Do you find it somehow un-philanthropic seeing some nonprofits hoarding billons of endowment?

Read the articles about endowment.

Do you find it somehow un-philanthropic seeing some nonprofits hoarding billons of endowment?

Are funds better spent now or should they be held aside to grow to ensure future sustainability?

Should endowments be untouchable, or should they be used as rainy-day funds?

What do you think? You may comment on one or more of the questions above or share other thoughts you may have.

Requirements: 150-250 words

9/26/22, 12:05 PMEndowment for a Rainy DayPage 1 of 13https://ssir.org/articles/entry/endowment_for_a_rainy_day#Endowment for a Rainy DayJudging from media accounts, U.S. nonprofits are facing unprecedented, ifnot catastrophic, financial distress because of endowment losses. Hiring isbeing frozen, facility maintenance is being deferred, programs are beingdropped, performance seasons are being shortened, and constructionprojects are being cut back or even halted. As the president of HarvardUniversity, Drew Gilpin Faust, put it when defending her decision to sharplyreduce expenditures following a 30 percent drop in the value of the schoolÕsendowment, ÒTinkering around the edges will not be enough.ÓHarvard isnÕt the only institution making dramatic cuts in response to afalling endowment. The J. Paul Getty Trust, which runs the J. Paul GettyMuseum in Los Angeles, slashed 14 percent of its workforce and delayedexhibitions and acquisitions after its endowment fell from $6.4 billion to $4.2billion. Yale University cut capital expenditures by $2 billion and staff salariesand benefits by 7.5 percent after its endowment fell from about $23 billion toabout $16 billion. And the Shriners Hospitals for Children considered closing6 of its 22 childrenÕs hospitals after its endowment fell from $8.3 billion to$5.0 billion. The Shriners tabled that motion, but are considering billinginsurance and Medicaid for treating children, a profound change from thefree patient care that they have traditionally provided.Of course, no organization likes losing a quarter or more of its wealth. Andany organization that does must make financial adjustments. But the actualstory behind falling endowments and the resulting financial crisis is muchmore complex. It turns out that only a small percentage of nonprofitsÑalbeitprominent ones with large endowmentsÑsuffered losses of 25 percent ormore. Most nonprofits have no endowment at all. And those nonprofits thatdo have endowments generally have small ones, which, ironically, declined

9/26/22, 12:05 PMEndowment for a Rainy DayPage 2 of 13https://ssir.org/articles/entry/endowment_for_a_rainy_day#less in value than did the large endowments.Even more important is how those nonprofits that have endowmentsresponded to the declines in the value of their holdings and other revenue(such as donations and user fees). Most of these nonprofits took the samepath as Harvard, Getty, and Yale, choosing to cut expenditures tocompensate for reduced income. Though many of these organizations havesubstantial endowments to fall back onÑenough to off set many years oflower income streamsÑmost choose not to draw down the endowment tomake up for reduced income.We believe that most nonprofits are taking the wrong approach when itcomes to managing their endowment. Instead of husbanding money for thefuture, nonprofits should treat at least some portion of their endowment as arainy day fund, a source of money that is available to make up for thoseunexpected, yet predictable, times when income drops or demand forservices increases.THE ENDOWMENT BOOMThe first thing to understand about endowments is that their plummetingvalue is from all-time record highs. A 30 percent drop actually returns mostnonprofit endowments to the level they were at just four years ago, evenafter controlling for inflation. Consider Brown UniversityÑschool officialsestimate that BrownÕs endowment will end the 2009 fiscal year at $2 billion,a shade more than the $1.8 billion the school had at the end of the 2005fiscal year. In 2004 and 2005 nonprofit universities, hospitals, and museumswere not crying poverty and were not cutting construction, programs,faculty, or financial aid to students. To the contrary, they were expandingprograms and services.Wealthier nonprofits grew their endowments faster than poorer ones. Rich

