Endowment: Colleges & universities

Large part of this chapter is contributed by Ms. Ashley Carlyle

COLLEGE & UNIVERSITY ENDOWMENTS

College and university endowments are funds that produce income for the institutions. When a gift of money, income producing property, or other asset is donated to the fund, the endowed asset typically remains intact and only the income earned on the asset is spent. Endowment funds are generally restricted and can only be used for specific purposes, such as to provide professorships, scholarships, and fellowships, and to maintain libraries, etc.

Endowments in excess of $1 billion dollars have come under scrutiny in recent years. The following criticism on mega endowments can be found on Wikipedia, the free encyclopedia, website: Officials in charge of the endowments of some universities have been criticized for "hoarding" and reinvesting too much of the endowment’s income.

Given a historical endowment performance of 10–11%, and a payout rate of 5%, around half of the endowment’s income is reinvested. Roughly 3% of the reinvestment is used to keep pace with inflation, leaving an inflation-adjusted 2% annual growth of the endowment. [To read about two arguments against inflation adjusted endowment growth, go to the Web site below.]

Source: http://en.wikipedia.org/wiki/College_and_university_endowments_in_the_United_States

Suggested Readings:

http://www.cnn.com/2008/US/05/14/beck.collegeendowment/index.html CNN.com/US.

Commentary: Tax-free hypocrisy from higher education. By Glen Beck.

http://www.insidehighered.com/views/2008/06/19/fryshman insidehighered.com

June 19. Today, Harvard. Tomorrow…? By Bernard Fryshman.

In his January 24, 2008, Boston Globe article, Harvard’s endowment surpasses $34 billion, s

taff writer Peter Schworm reported the following:

As endowments soar, the wealthiest colleges and universities are facing growing pressure from

Congress to spend more of their savings [at least 5 percent] to limit tuition increases and expand financial aid grants. Colleges have spent proportionately less of their endowment for each of the past four years

and now spend 4.6 percent on average. Institutions with more than $1 billion spent 4.4 percent.

Source: http://www.boston.com/news/local/articles/2008/01/24/harvards_endowment_surpasses_

34_billion/ Boston.com Harvard’s endowment surpasses $34 billion. Peter Schworm. Globe Staff/January 24, 2008. The Boston Globe.

"...Students from families that earn less than $60,000 per year don't have to pay any costs to

attend, and those from families that earn between $60,000 and $180,000 per year will pay no more than 10 percent of their annual income. For most Harvard students (about 60 percent), these policies add up to a big discount off the elite university's $52,000-per-year sticker price."

Schworm further reported that "In December [2007], Harvard announced it would spend $120 million on financial aid next year [2008], a $22 million increase."

Since then, a number of elite universities have increased their financial aid to exceptionally smart students from less affluent backgrounds. Besides being one of the top ranked colleges in the nation, Harvard is the best-funded one.

Beside, according to Andrew Farrell’s article, The Billionaire Universities, as provided by Forbes on the Yahoo! Finance Web site (Friday, May 30, 2008), the main reason perspective students hope to receive an acceptance letter is because "Harvard students are more likely to become billionaires than graduates of any other college…Of the 469 Americans on Forbes most recent list of the world’s billionaires, 50 received at least one degree from Harvard…"

Source: Yahoo! Finance. The Billionaire Universities. By Andrew Farrell. Friday,

May 30, 2008. Provided by Forbes.com.

http://finance.yahoo.com/college-education/article/105175/%60

Harvard’s endowment is a good example of how "the rich get richer" through the power of compounding. Donations from generous alumni and other sources have allowed the university to create a huge investment

portfolio worth billions of dollars. Most likely, Harvard’s recent decision to offer considerable financial assistance to deserving less affluent students will reap rewards by creating a new wave of loyal alumni.

Suggested Reading: The Motley Fool. Wisdom From the World’s Second-Best Investor.

By John Reeves. November 26, 2007

http://www.fool.com/investing/mutual-funds/2007/11/26/wisdom-from-the-worlds-second-best investor.aspx

There are more stories like this.

.

Table 58

Table 58 shows the market value of the top 50 college and university endowment assets for Fiscal Year 2007, including the percent change in endowment funds between 2006 and 2007. 2007 NACUBO Endowment Study© 2008 National Association of College and University Business Officers. All Institutions Listed by Fiscal Year 2007 Market Value of Endowment Assets with Percent Change Between 2006 and 2007 Endowment Assets.

