Huge Endowments: what are they for?

Parents Forum
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<p>CNBC made a point this morning about Harvard's endowment and the new person managing it. Apparently they are going to report something today. If remember correctly they mentioned it should top 30B despite some investment setbacks.</p>

<p>Interest rates are rather unpredictable nowadays but I am sure they can manage a 5% return; that would be 1.5B/year.</p>

<p>Harvard has 20,000 students or so including undergrads, grads and even the extension. The return for the endowment on a per student basis would then be $75K which means they could let everybody in for free (including Room and Board), still have $25K/student/year for "incidentals" and leave the 30B endowment to grow "only" with new contributions.</p>

<p>At what point do (did?) these large endowments stop making any sense?</p>

<p>I would be interested to hear from people that know how endowments work and why it is important to see them grow to these levels.</p>

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<p>I don't know if it is necessary to grow to these levels, but Harvard plans on a huge extension across the river to Allston. It is expanding its engineering program (reportedly seeking to hire up to 60 faculty) and its life science programs. Besides new faculty, new profs and every expensive state of the arts labs will be required. I believe all the existing schools have had part of their respective endowments set aside to generate income for this expansion over the next 40 years (?) so they do not have the income from these endowments to spend. I don't know what effect this has on individual schools which operate on the principle of </p>

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<p>Having worked for Harvard, I can say that the University's endowment is pooled from all of the tubs (that's what they call the various Schools, departments, etc.). So, the income generated by the endowment cannot be allocated to just the academic units; a percentage of the endowment is allocated for administrative units such as the art museums as well. And marite is right in that, at Harvard, every tub is on its own bottom, so some areas may be well endowed versus others that are not.</p>

<p>Having an endowment that generates sufficient income to cover a large portion of a unit's annual cost helps if that unit doesn't have the capacity to raise a great deal of money through annual giving. It also gives units the flexibility to apply the annual payout to areas that weren't covered through fundraising, e.g., deferred maintenance.</p>

<p>Folks sometimes liken endowments to savings accounts whereas annual giving or current use funds are akin to checking accounts. Having an endowment is a cushion should an institution need money for a special reason (sort of like the proverbial rainy day). Successful investment of one's endowment and subsequent designation of the income demonstrate an institution's fiscal responsibility. That helps to attract prospective donors who, like investors of any kind, prefer to go with a going concern.</p>

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<p><a href="http://www.haa.harvard.edu/hcf/html/hcf_fas_endowment.htm%5B/url%5D"&gt;http://www.haa.harvard.edu/hcf/html/hcf_fas_endowment.htm&lt;/a&gt;&lt;/p>

<p>23% return....Dow up 20% for fiscal year period.</p>

<p>50 million loss and still finished UP 0.4%</p>

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<p>Hazmat:</p>

<p>Does this include the recently reported $350 million loss from the hedge fund that went belly up?</p>

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<p><a href="http://www.thecrimson.com/article.aspx?ref=519438%5B/url%5D"&gt;http://www.thecrimson.com/article.aspx?ref=519438&lt;/a&gt;&lt;/p>

<p>My thinking from memory is the end of their fiscal year is before July....making the answer NO???</p>

<p>Loss reported in WSJ 01 AUG[1.2% of fund]. So the 2007 fiscal year NOT the numbers reported today.</p>

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<p>here are 3 important things to keep in mind when trying to understand endowments:</p>

<p>1) the cost of educating a single student at ANY college is significantly higher than the school's sticker price. when one considers faculty and staff salaries, housekeeping and grounds work, waste disposal, water and utility costs (which continue to rise quickly), research, updating old equipment and classrooms, periodical subscriptions and adding to libraries, buying new equipment for labs, new furniture for dorms, i could go on...and divides all these costs (the operating budget) by the number of students attending a particular school, one sees that even students not receiving financial aid are getting a substantial "discount"...everyone's education is subsidized. at many private schools, the actual operating cost/student can be double (or even more) than the sticker price - especially at research institutions. </p>

<p>2) endowments are investments and often times investments made with specific reasons/uses in mind...colleges' operating budgets are a combination of tuition revenue and the interest earned from its investments (endowment), in addition to unrestricted donations (meaning monies donated that could go towards paying for anything in the budget) and other revenues streams (grants from non-profits or government agencies, for example). the more diverse the revenue streams, the less a school has to rely on tuition. many parts of the endowments of schools, however, are restricted, meaning they can only be used for certain things, like endowing a chair in the english department or creating a new scholarship fund or building a new science center. thus, schools can't just use the interest from their endowments in an unrestricted way - they have to pay attention to what the money was invested for before spending the interest income. </p>