9/26/22, 12:05 PMEndowment for a Rainy DayPage 3 of 13https://ssir.org/articles/entry/endowment_for_a_rainy_day#organizations were able to achieve a higher rate of return because they tookon greater risk by investing in products like hedge funds, commodities, andprivate equity. One of the risks of investing in these types of products is thatthey are volatile and relatively illiquid, making it difficult to sell the assetwhen markets are weak, as in the recent financial decline. Of course, it isexactly during poor financial times when a nonprofit might need to sellassets and access its cash to off set declines in donations, fees, and othertypes of income.It was not chance that the endowments of the wealthiest nonprofits weregrowing so fast. The rich can afford to invest in high-risk, high-returnproducts. The poor cannot. And their comparative returns on endowmentsshow the net effect. According to the National Association of College andUniversity Business OfficersÕ ÒNACUBO Endowment Study 2007,Ó between1998 and 2007 colleges and universities with endowments of less than $25million posted a 6.7 percent average annual rate of return, while colleges anduniversities with endowments of more than $1 billion posted an 11.1 percentaverage annual rate of return. A typical nonprofit college had an $80 millionendowment in 2007 and received about a 7.9 percent annual return. Theimpact of these different rates of return, when compounded over severalyears, can be dramatic. Over 20 years the difference between a 7.9 percentand an 11.1 percent annual rate of return is a whopping 81 percent higherreturn for a wealthy college when compared to a typical college.The vast majority of colleges and universities, however, have little or noendowment to fall back on in a recession. One third of all two-year collegesand 11 percent of all public and nonprofit four-year schools report they haveno endowment. (These figures do not include for-profit schools, which haveno endowments.) And 85 percent of the two- and four-year schoolsreporting data have endowments of less than $100 million. These smallerendowments contribute at best only a few million dollars to a schoolÕs annual

9/26/22, 12:05 PMEndowment for a Rainy DayPage 4 of 13https://ssir.org/articles/entry/endowment_for_a_rainy_day#budgetÑa small portion for most schools. Schools with small or noendowments spend essentially all of their incomeÑfrom tuition, fees,donations, and other sourcesÑevery year. These schools have no savings tosustain activities and expenditures when revenues drop.THE PURPOSE OF AN ENDOWMENTIn the 1890s, Samuel Gompers, the president of the American Federation ofLabor, famously responded to the question, ÒWhat does labor want?Ó bysaying, ÒMore.Ó That seems to be the answer to todayÕs question, ÒWhat sizeof endowment does each nonprofit want?Ó But this answer is unsatisfactory.A nonprofit may want a larger endowment, and it can have itÑbut at the costof cutting current spending. It can have a bigger endowment or it can spendmore now, but it achieves one by forgoing some of the other.If the purpose of an endowmentÑthat is, of holding down currentexpenditures in order to save for the futureÑis to limit tuition, hospitalpatient charges, or museum admission fees later, then the issue is one ofintergenerational transfers. The holding, let alone the expansion, ofendowment is a matter of weighing the relative importance of todayÕs andtomorrowÕs users. With long-term economic growth of per capita income avirtual certainty, however, it is not clear why the present generations ofcollege students, patients, and museum goers should pay higher chargesand fees in order to preserve or expand endowment so that futuregenerations of wealthier people will benefit via lower prices.The primary goal of a college endowment should be to protect a schoolÕseducational and research programs. Similarly, a hospitalÕs goal should be totreat patients and advance medical research. A museumÕs goal should be toadvance cultural education and preserve cultural heritage. Building anendowment is a means to sustain these programs. It should not be the goal

9/26/22, 12:05 PMEndowment for a Rainy DayPage 5 of 13https://ssir.org/articles/entry/endowment_for_a_rainy_day#of the programs to protect the endowment, cutting them back to sustain orrebuild the endowment. ÒIn conversation with our donors, their motive was tosupport the university, not to grow the endowment,Ó observed Sandy Wilcox,president of the University of Wisconsin Foundation.The basic rationale for adding resources to endowment rather than usingthem to achieve these immediate goals is simple: to save for a rainy daywhen revenue falls sharply. The principal motive for saving for the futurerather than spending now is the same, whether for individuals ororganizations, nonprofit or for-profitÑuncertainty about the flow of futurerevenues.Every nonprofit will, at some time, encounter a situation that is beyond itscontrol and that has an immediate and substantial impact on its operations.It might be a natural disaster, like an earthquake or fire, or it could be afinancial collapse, such as the one that the world is currently undergoing.Nonprofits that have held money in reserve for just these sorts of situationsÑa rainy day fundÑwill be better able to weather these storms than thosenonprofits that did not prepare.RAINY DAYS HAPPENIn 2005, Hurricane Katrina struck the Gulf Coast of the United States.Extensive damage forced colleges and universities such as Tulane University,Loyola University New Orleans, and Dillard University to close downtemporarily. Tulane, for example, suffered a 10 percent drop in its totalrevenues between fiscal years 2005 and 2006, including a stunning 45percent drop in hospital revenues. Xavier University lost more than 12percent of its revenue, and Loyola University New Orleans was hit with astaggering 26 percent decline in revenue.The current economic crisis certainly constitutes a rainy day. Most