NOTE: This percentage does NOT represent the rate of return for the institution’s investments.

Rather, the percent change in the market value of an endowment from fiscal year end 2006 to fiscal year end 2007 reflects the net impact of:

1) withdrawals to fund institutional operating and capital expenses;

2) the payment of endowment management and investment fees;

3) additions from donor gifts; and 4) investment gains or losses.

Rank

Institution

State

2007 Endowment Funds ($000)

[Billions of $]

2006 Endowment Funds ($000)

[Billions of $]

*Percent Change in Endowment (2006 - 2007)

1

Harvard University

MA

34,634,906

28,915,706

19.8%

2

Yale University

CT

22,530,200

18,030,600

25.0%

3

Stanford University

CA

17,164,836

14,084,676

21.9%

4

Princeton University

NJ

15,787,200

13,044,900

21.0%

5

University of Texas System

TX

15,613,672

13,234,848

18.0%

6

Massachusetts Institute of Technology

MA

9,980,410

8,368,066

19.3%

7

Columbia University

NY

7,149,803

5,937,814

20.4%

8

University of Michigan

MI

7,089,830

5,652,262

25.4%

9

University of Pennsylvania

PA

6,635,187

5,313,268

24.9%

10

The Texas A&M University System and Foundations

TX

6,590,300

5,642,978

16.8%

11

Northwestern University

IL

6,503,292

5,140,668

26.5%

12

University of California

CA

6,439,436

5,541,930

16.2%

13

University of Chicago

IL

6,204,189

4,867,003

27.5%

14

University of Notre Dame

IN

5,976,973

4,436,624

34.7%

15

Duke University

NC

5,910,280

4,497,718

31.4%

16

Washington University

MO

5,567,843

4,684,737

18.9%

17

Emory University

GA

5,561,743

4,870,019

14.2%

18

Cornell University

NY

5,424,733

4,321,199

25.5%

19

Rice University

TX

4,669,544

3,986,664

17.1%

20

University of Virginia

VA

4,370,209

3,618,172

20.8%

21

Dartmouth College

NH

3,760,234

3,092,094

21.6%

22

University of Southern California

CA

3,715,272

3,065,935

21.2%

23

Vanderbilt University

TN

3,487,500

2,946,392

18.4%

24

University of Minnesota

MN

2,804,466

2,224,308

26.1%

25

Johns Hopkins University

MD

2,800,377

2,350,749

19.1%

26

Brown University

RI

2,780,798

2,290,646

21.4%

27

Ohio State University and Foundation

OH

2,338,103

1,996,839

17.1%

28

University of Pittsburgh

PA

2,254,379

1,802,859

25.0%

29

University of Washington

WA

2,184,374

1,794,370

21.7%

30

University of North Carolina at Chapel Hill and Foundations

NC

2,164,444

1,638,601

32.1%

31

New York University

NY

2,161,800

1,774,700

21.8%

32

The Rockefeller University

NY

2,145,203

1,771,954

21.1%

33

Williams College

MA

1,892,055

1,462,131

29.4%

34

California Institute of Technology

CA

1,860,052

1,580,922

17.7%

35

Case Western Reserve University

OH

1,841,234

1,598,566

15.2%

36

Purdue University

IN

1,786,592

1,493,554

19.6%

37

University of Toronto

ON

1,763,764

1,414,513

24.7%

38

Pomona College

CA

1,760,902

1,457,213

20.8%

39

University of Rochester

NY

1,726,318

1,491,275

15.8%

40

Grinnell College

IA

1,718,313

1,471,804

16.7%

41

Boston College

MA

1,670,092

1,447,887

15.3%

42

Amherst College

MA

1,662,377

1,337,158

24.3%

43

Wellesley College

MA

1,656,565

1,412,410

17.3%

44

University of Richmond

VA

1,654,988

1,380,439

19.9%

45

University of Wisconsin Foundation

WI

1,645,250

1,425,750

15.4%

46

Pennsylvania State University

PA

1,590,000

1,326,390

19.9%

47

Indiana University and Foundation

IN

1,556,853

1,276,160

22.0%

48

University of Illinois

IL

1,515,387

1,252,290

21.0%

49

Tufts University

MA

1,452,058

1,148,868

26.4%

50

Swarthmore College

PA

1,441,232

1,245,281

15.7%

Source: http://www.nacubo.org/x2376.xml 2007 NACUBO Endowment Study Results, Table: All Institutions Listed by FY 2007 Market Value of Endowment Assets With Percent Change Between 2006 and 2007 Endowment Assets.