<p>3) just because a school has a lot in their endowment this does not mean they are cash rich. look at brown university, for example. they have over $2 billion in their endowment...yet half of their operating budget comes from tuition revenues. it costs A LOT of money to run a school!!! most schools like to draw around 4%-4.5% from the endowment to fund their operating budgets (this is a safe amount)...this doesn't amount to a lot unless the intial endowment is huge. example: brown got a $100 million dollar gift from an alum to help endow more funds for financial aid...based on the stock market, brown's administration believed that that $100 million would return about $4 million a year to add to the financial aid budget...as more and more interest accrues and compounds year after year, that initial $100 million will grow and gain more interest, allowing the school to get more than $4 million/year in the future to increase its financial aid budget. but without the initial $100 million gift to the endowment, that $4 million extra wouldn't exist. (btw, i'm not picking on brown...i just had to use their info on a project i am doing and it came in handy...their budget info is available online through their budget office if you'l like a citation ;))</p>

<p>the endowment isn't just a savings account colleges and universities can spend from - they are investments that accrue interest and help fund the operating budget. at universities, different schools (the college, the med school, the law school, etc...,) have their own endowments, making the situation even more complicated. as marite and littlemother point out, harvard is a particularly good example of this (although there has been a lot of talk about making some changes to this there!).</p>

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<p>You forget to realize that often much of the cost of education a student is already covered by the school's money. So a good portion of the $75k/student might already be spent. Also, a college has more expenses than just students.</p>

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<p>Thanks for the quick responses and explanations. The reported endowment is actually $34.9B. As hazmat indicated a 23% return.</p>

<p>I can understand the restrictions on the way money can be spent, the rainy day fund paralell and the need to further invest in new and existing programs. That is fine but I still see a mismatch between these large sums of money and the consistent above-inflation increases in tuition and other expenses. If indeed these huge endowments are paying for so many expenses what else are the colleges and universities spending on, or equivalently, how much would we have to pay for a college education if the endowments were not there?.</p>

<p>I don't have any background in financing but over time I have learned that when things stop making sense (like the prices people were paying for houses in my neighborhood until a few months ago, or the value of my 401K plan during the dot.com years) there is a correction coming.</p>

<p>I don't when or how it will happen but the financial picture of higher education does not make sense to me right now.</p>

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<p>
[quote]
** how much would we have to pay for a college education if the endowments were not there?.

[/quote]
**</p>

<p>Wealthy schools do offset the actual costs.....pass on less as tuition. Give generous financial aid. Practice no loans for low income students. Basically the discussion would have to include PELL and other such grants plus the subsidized gov't loans. You up the awards and some argue that tuition will swell to soak it up. There is much discussion about this.</p>

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<p>artiesdad:</p>

<p>The endowment income isn't used just to cover current expenses that are more or less fixed and unchanging. Every time a new technology is introduced, a new branch of learning created, it leads to new expenses. Take computers. When I was in college, there was one pay phone per dorm floor, serving about 40 students. A couple of decades ago, each room had its own phone--which meant phone outlets in every room. Then came computers, which meant computer jacks in every room. Then came wireless. There are computers everywhere, in libraries, classroom buildings, etc... As computers were introduced, secretaries disappeared; but they've been replaced by an army of technicians for both profs and students. Then powerpoint and videos became commonly used in classrooms, so screens, and a whole bank of equipment had to be installed in classrooms. Health services have exploded; the cost of health insurance has also exploded. Profs are graying, but the federal mandatory retirement age has been lifted, so there isn't much incentive for them to retire. This means higher salaries and benefits, as well as the cost of pensions for those who have retired (same issue with GM compared with Toyota).
And this is before we consider fields of study that did not exist a few decades ago, in particular in the life sciences, which, as I said earlier, require large investments in labs.</p>

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<p>It's still a fair question. After the Gates Foundation -- which is explicitly designed to spend itself down in a generation or so -- Harvard's endowment is tha largest charitable fund on Earth. I haven't seen this year's actual report, but I spent a while with last year's. Here's some basic, big numbers:</p>

<p>Total operating budget: $3 billion
Student revenues net of scholarships: $600 million
Sponsored research: $600 million
Endowment contribution to operations: $1 billion (3.7%)
Gifts for current use: $200 million
Ancillary income (rent, sales): $450 million</p>

<p>Endowment income: $4 billion (15%)
Gifts to endowment: $250 million
Endowment, 6/30/2006: $30 billion
Net interest in trusts: $600 million (not included in endowment)
Total fixed assets, at cost (depreciated): $6 billion ($4 billion)
(based on how the university does its accounting, that $6 billion represents more than everything spent or donated during the past 20 years on buildings, equipment, land, etc.)</p>

<p>Yale's endowment was about $19 billion, Princeton's $14 billion (for a much smaller university in every respect). Both of them run fine universities; Yale includes a substantial hospital in the mix. The total combined endowment of all of the colleges at Oxford was about $1 billion.</p>

<p>It's awfully hard not to have some suspicion that the size of Harvard's endowment is somewhat disproportional to the size and scope of the institution itself. Net of all transfers to cover expenses, it has been growing by well over 10% a year for quite a while. With all the buildings, all the repairs, all the maintenance, all the faculty salaries, all the legal fees . . . the endowment is growing much, much faster than the institution it supports. How long will it be until that enormous tail starts wagging the Harvard dog?</p>

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<p>martie and others,</p>

<p>Thanks for further expanding on this topic. It is clear that money from the endowment is in part responsible for the reputation of these schools (although this may be a chicken and egg situation since the reputation is what allows them to raise this kind of money).</p>