9/26/22, 12:05 PMEndowment for a Rainy DayPage 6 of 13https://ssir.org/articles/entry/endowment_for_a_rainy_day#nonprofits, however, have not adequately planned for this event. Many havenot created any endowment, and so have no reserves to ride out the storm.Some have substantial endowments that would allow them to ride out thecurrent economic crisis with no cuts, if they choose. But instead of drawingdown their endowments to cover the rainy days, they have focused oncutting budgets.The American Conservatory Theater in San Francisco, for example, cut $1.5million from its $21-million budget, letting go three high-level managers,suspending non-main-stage productions, and shortening performanceruns.10 The Rhode Island School of Design closed its Museum of Art for themonth of August, laid off school staff, froze wages, and reduced itscontribution to employeesÕ retirement accounts. Princeton University, evenafter the loss of 24 percent in endowment in the last year, still has a massiveendowment of $12.6 billionÑten times its total annual budget. But theuniversity reduced its spending for 2009-2010 by $50 million, choosing tocut programs and staff rather than dip further into the endowment.Some nonprofits are trying to compensate for financial shortfalls byincreasing revenues. In a depressed economy, however, increasingdonations, government funding, or user fees is difficult and may undercutthe organizationÕs mission. Colleges can increase the number of students, asColumbia University has, to increase revenue. Or they can admit fewer low-income students and more students whose families can afford to pay fulltuition. Reed College, for example, was unable to sustain its Òneed-blindÓadmissions policy this year and admitted more than 100 students who couldpay their way instead of students, already on the admissions list, whoneeded financial aid. Other nonprofits are increasing fees. The PhiladelphiaMuseum of Art, for example, raised its admission prices in July 2009 for thesecond time in two years.

9/26/22, 12:05 PMEndowment for a Rainy DayPage 7 of 13https://ssir.org/articles/entry/endowment_for_a_rainy_day#A few nonprofits are considering merging to reduce operating costs.Andover Newton Theological School and Colgate Rochester Crozer DivinitySchool, for example, are discussing merging, despite being in differentstates (Massachusetts and New York, respectively).Other nonprofits are choosing to borrow money. In April 2009, StanfordUniversity, reeling from endowment losses and in need of short-termliquidity, sold more than $1 billion of bonds and is now holding $800 millionin low-yield money market funds. Stanford CFO Randy Livingston describesthese actions by saying, ÒWeÕve created a rainy day fund.ÓITÕS A MATTER OF CHOICEEndowment is not simply a sum of assets that is determined by outsideforces. It is, instead, a fund that nonprofits have a great deal of control over.It is a mistake to assume that a schoolÕs endowment is determined bydonorsÕ decisions to require that most of their contributions be retained andonly a small percentage of their yield be spent. Rather, hospitals,symphonies, colleges, and other nonprofits decide how much of theirincome from all sources to spend and how much to save. They decide howmuch revenue to generate via tuition, patient fees, or ticket sales, and howmuch to cut into that revenue by granting student financial aid, providingcharity care, or giving free performances. They decide how much to spendon developing alumni giving or corporate gifts, on lobbying legislators forgovernment grants, and on building luxury skyboxes at their footballstadiums.We do not claim that nonprofits can have whatever endowment they wantÑonly that they have significant control over how much they save for thefuture and how much they spend now. Contrary to common belief, there isno legal minimum or maximum amount that nonprofits must withdraw

