Snapshots of Endowment Spending

March 7, 2008

In asking (okay -- essentially requiring) 136 colleges and universities to submit a wealth of information and data about their endowment and financial aid practices, leaders of a U.S. Senate committee were presumably hoping to collect fodder to prove their thesis that elite institutions are sitting on huge pots of money that they could be spending to make higher education more affordable.

In publicly welcoming the inquiry, as several college leaders did, higher education officials posited that the information would go a long way toward proving their point that the story of college endowments and financing is far more nuanced -- and in many ways positive -- than the politicians suggested.

So now that the responses from the colleges have begun to pour in, which is it?

Not surprisingly, to judge from the letters submitted to the Senate Finance Committee by the 25 universities with the largest endowments (at least the responses made public), it’s a little of both. As college officials have argued, the responses show that many of the institutions are putting significant endowment funds toward need-based financial aid, that large proportions of their endowment funds are restricted for certain purposes, and that there is enormous variation in the makeup and uses of the endowments -- variation that should discourage policy makers from contemplating “one-size-fits-all” efforts to regulate the endowments, some campus officials said.

"Concerns about ensuring that young people have access to an affordable and quality education are valid and we take them seriously," David W. Leebron, president of Rice University, wrote in a letter accompanying his institution's response. "But a fixed, formulaic approach to how endowments are managed or allocated or how education is priced threatens to force our diverse higher education institutions into a tight mold where enterprise and innovation give way to rigid processes and mediocrity."

But the information and data contained in the responses – much of which is already in the public domain, but some of which rarely if ever sees the light of day -- also point to some potential vulnerabilities for higher education institutions. At a time when some lawmakers are suggesting that wealthy colleges should be required to spend at least 5 percent of their endowment funds each year, as federal law requires some foundations to do, the responses show that some colleges regularly fall beneath that threshold, as seen in the table lower in the article.

That information is among selected other data in the reports that many colleges do not typically make public, including statistics on how much they pay in bonuses to their investment managers and specific breakdowns of what they spend most of their endowment funds on, how much of the money is restricted, and for what purposes.

“This information will be extraordinarily helpful in terms of Congress looking at how colleges and universities are spending their money to help kids go to school,” said Dean Zerbe, who as an aide to the Senate panel helped lead its inquiry into nonprofit governance and finances. “There’s a lot here for those of us interested in these issues to go through,” said Zerbe, who is now national managing director for AlliantGroup, a tax services firm.

A Call for Paper

Sens. Max Baucus (D-Mont.) and Charles E. Grassley (R-Iowa), the chairman and senior Republican on the Senate Finance Committee, wrote the presidents of 136 colleges in January asking for their responses to a three-page letter seeking a wide range of data and explanation about their admissions, financial aid and endowment spending policies and practices. “We would appreciate additional information about tuition costs and your institution’s endowment,” which receive “very generous tax breaks under the Internal Revenue Code,” the two senators wrote. “We want to better understand how these tax benefits for higher education endowments are improving education and making undergraduate studies more affordable for low and middle income families today.”

While some college officials challenged the lawmakers’ suggestion that their inquiry would not be “unduly burdensome,” leaders of several higher education groups said they believed that colleges would generally welcome the opportunity to make their case. “I am certain that colleges and universities will be pleased to share the information requested by the Finance Committee leadership,” John Walda, president of the National Association of College and University Business Officers, said at the time. “I’m also confident that this information will strengthen the committee’s understanding of college and university endowments and will demonstrate the prudent practices through which higher education institutions manage their endowments.”

As of this week, many if not most institutions had already submitted their materials to the Finance Committee, and others, granted extensions, were planning to submit them by next week. No institution appears to be refusing to comply with the senators’ request.

To get a flavor of the responses, Inside Higher Ed sought the replies of the 25 universities with the largest endowments in NACUBO’s most recent annual endowment survey. Of the 25, officials at three -- Columbia University, the University of Notre Dame, and the University of Texas System -- said the institutions had received extensions and had not yet submitted their responses to the Senate panel. (Note: Notre Dame notified Inside Higher Ed on March 14 that it had subsequently submitted its reply, which can be found here.)

