at $19 billion. Even with these high values, many schools are still struggling to return to their 2008 endowment levels.
  2. Ivy League endowment fund managers get access to the best opportunities: In a 2008 study, researchers from Harvard and MIT sought to explain why wealthier schools, like those in the Ivy League, receive endowments that far outpace other schools. The obvious answer was that high-quality alumni get good jobs for good money, then they donate. But a surprising find was that the excellent investment returns these endowment funds get are the result of managers' connections and special access to the top strata of alternative funds. In other words, endowment funds at wealthy schools secure the best management talent because they're wealthy, and the best managers make them wealthier, and around and around it goes.
  3. Many universities do not have to disclose investment information: It might surprise environmentally-conscious students to learn that the fund managers for their school's endowment have invested in coal companies. Unfortunately, for students with these and similar qualms about doing business with certain corporations, some states have laws that protect venture capital firms from disclosing where the investments from the endowments of even public universities go. Companies in states like Colorado and Michigan have successfully lobbied for laws exempting them from a requirement to reveal their investment info, calling it "trade secrets." In some states, like California, firms find a way around the disclosure laws by investing in "funds of funds" that disclose aggregate return info but not info on specific companies.
  4. Most colleges only spend about 4.5% of their endowments: Many may wonder what happens to the millions and even billions of dollars some colleges control in endowments. Typically more than 95% of the money is invested, leaving 5% or less to be granted to scholarships, professorships, and social work. Many people, including some influential politicians, have asked in recent years if this rate of spending justifies the tax exemption they get. There have been proposals to set a 5% spending floor that universities must meet to allow more needy kids to go to college and for more to be done in poor countries.
  5. Endowments probably can't be used to lower tuition: This is a fact college administrators would prefer you knew. Although many may look at the billion dollar endowments some schools enjoy, almost half of colleges and universities have smaller endowments than they did in 2008, courtesy of the recession. More growth years like 2011 are needed before schools could begin to use endowments to lower tuition. As it stands, the median endowment size of $90 million only translates into $4.5 million in spendable money annually, not enough to enable significant tuition decreases for students.
  6. Most colleges have no endowment: If the total endowment money in the U.S. was distributed evenly to all four-year colleges and universities, each school would have an endowment of $131 million. Of course this is not the case; the top 120 colleges (less than 3% of American higher education institutions) by endowments account for three-fourths of the endowment money. These big-money colleges skew the numbers up, while most colleges have no significant endowments.
  7. Some endowments were over-leveraged when the financial crisis hit: In a 2009 article defending the university endowment model, Michael Hennessy, managing director at Morgan Creek Capital Management, said despite significant losses in the 2008 financial crisis, endowments still performed as well or better than other investment funds. But in a statement that should bother students and donors, he admits that some endowments went so far as to budget spending based on predictions of charitable donations and tuition payments. Such freewheeling practices are what precipitated the crisis in the first place and burned groups like these endowments, whose donations subsequently dried up.
  8. Student-run endowments are catching on: In 2008, students at Wesleyan set up what was called the first student-run endowment fund in the nation. They would use overflow from student activity fees to fund the endowment and use the returns to one day eliminate those fees. The endowment's performance has been modest, but it has proven to students across the country that they can take financial matters into their own hands. Student-run funds have popped up at Georgia Tech, University of Dayton, Bentley University, Yale, Harvard, and elsewhere.
  9. Although some claim otherwise, schools are not restricted by law from spending past a certain point: Since the financial crisis, a common defense for many schools against accusations that they should tap their own endowment reserves to ease budget concerns is that they are barred by law from forcing endowments "underwater," or decreasing the value of the endowment to a level beneath its original donation value. But in a hard-hitting paper in the Stanford Law Review, Peter Conti-Brown exploded this and other myths. He pointed out that under the new law — the Uniform Prudent Management of Institutional Funds Act (UPMIFA) — such a rule is eliminated. Every state except Pennsylvania has now adopted UPMIFA, and schools in these states can and should begin spending more liberally via endowments.
  10. Endowment management boards are rife with conflicts of interest: Part of the criticism of the university endowment model is the conflicts of interest among fund managers, school boards, and companies run by trustees. A report by the Center For Social Philanthropy Tellus Institute mentioned a half-dozen Dartmouth board members who have handled more than $100 million for the school's endowment. The Chronicle of Higher Education has reported that a quarter of private colleges do business with trustee-affiliated companies.