9/26/22, 12:05 PMEndowment for a Rainy DayPage 8 of 13https://ssir.org/articles/entry/endowment_for_a_rainy_day#(payout rate) from their endowment each year. (Foundations are required totake a 5 percent payout rate.) The commonly used payout rate of 4.5percent is chosen by the trustees, not by external authorities. Endowmentcan grow more rapidly if a school gives less financial aid, if it dropsunprofitable initiatives such as specialized science programs requiring costlylaboratory facilities that bring in little grant revenue from government orprivate sources, or if it replaces expensive tenure-track faculty with cheaperadjunct and lecturer faculty. Or, endowment can grow more slowly, or evendecline, if the school chooses to spend more money on current educationaland research programs.It is also wrong to assume that donations commonly specify that the giftmust be added to endowment or that it be spent promptlyÑ in either casedictating whether the contribution must or must not be added toendowment, putting the decision beyond the schoolÕs or museumÕs control.In fact, nonprofits are only rarely confronted by a Òtake it or leave itÓ donationoffer in which the donor insists that a gift be used for something that thenonprofit does not want to do. Much more commonly, the relationshipbetween donor and donee is collaborative, with the donor wanting to helpadvance the nonprofitÕs agenda rather than trying to force the nonprofit tinto another direction.Another erroneous assumption is that gifts to endowment are typicallyrestricted. According to the ÒNACUBO Endowment Study 2008,Ó of the 77colleges and universities reporting more than $1 billion in endowments in2008, 51 percent of their endowments on average are ÒtrueÓ or, as the IRScalls it, Òpermanently restrictedÓ endowment, 9 percent of the endowmentsare Òtemporarily restricted,Ó and 35 percent on average are Òquasi-endowmentÓ or ÒunrestrictedÓ endowments. (An additional 5 percent ofendowment funds are Òheld in trust by others.Ó) But there is a gigantic difference, of enormous importance, between a fund balance being labeled

9/26/22, 12:05 PMEndowment for a Rainy DayPage 9 of 13https://ssir.org/articles/entry/endowment_for_a_rainy_day#ÒrestrictedÓ and the fund being truly restrictive. Insofar as the terms of anendowment truly constrain how it may be used, the nonprofit does not havecontrol. But money is fungible, and so a gift that is apparently restricted may,and typically does, leave the nonprofit with wide discretion overexpenditures and over saving by building up endowment.Consider the example of a $1 million donation specifying that it be added tothe ÒtrueÓ or ÒpermanentÓ endowment and that 5 percent of it, $50,000, bedevoted each year to student fi nancial aid. It would seem that the collegehas no control over the deployment of the donation once it is accepted. Notso. It would be so if the school would have given no financial aid but for thisgift. But if the school were providing $300,000 of such aid, there would be,in general, nothing preventing it from devoting the new $50,000 to financialaid, thereby releasing that same amount for spending on other programs.This fungibility of money makes it very difficult to take control away from theschool by mandating that total financial aid increase by $50,000 beyondwhat it otherwise would be, for that requires knowing what would have beenspent in future years on a specific program had it not been for the newdonation. Only when the giftÑ in this example the $50,000 per yearÑexceeds the total of what would otherwise have been spent on the particularactivity, would the school lose control over its use of the gift funds. As this isextraordinarily uncommon, the conclusion is clear: Even though the vastmajority of endowments are shown on nonprofit organizationsÕ IRS Form 990returns as Òrestricted,Ó the fungibility of money permits wide latitude in howendowment funds are spent.CREATING A RAINY DAY FUNDThere is no simple definition of what constitutes a rainy day, but an overalldrop of 10 percent of annual revenues (what Tulane suffered in 2005 as a

9/26/22, 12:05 PMEndowment for a Rainy DayPage 10 of 13https://ssir.org/articles/entry/endowment_for_a_rainy_day#result of Hurricane Katrina) certainly qualifies as a highly unusual eventÑinthis instance, literally a rainy day. Using a 10 percent drop in annual revenuesas the standard metric for a rainy day, we see that if a nonprofit had anannual budget of $100 million and an endowment of $80 million, it wouldhave a rainy day fund that would last for roughly 8 years of $10 milliontransfers from the endowment.We found, in random samples of 100 IRS Form 990 returns for 2003 (thelatest available complete data), that the average rainy day fund for museumswas about 37 years, for undergraduate colleges about 21 years, and forgeneral hospitals five years. Although the average museum is wealthy interms of its rainy day fund, nearly 40 percent of museums have noendowment and so no rainy day fund. By comparison, only 10 percent of thegeneral hospitals and 2 percent of the colleges and universities wemeasured had no endowment.These three industries are more alike, however, when we compare theirmedian rainy day funds. Half of all museums have rainy day funds that couldlast more than 20 years, and half of all colleges have endowments that couldwithstand 13 years of rainy days, but half of all hospitals could survive onlyfive years of rainy days. The causes of, and justifications for, thesedifferences need more study, but it is likely that they reflect differing volatilityand dependability of revenues from various private and public sources.Wealthier nonprofits generally have larger rainy day funds, but not always. In2006, Princeton had a 141-year rainy day fund, but tiny Grinnell College, witha far smaller endowment, had the largest rainy day fund of all colleges anduniversitiesÑan astonishing 191 years. Harvard, Yale, and Stanford have farlarger endowments, but they also spend much more, and so their rainy dayfunds of 96, 92, and 53 years respectively do not make even the top ten.Even endowment reductions of 25 percent together with no reductions in