Of the 22 others, 10 had posted the responses on their Web sites and nine others provided electronic copies of their reports to Inside Higher Ed. Three private institutions -- Emory and Northwestern Universities and Washington University in St. Louis -- declined to make their responses public.

Officials at Northwestern and Washington said they did not plan to make their responses public because they did not want to interfere with the Senate Finance Committee’s inquiry. "The information was requested by the Senate Finance Committee and it is therefore not appropriate to preempt the committee's deliberations by providing a public copy at this time," Chuck Loebbaka, a Northwestern spokesman, said in a prepared statement.

Asked if the U.S. senators who sent the letter had an opinion on how the colleges’ handled their responses, Jill Gerber, a spokeswoman for Grassley, said that he “appreciates the schools’ wanting to follow appropriate protocol and not preempt our right to release the information.” But Grassley, she added, “would not be offended if they release the information because his view toward most nonprofit issues is the more transparency the better, and he’s trying to generate a public discussion of what’s appropriate in how universities are spending their money.”

What the Responses Say

Many of the responses submitted by universities read like the political documents that they inevitably are, given who requested them. Numerous presidents took the opportunity, in accompanying letters or introductions to their listed answers, not only to make key points about their own institutions' progress in expanding financial aid for low-income students or spending their endowments wisely, but to address the larger concerns about college access and affordability that underlie the senators' request.

"This country’s leading universities -- public and private -- rank among the best in the world," Shirley Tilghman, Princeton University's president, wrote in her institution's response. "Our country depends on their continuing capacity to teach and conduct research on the frontiers of expanding fields of knowledge, and to open wide the doors of opportunity to students from all backgrounds and economic circumstances. As you conduct your review, I hope you will reaffirm the importance of public policies that sustain and even enhance the capacity of these universities to pursue these missions, now and into the future."

Virtually all of the responses, though, focused on showing the institutions as acting aggressively and diligently to balance the sometimes competing interests of bolstering access for low-income students, keeping their tuitions affordable, and shepherding their financial resources prudently. "The committee is going to get 136 snapshots of how institutions are responsibly managing their money to accomplish their institutional missions," said M. Matthew Owens, associate vice president for federal relations at the Association of American Universities.

Although the institutions answer common questions, the "snapshots" they provide sometimes differ based on the circumstances. The public institutions in the mix make clear in their discussions of tuition setting and endowment spending just how much their decisions are influenced by state spending, in many cases "revealing the great pressures these institutions are facing to backfill their budgets with money from their endowments," Owens said.

The responses from the private institutions tend to reflect how "their endowments have to fund so much more of their core mission than they do in public universities," said A. Scott Sudduth, assistant vice president for federal government relations at the University of California. "I don’t know if it will come out in the responses as much as it would if you visited a university campus, but these should give a sense of just how complex and diverse endowments are."

While about half of the questions relate to financial aid and tuition policies, most of the interest and attention is likely to focus on the questions (and answers) related to endowments. While some information about individual university endowments is published in annual surveys like the one the business officers' group does each year, and institutions make other information about their spending practices available in financial statements and investment reports to their governing boards, some of the information presented is rarely seen.

Most noteworthy, perhaps, are the data about endowment spending rates, which have been at the center of the debate raised by Grassley and others. In the context of the suggestion that colleges should be required (by federal tax law) to spend at least 5 percent of their endowments a year -- which college officials vigorously oppose, even though many of them say that they strive as a matter of policy to spend about that much -- the statistics show great variation between colleges and, in some cases, at individual colleges year to year, as seen in the table below:


Proportion of Endowment Funds Spent by Universities With 25 Biggest Endowments, 1998-2007

