Endowment Spending Rate Drops Slightly

As scrutiny increases (and stock market takes a tumble), data show how cautious colleges are with their funds -- and how the wealthiest institutions continue to gain ground.
January 24, 2008

At a time that some lawmakers are pushing colleges to spend more of their endowments, data being released today suggest that the opposite was the trend last year. The average spending rate on college endowments in 2007 was 4.6 percent, the lowest since 1999 and 0.5 percentage points lower than the high point of the last decade, 5.1 percent in 2002 and 2003.

For the wealthiest colleges, the spending rate was even lower. Colleges with endowments larger than $500 million spent on average only 4.4 percent in 2007. For colleges with endowments greater than $500 million but less than $1 billion, that's the lowest rate since 1999, and for colleges with endowments greater than $1 billion, that's the lowest rate since 2001.

The figures come from the annual endowment report of the National Association of College and University Business Officers. The report found that the average rate of return of the 785 colleges in the study was 17.2 percent. As is typically the case, the wealthier institutions saw the largest gains. The average returns for those in the billion-dollar plus category were 21.3 percent last year, while those with endowments up to $25 million saw a rate of return of only 14.1 percent.

Those at the very top saw astronomical gains. Harvard's endowment grew by just under 20 percent, to $34.6 billion. If you took just the gain in Harvard's endowment in 2007 ($5.7 billion), that sum alone would be larger than the endowments of all but 15 universities. Number 16, Washington University in St. Louis, has an endowment of $5.6 billion. Harvard's gains alone are more than the combined endowments of every historically black college in the country (and plenty of other categories of college, too). Even within the group of national research universities, Harvard and a few other institutions are in a completely different financial league from most others. If you added the endowments of Johns Hopkins University, Cornell University, Duke University and the University of Chicago, you wouldn't equal the total of either Harvard or Yale University, which is in second at $22.5 billion.

The release of the annual report on endowments is both miserably timed and beautifully timed, from the perspective of those with large endowments. The timing is poor because there are plenty of figures that will buttress the arguments being made that colleges are exceptionally wealthy and should be spending much more of their money. The timing is ideal -- in a somewhat odd way -- because a development that endowment managers hate to see (sharp declines in the stock market) backs up one of their main points: that endowments shouldn't be pressured to spend more in good years because they need the money for tight years.

The data on endowment spend rates show a gradual decline over the last five years.

Average Endowment Spending Rates, 2003-7

Endowment Assets 2007 2006 2005 2004 2003
> $1 billion 4.4% 4.5% 4.8% 5.2% 5.3%
> $500 million to $1 billion 4.4% 4.5% 4.7% 5.0% 5.2%
> $100 million to $500 million 4.6% 4.6% 4.7% 5.0% 5.2%
> $50 million to $100 million 4.8% 4.7% 4.8% 4.9% 5.3%
> $25 million to $50 million 4.8% 4.7% 4.7% 4.7% 4.9%
Up to $25 million 4.6% 4.7% 4.7% 4.5% 4.8%
All 4.6% 4.7% 4.7% 4.9% 5.1%

John Walda, president of NACUBO, said that the declines this year in spending rates are largely because so many colleges saw large increases in endowment earnings. "It takes a while to catch up, and to direct money into programs that they weren't spending before," he said. The many colleges that are significantly increasing spending on financial aid this year, Walda said, are generally doing so in part by increasing their spending rates.

Further, Walda said that "the focus shouldn't be on what the spend rate is from one year to the next or the value of an endowment from one year to the next, but the value over time and over a 10-year period." He added: "You don't set a spend rate based on one year's investment results. You arrive at a spend rate as a matter of policy so you can maintain value."

Those arguments are generally accepted by college leaders, but not by some prominent critics. Lynne Munson, an adjunct research fellow at the Center for College Affordability and Productivity, is working on a book on endowment hoarding, and she has written here and elsewhere that colleges should spend more now to cut tuition and in some cases to eliminate it.

"Even though many schools continue to get better and better at managing their endowments, they haven't thought about sharing this tremendous wealth," she said, arguing that the wealthiest institutions should become free. She noted that Harvard's much-discussed shift in financial aid policies will cost the university about $22 million a year -- hardly enough to make a dent in the $5 billion plus coming in from endowment earnings and gifts. Munson called Harvard's aid plans "little more than a PR stunt."

Walda said he was concerned that the public and journalists were paying too much attention to Harvard. He said that the 76 colleges with endowments of at least $1 billion shouldn't be used to set policy for everyone else. Most institutions have far more limited resources and can't afford to take as much risk as do wealthier universities, he said.

While the higher education lobbying groups are lining up to oppose any effort by Congress to push colleges to spend more of their endowments, some institutions that serve low-income students -- and do so with small endowments -- say that they don't have much sympathy for the idea that Ivy League institutions need to be protected to spend less.

Philander Smith College is a historically black institution in Arkansas, with an endowment of about $14.5 million. Its president, Walter M. Kimbrough, said that the college typically spends between 4 and 5 percent of its endowment a year -- a proportion similar to that used at the wealthiest institutions. But Kimbrough noted that his college doesn't have professional money managers and can't afford to take much risk, so his endowment is typically earning 5 to 7 percent a year. So he's spending most (and some years all) of his endowment growth.

"I have to squeeze out every bit I can for my students, so I'm not going to have a strict policy. I spend what I need to," he said. With 70 percent of his students eligible for Pell Grants, a year when federal aid spending is flat is going to be a year he has to spend more, or he would lose students, he said.

Kimbrough said he understands the principles that college endowments should be saved for rainy days, and that the market can never be a sure thing. But from the perspective of an institution without much of an endowment, he said it's hard to understand why others aren't spending more.