9/26/22, 12:05 PMEndowment for a Rainy DayPage 11 of 13https://ssir.org/articles/entry/endowment_for_a_rainy_day#program spending would leave their rainy day funds at dozens if not scoresof years.Universities are not the only nonprofit institutions with substantial rainy dayfunds. In 2008, the Metropolitan Museum of Art had a 90-year rainy dayfund. In 2007, the Memorial Sloan-Kettering Cancer Center had a 21-yearrainy day fund, and the Boston Symphony Orchestra had a 53-year rainy dayfund.There are also prominent nonprofits that have essentially no endowments.The American Red Cross has only a 2-year rainy day fund, relying instead ondonations to fund its expenditures during emergencies. In effect, increaseddonations during disasters are its rainy day fund. But apparently not everynonprofit sees the dependability of increased donations to respond to afiscal rainy day, whether in the form of diminished revenue or need forincreased program expenditures. The greater the positive expectedresponse of donors, private or governmental, to a rainy day, the smaller isthe need for a rainy day endowment fund.FINAL THOUGHTSProtection against a rainy day need not be the only reason for creating anendowment, but it should surely be a major reason. Real incomes will riseover the years, so nonprofits can, in general, look forward to increasedrevenue from donations and user fees. Squeezing todayÕs students, patients,and museumgoers to save money for future generations of users ismisguided. But building endowment is not misguided if it is used as rainy dayinsurance, to preserve the stability and long term development of programscentral to a nonprofitÕs mission.The hard questions are these: ÒHow large an endowment is enough?Ó andÒWhat is the appropriate balance between spending now and saving for the

9/26/22, 12:05 PMEndowment for a Rainy DayPage 12 of 13https://ssir.org/articles/entry/endowment_for_a_rainy_day#future?Ó We do not have the answers to these questions. Indeed, we thinkthere is no single answer, but we do see a number of issues that deservecareful attention by researchers, nonprofit managers, and public policyleaders.Because nonprofit organizations benefit handsomely from tax breaks onendowmentsÑpaying no tax on either the dividend and interest yields or thecapital gainsÑsociety is justified in asking how much is enough. ShouldÒenoughÓ be measured by size of endowment or, as we prefer, by size ofrainy day fund? The substantive question is how much saving by nonprofitsshould be encouraged.In any case, regulators should recognize that depending on whetherÒendowmentÓ is taxed or not, a nonprofit will have a different incentive notonly to accumulate or spend down its endowment but also to rename itsassets. A college president once said that if the government decided to taxthe schoolÕs endowment, he could dramatically cut ÒendowmentÓ in just 10minutes! Whatever the purpose of endowment, it would be poor publicpolicy to encourage nonprofit to spend money on accountants and taxattorneys simply to rename assets.Now is not the time for hasty decisions and changes in tax laws spurred bytodayÕs Òrain.Ó It is the time for rethinking conventional policies on financingnonprofit and bringing greater stability to organizations that are providinghigher education to our youth, medical care to our sick, and advancement tothe cultural fabric of our society.In todayÕs depressed economy, nonprofits are hurting. Falling collegeendowments have garnered the lionÕs share of publicity, but hospitals,museums, foundations, and other nonprofits are suffering in similar ways.What can one learn from these experiences? Nonprofits with sizable