Institution Fiscal 2007 1998-2007 Average 1998-2007 High 1998-2007 Low
Harvard U. 4.20% 4.25% 5.2% 3.3%
Yale U. 3.80 4.02 4.5 3.4
Stanford U. 4.30 4.68 5.5 3.9
Princeton U. 4.01 4.00 4.69 3.07
U. of Texas System Has not filed    
Mass. Inst of Tech 4.30 4.78 6.4 3.5
Columbia U. Has not filed    
U. of Michigan 3.80 4.41 5.4 3.8
U. of Pennsylvania 3.90 4.23 4.9 3.6
Texas A&M U. System 4.55 4.90 5.77 3.88
Northwestern U. Declined to release    
U. of California system* -- -- -- --
U. of Chicago 4.19 4.40 5.9 3.21
U. of Notre Dame Has not filed    
Duke U.** 3.90 4.04 4.9 3.1
Washington U. Declined to release    
Emory U. Declined to release    
Cornell U. 4.90 5.10 6.7 3.7
Rice U.*** 5.4 5.35 5.7 4.8
U. of Virginia 4.00 4.42 4.8 4.0
Dartmouth College 5.40 4.81 5.4 3.8
U. of Southern California**** 5.10 5.17 5.5 4.89
Vanderbilt U. 4.00 4.35 6.1 3.5
U. of Minnesota 2.8 4.59 6.8 2.8
Johns Hopkins U.*** 4.50 5.08 6.53 3.91

*U. of California provided dollar figures on endowment spending but not an overall spending rate in its response.
**An earlier version of this article contained an incorrect average spending rate for Duke.
***Percentages based on three-year rolling average of endowment value, which tends to moderate fluctuations.
****Percentages based on value of endowment at years' end.


Among the arguments that college leaders have marshaled against the idea of a required minimum payout -- on top of the general view that it isn't an area in which the federal government should meddle -- is that endowments exist to finance institutions for the long haul and that officials need to have the flexibility to have their own spending ebb and flow with good financial times and bad. The data reflect that trend; regardless of where institutions fell on the scale of endowment spending rates, their rates rose in the early part of this decade when the economic downturn hit higher education hardest.

The response from the Massachusetts Institute of Technology, for instance, showed MIT's rate at 5.1 and 5.4 percent in 2002 and 2003, respectively, well above its average for the 10-year period of 4.78. And the University of Chicago's rate, which was in the high 3 percent range in the boom days of the late 1990s, soared to the mid- and even high 5 percent range in 2002-3 and 2003-4. The University of Minnesota's rate fluctuated even more, from a low of 2.8 in 2007 to a high of 6.8 percent in 2002.

Although many of the colleges' responses go to great lengths to explain and justify why their spending rates sufficiently meet the needs of their current students, critics are likely to seize on the relatively low rates in these reports to keep the pressure on institutions to raise those rates. And universities are already responding: The University of Texas System announced last month that it was raising its targeted spending rate to 5 percent from 4.75 percent, and the University of Virginia's response to the Finance Committee was not alone in assuring the senators, as President John Casteen did in his cover letter, that "as part of an annual review, the university's Board of Visitors will consider the current endowment spending rate at its April 2008 meeting."

Other data in the universities' Finance Committee responses could also draw some scrutiny. Some of the people questioning whether institutions are spending enough from their endowments for financial aid have challenged higher education leaders' arguments that vast majorities of colleges' endowments are restricted for other purposes, tying the hands of institutional leaders who might wish to direct the money to more pressing purposes. And the institutional reports, which reveal how much of the endowments are limited and for what, show great range.

The Texas A&M University System reported that more than 90 percent of its endowment funds are restricted or limited by the donor. Rice University's response, on the other hand, says that 53 percent of its endowments have "permanent spending restrictions" imposed by the donor. But in response to a question about what the money is restricted for, Rice's report says that the largest pool of restricted funds is restricted for ... unrestricted purposes, or general university support. A Rice spokesman was unable to answer a reporter's question about how funds for unrestricted purposes could be counted in the pool of restricted funds.

The reports also provide data on how much universities spend on managing their endowments, and the numbers vary widely, from under half a percentage point of the endowment's value to well over a percentage point (1.37 percent in 2006-7, in Princeton's case). Similarly, the responses also include information -- or at least some of them do -- on how much the institutions paid in bonuses for their endowment managers. But some institutions, including Harvard and Vanderbilt Universities, withheld that data.

While the responses will undoubtedly give critics some ammunition, college officials express confidence that the general picture they paint will be one that suggests sound management by institutions and enormous complexity in the higher education financial system -- both of which might, they hope, dissuade lawmakers from intruding legislatively.


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