HOWEVER 2008 AND 2009 COLLEGE ENDOWMENT FUNDS HAD DIFFERENT RATE OF RETURNS. ALL FUNDS SUSTAINED HUGE LOSSES (40%+/-) TILL MARCH 2009 AND AFTER MARCH,2009 ALL FUNDS REGAINED CONSIDERABLY.

Table 60

Table 60 shows only Line 1 from Table 58 above to emphasize Harvard’s staggering endowment stockpile and its nearly 20% increase in one year.

Rank

Institution

State

2007

Endowment Funds

2006

Endowment Funds

Percent Change in Endowment (2006 - 2007)

1

Harvard University

MA

34,634,906,000

28,915,706,000

19.8%

Harvard’s endowment is a classic example of how the power of compounding may create untold wealth. In his article, Commentary: Tax-free hypocrisy from higher education, Glen Beck (host on CNN Headline News nightly at 7 and 9 ET and host of a conservative national radio talk show) writes that "…if you project Harvard's endowment out using their historical rate of return they would have over half a TRILLION dollars in 20 years."

Source: http://www.cnn.com/2008/US/05/14/beck.collegeendowment/index.html CNN.com/US.

Commentary: Tax-free hypocrisy from higher education. By Glen Beck.

According to Jessica Shedd, director of research and policy analysis for the NACUBO (as reported

in The Boston Globe article, Harvard’s endowment surpasses $34 billion, by Peter Schworm), "It was a very good year for endowments." Some of Shedd’s comments on the results of the NACUBO annual report is as follows:

Among colleges with endowments greater than $1 billion, the median one-year return was 21 percent.

Nationally, the median return was 17.2 percent, the highest since 1998…Over the past decade, college endowments showed an 8.6 percent rate of return, an important threshold in maintaining financial stability…[Shedd] credited a strong stock market for fueling the endowment increases, pointing out that the

S&P 500 index rose by more than 20 percent over the past fiscal year, which ended in June.

Source:

http://www.boston.com/news/local/articles/2008/01/24/harvards_endowment_surpasses_34_billion/ Boston.com

Harvard’s endowment surpasses $34 billion. Peter Schworm. Globe Staff/January 24, 2008. The Boston Globe.

Table 59

Table 59 shows that, by applying the Rule of 72, the value of Harvard’s endowment will top $1 trillion dollars in 86.4 years at 5 percent interest, compounded annually (Rule of 72: Divide 5 into 72 = 14.4). Realistically, the fund should top $1 trillion in less time because the Rule of 72 does not take into account any reinvested funds and the likelihood of future endowed assets and the resulting income and interest earned on those assets.

$ Value of Endowment

Beginning at the end of 2007

Number of Years Required to

Double the Value

34,634,906,000

14.4

69,269,812,000

28.8

138,539,624,000

43.2

277,079,248,000

57.6

554,158,496,000

72

1,108,316,992,000

86.4

The Best Colleges in the Country, 2010 Edition

Thursday, August 20, 2009 provided by U.S. News & World Report

Harvard and Princeton lead the national universities in U.S. News’ 2010 college rankings.

Introduction by Kenneth Terrell

http://finance.yahoo.com/college-education/article/107540/best-colleges-2010.html;_ylt=AiUh80OMRJ89BeGwc5LJ..e7YWsA;_ylu=X3oDMTFhY3AxYzk4BHBvcwMzBHNlYwNwZXJzb25hbEZpbmFuY2UEc2xrA3RoZWJlc3Rjb2xsZQ--?mod=edu-collegeprep

"....In recent years, Harvard University's sterling academic reputation appears to have been bolstered by the Cambridge, Mass., school's decision in December 2007 to increase significantly the financial aid awards it grants. Students from families that earn less than $60,000 per year don't have to pay any costs to attend, and those from families that earn between $60,000 and $180,000 per year will pay no more than 10 percent of their annual income. For most Harvard students (about 60 percent), these policies add up to a big discount off the elite university's $52,000-per-year sticker price."