9/26/22, 12:05 PMEndowment for a Rainy DayPage 13 of 13https://ssir.org/articles/entry/endowment_for_a_rainy_day#endowments must understand that if they succumb to the attraction ofriskier and less liquid investments in pursuit of higher returns, they should beprepared to deal with the inevitable fiscal rainy days. Nonprofits withendowments should be willing to spend down their endowment to sustainprogram expenditures. And those nonprofits that have little or noendowment need to find ways of diverting some of their even limitedrevenues to creating a rainy day endowment fund, because this is not thelast rainy day.Burton A. Weisbrod is the John Evans Professor of Economics and a facultyfellow at the Institute for Policy Research, Northwestern University. He hasauthored or edited 15 books, including The Nonprofit Economy, To Profit orNot to Profit: The Commercial Transformation of the Nonprofit Sector, andmost recently, with coauthors Jeffrey P. Ballou and Evelyn D. Asch, Missionand Money: Understanding the University. Weisbrod served as senior staffeconomist on the Council of Economic Advisors to Presidents John F.Kennedy and Lyndon B. Johnson.Evelyn D. Asch is the research coordinator for the Commercialism in HigherEducation project at Northwestern UniversityÕs Institute for Policy Research.She is the coauthor, along with Burton A. Weisbrod and Jeffrey P. Ballou, ofMission and Money: Understanding the University (Cambridge UniversityPress, 2008). Asch has taught at Loyola University Chicago, DePaulUniversity, and Shimer College.Read more stories by Evelyn D. Asch & Burton A. Weisbrod.

9/26/22, 12:44 PMUnderstanding Endowments: Types and Policies That Govern ThemPage 1 of 9https://www.investopedia.com/terms/e/endowment.aspUnderstanding Endowments: Typesand Policies That Govern ThemWhat Is an Endowment?An endowment is a donation of money or property to a nonprofitorganization, which uses the resulting investment income for a specificpurpose. An endowment can also refer to the total of a nonprofit institutionÕsinvestable assets, also known as its ÒprincipalÓ or Òcorpus,Ó which is meant tobe used for operations or programs that are consistent with the wishes ofthe donor(s). Most endowments are designed to keep the principal amountintact while using the investment income for charitable efforts.1Key TakeawaysMost endowments are designed to keep the principal amount intactwhile using the investment income for charitable efforts.Endowments tend to be organized as a trust, private foundation, orpublic charity.Educational institutions, cultural institutions, and service-orientedorganizations typically administer endowments.Understanding EndowmentsEndowments are typically organized as a trust, private foundation, or publiccharity.23 Many endowments are administered by educational institutions,such as colleges and universities. Others are overseen by culturalinstitutions, such as art museums, libraries, religious organizations, privatesecondary schools, and service-oriented organizations, such as retirementhomes or hospitals.4

9/26/22, 12:44 PMUnderstanding Endowments: Types and Policies That Govern ThemPage 2 of 9https://www.investopedia.com/terms/e/endowment.aspIn some cases, a certain percent of an endowmentÕs assets are allowed to beused each year so the amount withdrawn from the endowment could be acombination of interest income and principal.5 The ratio of principal toincome would change year to year based on prevailing market rates.Policies of EndowmentsMost endowment funds have the following three components, which governinvestments, withdrawals, and use of the funds.Investment PolicyThe investment policy lays out which types of investments a manager ispermitted to make and dictates how aggressive the manager can be whenseeking to meet return targets. Many endowment funds have specificinvestment policies built into their legal structure so that the pool of moneymust be managed for the long term.6Endowment funds of larger universities can have hundreds, if not thousands,of smaller funds that invest the pools of money in various securities or assetclasses. The funds typically have long-term investment goals, such as aspecific rate of return or yield. As a result of the investment goals, the assetallocation (or types of investments within the fund) is designed to meet thelong-term returns set forth in the fundÕs objectives.6Withdrawal PolicyThe withdrawal policy establishes the amount the organization or institutionis permitted to take out from the fund at each period or installment. Thewithdrawal policy can be based on the needs of the organization and theamount of money in the fund. However, most endowments have an annual

9/26/22, 12:44 PMUnderstanding Endowments: Types and Policies That Govern ThemPage 3 of 9https://www.investopedia.com/terms/e/endowment.aspwithdrawal limit. For example, an endowment might limit the withdrawals to5% of the total amount in the fund. The reason the percentage of withdrawalis typically so low is that most university endowments are established to lastforever and, therefore, have annual spending limits.7Usage PolicyThe usage policy explains the purposes for which the fund can be used andalso serves to ensure that all funding is adhering to these purposes andbeing used appropriately and effectively. Endowments, whether set up by aninstitution or given as a gift by donors, can have multiple uses. These includeensuring the financial health of specific departments, awarding scholarshipsor fellowships on the basis of merit to students, or providing assistance tostudents from a background of economic hardship.89Chair positions or endowed professorships can be paid with the revenuefrom an endowment and free up capital that institutions can use to hire morefaculty, reducing professor-to-student ratios. These chair positions areconsidered prestigious and are reserved for senior faculty.10Endowments can also be established for specific disciplines, departments,or programs within universities. Smith College, for example, has anendowment for its botanical gardens, and Harvard University has more than14,000 separate endowment funds.1112Endowment TypesThere are four different types of endowments:13Unrestricted Endowment Ð This consists of assets that can be spent,saved, invested, and distributed at the discretion of the institutionreceiving the gift.