<p>JHS: I agree with you about being suspicious and that is what prompted me to post in the first place. I tuned it CNBC again at lunchtime and they indicated some other schools that are trying to emulate Harvard's approach to managing their endowment may be taking on more risk than they should.</p>

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<p>I will also note that no one knows what huge endowments like this are for, because there have never been huge private endowments like this in the history of the world, until the last few years, except perhaps for the Catholic church. In 1970, the Ford Foundation was the largest American nonprofit by a wide margin, with assets of about $4 billion (the equivalent of $15 billion in 2006 dollars, more than its actual current value of about $12 billion). It was spending 8-10% per year then, much more than its real, inflation-adjusted investment return (which is why is not worth as much today as it was then), and it has continuously paid out at least 6% per year. It has grown modestly at an average rate of a little more than 5% per year, or about half the growth rate Harvard has been enjoying.</p>

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<p>JHS:</p>

<p>Although the thread is primarily about Harvard, I was trying to explain to artiesdad that universities' endowments are not used to cover only the direct costs involved in educating x numbers of students. </p>

<p>I agree that Harvard's endowment is huge. Its ambitions for expansion are also huge. As I wrote earlier, Allston will consume much of the endowment and in fact already affects what can be done by various schools, </p>

<p>Some of the $30-34 billion endowment is not available to the Faculty of Arts and Sciences whose task it is to educate students in the College and the Graduate School of Arts and Sciences, for a total of about 9,000 students. I read somewhere that FAS endowment was about $12 billion. FAS is reportedly facing a deficit of $80millions.</p>

<p>While the College is well endowed thanks to the generosity of alums, the Graduate School of Arts and Sciences (with around 3,000 students) is not so endowed. So the financial aid packages offered to graduate students come straight out of the FAS operating budget. By contrast, the graduate program at Princeton is fully endowed. </p>

<p>Larry Summers tried to bring more funds under the control of the university but had only limited success. A friend of mine reports that the amenities available to the B school are unbelievable. That must be a contrast to perennially cash-strapped Div School and Ed School.</p>

<p>But you are also right that donors' wishes can distort priorities. At the time $5million were donated to restore the Mem Hall spire, the library was falling short of its fund-raising goal, as was the Graduate School of Arts and Sciences. I'm sure someone tried to talk the donor into contributing to something else, but was not successful.</p>

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<p>artiesdad:</p>

<p>Well, Harvard did lose $350 million in the hedge fund started by one of its former managers. That equals the endowment of many a good college! I think that kind of risk should be taken only if you can afford a total loss.</p>

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<p>Harvard Yale and Princeton enjoy disproportionately lg endowments relative to everyone else. For a VERY interesting article about the huge jump Yale's endowment. An article entitled "Yale's eight billion dollar man"</p>

<p><a href="http://www.yalealumnimagazine.com/issues/2005_07/swensen.html%5B/url%5D"&gt;http://www.yalealumnimagazine.com/issues/2005_07/swensen.html&lt;/a&gt;&lt;/p>

<p>Basically in the 22 years since Swensen has headed the investments, it's returned 16% avg per year. This represents $7.8billion above what other endowments averaged in the same time period.</p>

<p>Believe it or not, he was my instructor for "Financial Markets" my senior year at Yale.</p>

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<p>marite, I appreciate the ambition of the Allston project, but Harvard could probably move itself to Manhattan and have Yale's endowment left over. (Seriously -- Stuyvesant Town -- a huge area in central Manhattan -- sold for $6 billion or so last year.) I also, of course, appreciate the complexity (and unmanageability) of Harvard's organization, and the fact that endowment funds are not available for everything and anything. But I refuse to shed big tears, either, at the thought of poor, deficit-running FAS which merely has about the same endowment as Princeton's FAS and four times Brown's. And none of this even includes the value of Harvard's parking lots, etc., which is just enormous, or its $600 million share of charitable remainder trusts, not included in endowment.</p>

<p>Lord knows, I am a big, big fan of Harvard. But every time I look at its endowment numbers, I think it may be testing the concept of "having more money that you know what to do with". With only slightly greater assets, Bill Gates is making a serious attempt to end infectious disease for all of humanity, and to recast American education. Not forgetting Harvard's important contributions to both projects, building some more buildings in Boston does not measure up.</p>

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<p>JHS:</p>

<p>I don't disagree with you. I'm not shedding tears, either. And you are right that donors priorities have a distorting effect. During the last fund-raising campaign, all coaches were endowed first. The library and the Graduate School of Arts and Sciences fell well short of their goals. Harvard's been losing graduate students to other schools that are offering better financial aid packages. Princeton is at the top of that list but there are others.</p>

<p>You are not the only skeptic about Allston. A lot of profs (is it surprising that they are mostly in the social sciences and humanities?) are equally skeptical of the need for expansion into Allston. But the powers-that-be have decided that the future lies in bio-sciences and engineering. It's almost as if Harvard was building a brand new university rather than keeping an existing one going.</p>

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<p>Along with private education loans, this is an under-considered topic. I guess this is a bump.</p>