"When you have successive years of earning double-digit increases, 15 percent and above, you can't spend 5 percent?" he asked, noting a figure some critics say should be a minimum. "There isn't a substantive reason why those institutions can't spend 5 percent."

Imagine what might happen if colleges with mega-endowments gave some of that money to Pell Grants for use anywhere, Kimbrough said. While the idea may seem unrealistic, he said there comes a point when enough money should be enough. "There's a point where you should say: They have plenty of money. They don't need any more. Don't give them any more. There isn't a greater good any more."

Over all, the one-year returns have been exceptionally good for the wealthiest colleges, especially in the last year. But Walda noted that taking a 10-year perspective, the returns are healthy but not as spectacular.

Returns by Endowment Size Over 1, 3, 5 and 10 years

Endowment Assets 1-Year Return 3-Year Return 5-Year Return 10-Year Return
> $1 billion 21.3% 16.4% 13.9% 11.1%
> $500 million to $1 billion 19.3% 14.2% 12.3% 9.5%
> $100 million to $500 million 18.0% 13.1% 11.5% 8.5%
> $50 million to $100 million 16.7% 11.9% 10.8% 7.9%
> $25 million to $50 million 15.9% 10.7% 9.8% 7.3%
Up to $25 million 14.1% 9.7% 8.8% 6.7%
All 17.2% 12.4% 11.1% 8.6%

The data continue to show the impact of wealthier colleges' ability to invest with riskier strategies, which may also have the highest potential payoff. Generally, wealthier colleges have larger shares of their endowments in hedge funds, private equity and venture capital -- and smaller shares in fixed income and domestic equity. Walda said he expected that the current market downturn would probably prompt strategy shifts at some institutions, but he said it was too early to tell exactly what they would be.

The NACUBO data on individual colleges show endowment growth, but not rates of return. Endowment growth includes earnings and gifts, and takes away spending. Not every college participates in the NACUBO survey, although generally the wealthiest institutions do. So it is possible that in some of the subcategories noted below that other colleges would be in the lists had they participated in the survey. The rank figure refers to the colleges’ ranks among all survey participants. So Williams College, first among liberal arts colleges, is 33 among all institutions.

Among the top institutions, there was relatively little change, with the very top remaining the same and some institutions moving up or down a few spots. In the liberal arts category, Williams and Pomona Colleges displaced Grinnell College from its recent position on the top of the list.

Top 20 Endowments

Rank Institution 2007 Endowment 1-Year % Change
1. Harvard U. $34,634,906,000 +19.8%
2. Yale U. $22,530,200,000 +25.0%
3. Stanford U. $17,164,836,000 +21.9%
4. Princeton U. $15,787,200,000 +21.0%
5. U. of Texas System $15,613,672,000 +18.0%
6. Massachusetts Inst. of Technology $9,980,410,000 +19.3%
7. Columbia U. $7,149,803,000 +20.4%
8. U. of Michigan $7,089,830,000 +25.4%
9. U. of Pennsylvania $6,635,187,000 +24.9%
10. Texas A&M U. System $6,590,300,000 +16.8%
11. Northwestern U. $6,503,292,000 +26.5%
12. U. of California $6,439,436,000 +16.2%
13. U. of Chicago $6,204,189,000 +27.5%
14. U. of Notre Dame $5,976,973,000 +34.7%
15. Duke U. $5,910,280,000 +31.4%
16. Washington U. in St. Louis $5,567,843,000 +18.9%
17. Emory U. $5,561,743,000 +14.2%
18. Cornell U. $5,424,733,000 +25.5%
19. Rice U. $4,669,544,000 +17.1%
20. U. of Virginia $4,370,209,000 +20.8%

Top 10 Liberal Arts College Endowments

Rank College 2007 Endowment 1-Year % Change
33. Williams College $1,892,055,000 +29.4%
38. Pomona College $1,760,902,000 +20.8%
40. Grinnell College $1,718,313,000 +16.7%
42. Amherst College $1,662,377,000 +24.3%
43. Wellesley College $1,656,565,000 +17.3%
50. Swarthmore College $1,441,232,000 +15.7%%
53. Smith College $1,360,966,000 +17.7%%
68. Berea College $1,102,272,000 +16.2%
84. Middlebury College $936,354,000 +20.7%
87. Vassar College $869,122,000 +17.2%

Top 5 Canadian University Endowments

Rank College 2007 Endowment (U.S. $) 1-Year % Change
37. U. of Toronto $1,763,764,000 +24.7%
75. U. of British Columbia $1,013,532,000 +31.2%
88. McGill U. $863,405,000 +18.3%
99. U. of Alberta $722,539,000 +29.6%
122. Queen's U. $614,739,000 +22.5%

Top 5 Historically Black College Endowments

Rank College 2007 Endowment 1-Year % Change
138. Howard U. $523,690,000 +23.5%
189. Spelman College $340,261,000 +16.7%
223. Hampton U. $256,990,000 +18.1%
433. Meharry Medical College $78,421,000 +19.5%
502. Morehouse School of Medicine $56,385,000 +22.3%

Top 5 Community College Endowments

Rank College 2007 Endowment 1-Year % Change
462. Valencia CC (Florida) $68,004,000 +19.4%
612. Florida CC at Jacksonville $32,923,000 +35.9%
623. Harrisburg Area CC (Pennsylvania) $30,563,000 +10.6%
642. Sinclair CC (Ohio) $27,690,000 +17.3%
644. Kentucky Community and Technical College System $27,422,000 +29.3%


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