9/26/22, 12:44 PMUnderstanding Endowments: Types and Policies That Govern ThemPage 4 of 9https://www.investopedia.com/terms/e/endowment.aspTerm Endowment Ð This setup usually stipulates that, only after aperiod of time or a certain event, can the principal be expended.Quasi Endowment Ð This is a donation made by an individual orinstitution and given with the intent of having that fund serve a specificpurpose. The principal is typically retained, while the earnings areexpended or distributed per specifications of the donor. Theseendowments are usually started by the institutions that benefit fromthem via internal transfers or by using unrestricted endowments alreadygiven to the institution.14Restricted Endowment Ð This has its principal held in perpetuity, whilethe earnings from the invested assets are expended per the donorÕsspecifications.Except in a few circumstances, the terms of endowments cannot be violated.If an institution is near bankruptcy or has declared it but still has assets inendowments, a court can issue a cy pres doctrine, allowing the institution touse those assets toward better financial health while still honoring thewishes of the donor as closely as possible.15Drawing down the corpus of the endowment to pay debts or operatingexpenses is known as ÒinvadingÓ or Òendowment fund invasion,Ó andsometimes requires court approval.16Requirements for EndowmentsManagers of endowments have to deal with the push and pull of interests tomake use of assets to forward their causes or sustainably grow theirrespective foundation, institution, or university. The goal of any group giventhe task of managing a universityÕs endowments, for example, is tosustainably grow the funds by reinvestment of the endowmentÕs earningswhile also contributing to the operating cost of the institution and its goals.

9/26/22, 12:44 PMUnderstanding Endowments: Types and Policies That Govern ThemPage 5 of 9https://www.investopedia.com/terms/e/endowment.aspManagement of an endowment is a discipline unto itself. An outline ofconsiderations compiled by a leading management team includes settingobjectives, developing a payout policy, building an asset allocation policy,selecting managers, managing risks systematically, cutting costs, anddefining responsibilities.17Philanthropies, or, more specifically, private nonoperating foundations, acategory that includes the majority of grant-making foundations, arerequired by federal law to pay out 5% of their investment assets on theirendowments every year for charitable purposes in order to keep their tax-exempt status.18 Private operating foundations must pay substantially allÑ85% or moreÑof their investment income.19 Community foundations haveno requirement.20Under the Tax Cuts and Jobs Act of 2017, substantially large universityendowments must pay a tax of 1.4% on net investment income. This tax islevied on endowments held by private colleges and universities with at least500 students and net assets of $500,000 per student.21Endowments and Higher EducationEndowments are such an integral part of Western academic institutions thatthe size of a schoolÕs endowment can be a fair measure of its well-being.They provide colleges and universities with the ability to fund their operatingcosts with sources other than tuition and ensure a level of stability by usingthem as a potential rainy-day fund.13 Older educational institutions, such asthe Ivy League schools in the United States, have been particularlysuccessful in building extremely robust endowment funds, having theadvantages of continued donations from wealthy graduates and good fundmanagement.22 

9/26/22, 12:44 PMUnderstanding Endowments: Types and Policies That Govern ThemPage 6 of 9https://www.investopedia.com/terms/e/endowment.aspMarcus Aurelius established the first recorded endowment, circa 176 AD, forthe major schools of philosophy in Athens, Greece.23Criticism of EndowmentsHarvard and other elite higher educational institutions have come undercriticism for the size of their endowments. Critics have questioned the utilityof large, multibillion-dollar endowments, likening it to hoarding.24 Largeendowments had been thought of as rainy-day funds for educationalinstitutions, but during the Great Recession, many endowments cut theirpayouts. A 2014 study published in the American Economic Review lookedclosely at the incentives behind this behavior and found a trend toward anoveremphasis on the health of an endowment rather than the institution as awhole.25ItÕs not unusual for student activists to look with a critical eye at where theircolleges and universities invest their endowments. In 1977, HampshireCollege divested from South African investments in protest of apartheid, amove that a large number of educational institutions in the United Statesfollowed.26 Advocating for divestment from industries and countries thatstudents find morally compromised is still prevalent among student activists,though the practice is evolving to improve efficacy, according to reporting byThe New Yorker.27More recently, three prominent universities with multibillion-dollarendowmentsÑHarvard, Princeton, and StanfordÑdeclined to accept millionsthey were set to receive as part of a $14 billion federal aid package for highereducation included in the CARES Act, according to reporting by The NewYork Times.28 Indeed, Harvard University has now declined emergencyCOVID-19 relief money from the federal government three times, mostrecently $25.5 million from President BidenÕs American Rescue Plan.29

