Forever Is a Long, Long Time

Colleges should rethink perpetual endowments that honor the donor but thwart good stewardship today, writes John Thelin.

November 3, 2015

“Endowments ’R’ Us!” Now that’s a fitting motto for American higher education.

College and university presidents like large endowments for both their real and symbolic benefits. A large endowment provides a flow of spendable resources each year and also gives a college or university a big boost in prestige and national rankings. And a high endowment per student adds luster to the symbolic shine -- and raises the institution’s Moody’s credit rating.

Little wonder then that college and university presidents avoid spending more than the endowment’s annual interest and dividends. And they bristle when a congressional subcommittee suggests new federal legislation that would require colleges and universities to increase their endowment spending or questions how much they are spending -- as occurred at a recent hearing on Capitol Hill last month.

Presidents have thus far warded off congressional threats by reminding the public that endowments guarantee colleges “will have a future” so “we can continue to enhance our value and service to our students, faculty, community and nation” or something along those lines. As the president of Pomona College, David Oxtoby, recently wrote, “Endowments are financial pillars, not piggy banks.”

Endowments certainly should not be used as piggy banks. But “financial pillar” is hardly an apt metaphor, either. First, it literally ties colleges to a “bricks and mortar” image when the priority should be education, not construction. Second, pillars, for all their imposing stature, are inflexible, inanimate and do not withstand earthquakes and erosion very well.

Endowments need to be reconceived as organic, comparable to the college’s garden. As such, they need continual care in weeding and seeding. More urgent than fending off federal regulation is for college presidents, trustees and development officers to reconsider the customs they have taken to heart in celebrating endowments as important to colleges and universities.

The foremost scripture worth revisiting is that perpetual endowments are sacred. Is that always a good thing? Even John D. Rockefeller Sr. -- no stranger to generous philanthropy for American higher education -- had some reservations. In opting to put term limits on one of his major gifts for educational projects, he noted, “After all, forever is a long, long time …”

Think of some of the headaches caused by perpetual gifts, which may honor the donor but thwart good stewardship today: scholarships restricted to children of Spanish-American War veterans might have been noble and useful in 1900, but they now tie up some student financial aid resources and help no one. If a financial aid director today does happen to have a prospective recipient, she should be careful to check the applicant’s birth certificate as well as the Free Application for Federal Student Aid.

The waste of petrified funds caused by colleges agreeing to unwieldy restrictions is not only from the distant past. A few years ago a university in the San Diego area reported that it had a substantial scholarship fund, which the donor restricted to "Jewish orphans interested in pursuing a graduate degree in aeronautical engineering." The donated money may accrue interest that increases the college endowment tally, but it is useless in assisting students because it is lifeless.

The problem is not confined to idiosyncratic scholarship funds. Many colleges and universities have institutes and centers originally supported by private gifts -- but for research projects on topics that have long cease to be pertinent, now artificially shored up by a perpetual fund. These take up space, facilities and may even be cross-subsidized from revenues elsewhere in the institution.

So, a first consideration for the 21st century is that colleges need to review thoroughly the terms of all their assorted gifts, which coagulate to create the complex mutual fund we refer to as the endowment. If the terms of a particular gift are obsolete or unreasonable, colleges can bundle the dysfunctional scholarship funds and request the courts to invoke the doctrine of cy pres -- translated as “so near.” This then allows a college to propose reasonable new terms to guide spending from these albatross gifts. But that requires the college to take initiative and give sustained attention, as the crucial concern of the courts is that an institution has truly shown good faith in tracking down donors or their heirs to get their permission and collaboration.

One might argue that such a review of all gifts is a housekeeping chore that distracts from the main issues about purposes and funds of a college. Perhaps, but the case-by-case exercise does prompt colleges and universities to address ultimately a serious concern: namely, that restrictions donors place on gifts -- and to which colleges have knowingly agreed -- may not always represent responsible educational priorities.

Yes, of course, a potential donor has the right to demand conditions. And colleges have equal right to persuade the donor to change the terms. And, if that falls through, a college can refuse gifts whose terms remain unreasonable or inappropriate. Even though a major gift may be tempting to take, college officials must be vigilant to make certain its charter of educational service is not compromised.

The principle of scrutiny and restraint could be extended to additional situations where donors are detailed and demanding. For example, at one time, college officials discovered -- often, too late -- that major gifts for monuments and buildings left the college stuck with maintenance and heating expenses long after a bell tower or library had been named in honor of a donor. Presidents had to make sure that henceforth prospective building donors be required to include a fund for repairs and maintenance. Here was an example where incorporating a restriction was the right thing to do. Such innovations in fund-raising require that the burden shifts to the modern college president as the one who educates and persuades donors on wise projects and their time limits.

In asking college presidents to rethink the propriety of perpetual gifts, no one is suggesting that colleges “spend out” or exhaust their endowment. Rather, the invitation is to consider working with donors so that each gift has an appropriate life span to accomplish a worthy and timely educational goal. This might result in a perpetual endowment -- but perhaps not.

The point is to move away from the presumption of a perpetual gift and the presidential path of least resistance in accepting unwieldy gifts. A project might be accomplished in 50 years, another project in 10 years. So, instead of federal regulation, how about a voluntary, good faith commitment by presidents to work at educating donors to define gifts to finite periods that are educationally and fiscally sound?

The conventional wisdom is that a large endowment assures a financially healthy future. By this logic, it provides a college protection if “tomorrow is a rainy day.” This justification is not wholly convincing. If a college has a firm policy that prohibits spending the principle, the endowment is limited in how it can provide added relief in a problematic time, whether it is in 2016 or 3016. It’s feasible for a college to close down financially even if it has a substantial endowment that is either untouched or untouchable.

Some presidents note that colleges spend more from their endowments in “bad times” and then less in financially “good times.” But I’m not certain that is universally accurate. Following the 2008 stock market decline, many institutions with relatively high endowments still cut staff and faculty positions and reduced spending on educational programs.

Most overlooked is that the primary threat to reducing a college’s endowment has not been the spendthrift who draws out more than the accrued interests and dividends. Rather, it is bad investing. Somehow college presidents and boards who are averse to spending, say, 15 percent of the endowment on timely educational programs in a year still readily accept as an unavoidable fact of life that an endowment can lose 25 percent in a year due to stock market losses. What is missing from that explanation is that some colleges became susceptible to severe losses when, over the past two decades, they opted for high-risk investment strategies.

It’s hard to see established, affluent colleges and universities as beleaguered institutions. They are beneficiaries of many privileges and exemptions -- and enjoy a favorable status even within the ranks of all charitable nonprofit organizations. For example, colleges already get a substantial break from the requirement whereby foundations must spend 5 percent of their endowment each year. Colleges, in contrast, have to spend annually only 4 percent of their endowment to comply with the IRS.

Weeding the college endowment garden may reveal that many restricted gifts do not serve genuine educational activities in the historic spirit of an eleemosynary institution. Presidents and boards need to keep in mind that a college or university is a charity. It can receive money and also is required to spend money on appropriate charitable, educational goals. With large endowments, spending wisely does not always mean spending less.


John Thelin is a professor at the University of Kentucky and the co-author, with Richard Trollinger, of Philanthropy and American Higher Education (Palgrave MacMillan).


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