9/26/22, 12:44 PMUnderstanding Endowments: Types and Policies That Govern ThemPage 7 of 9https://www.investopedia.com/terms/e/endowment.aspReal World Examples of EndowmentsThe oldest endowments still active today were established by King Henry VIIIand his relatives. His grandmother, Countess of Richmond,30 establishedendowed chairs in divinity at both Oxford and Cambridge, while Henry VIIIestablished professorships in a variety of disciplines at Oxford andCambridge.3132According to the National Center for Education Statistics article from 2020,the top 10 U.S. universities by endowment size at the end of the fiscal year2020 were:221. Harvard University Ð $41,894,380,0002. Yale University Ð $31,201,686,0003. University of Texas System Office – $30,522,120,0004. Stanford University Ð $28,948,111,0005. Princeton University Ð $25,944,283,0006. Massachusetts Institute of Technology (MIT) Ð $18,381,518,0007. University of Pennsylvania Ð $14,877,363,0008. Texas A&M University Ð $12,720,530,0009. University of Notre Dame (IN) Ð $12,319,422,00010. University of MichiganÑAnn Arbor Ð $12,308,473,000Harvard University EndowmentHarvard officials had expected the endowment to shrink in 2020 due to theimpact of the pandemic on the economy and financial markets.33 They werewrong, though, as it returned 7.3% on its investments and actually increaseda bit.34 Similar fears about 2021 proved even more unfounded. Powered bya rising stock market, the endowment returned a whopping 33.6% on itsinvestments and grew by $11.3 billion to $53.2 billion.35 This made it the

9/26/22, 12:44 PMUnderstanding Endowments: Types and Policies That Govern ThemPage 8 of 9https://www.investopedia.com/terms/e/endowment.asplargest amount in the endowmentÕs history.36 And that is saying something,as, according to The New York Times, Harvard in 2020 was already Òthemost well-heeled university in the world.Ó3738There are thousands of specific funds within the overall endowment fund forHarvard. The fundsÕ asset allocation was spread out through various types ofinvestments, including:35Equities: 14%Hedge funds: 33%Private equity investments: 34%Real estate: 5%Bonds: 4%The endowmentÕs annual payout rate is typically capped. HarvardÕs payoutrate was 5.2% in 2021, which totaled $2.0 billion.39 Distributions provided35% of total revenue for 2021, and another 10% of revenue came fromcurrent gifts of philanthropy. Cash gifts to the endowment totaled $541million.38 Approximately 70% of the annual distribution is restricted tospecific departments, programs, or other purposes. In other words, thefunds need to be spent according to the terms established by the donors.Only 30% of the fund can be used by Harvard for flexible spending.40In 2021, Harvard paid nearly $161 million from the endowment toundergraduates for scholarships.41 Approximately 55% of the studentsreceive need-based scholarships and pay, on average, $12,700 per year toattend Harvard. Of the students who receive scholarships, 20% pay nothingto attend Harvard College.42From an investment perspective, HarvardÕs endowment fund hasconsistently produced strong returns over the long term, although ongoinginfusions of capital in the form of new endowments also drives total growth.

9/26/22, 12:44 PMUnderstanding Endowments: Types and Policies That Govern ThemPage 9 of 9https://www.investopedia.com/terms/e/endowment.aspSponsoredThe Value of Financial Advice During Market SwingsSeeking financial advice can help you prepare for downswings and seek outnew opportunities in the markets. Whether youÕre feeling bullish or bearish,enlisting the guidance of a fiduciary financial advisor can help you manageyour assets with your best interests in mind. With a quick quiz, SmartAssetcan help you find your advisor match. Learn more about putting your moneyto work and connect with an advisor today.

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