Financial Endowment

COLLEGE AND UNIVERSITY ENDOWMENTS

The total endowment can be over a billion dollars at many of the United States' richest universities. However, each university typically has numerous endowments, each of which are frequently restricted to funding very specific areas of the university. The most common examples are endowed professorships (also known as chairs), and endowed Scholarships or fellowships.

At universities, typically 5% of the endowment's assets are spent every year, with any excess earnings reinvested to augment the endowment and to compensate for inflation and recessions in future years.

Restricted Endowments

Endowment revenue can be restricted by donors in numerous ways. Professorships and endowed scholarship/fellowships are the most common restriction on large donations to an endowment.

Professorship

An endowed and other institutional evaluations, or direct money that would otherwise have been spent on salaries toward other university needs. In addition, holding such a professorship is considered to be an honor in the academic world, and the university can use them to reward its best faculty or to recruit top professors from other institutions. Currently, a donation of $1-3 million is required at most universities to endow a professorship.

Endowed Scholarship/Fellowship

An endowed Scholarship is tuition (and possibly other cost) assistance that is permanently paid for with the revenue of an endowment fund specifically set up for that purpose. It can be either merit-based or need-based (which is only awarded to those where the college expense would cause their family financial hardship) depending on university policy or donor preferences. Some universities will facilitate donors meeting the students they are helping. Given the cost of college, finance is frequently a factor when students decide where to go to college. By offering them money, colleges are sometimes able to lure students away from other universities. The amount that must be donated to start an endowed scholarship can vary greatly.

Fellowships are similar, although they are mostly commonly associated with graduate students. In addition to helping with tuition, they may also include a stipend. Fellowships with a healthy stipend can lure students away from the workforce, to work on a Doctorate . Frequently, teaching or working on research is mandatory part of a fellowship.

Criticisms

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. At some universities, if this growth rate was turned into current spending, tuition could be cut in half.

Two arguments against inflation adjusted endowment growth are:

#The future needs the money less than the present – Trends strongly suggest that the future will be much richer materially than the present due to technological innovation and specialization.
#A constantly growing endowment shields universities from competitive forces – As the endowment’s reinvestment starts becoming a larger part of its growth, the need for happy students and alumni to donate funds to the university’s budget and endowment are reduced. Therefore, traditional market forces that provide incentives to run a university efficiently may be greatly reduced and at least theoretically lead to university administration not being held accountable for its actions. (Theoretically, this might also be considered a worthy goal, as it would mean the ultimate freedom of the Academia from the material world.)

SEE ALSO

List Of US Colleges And Universities By Endowment

REFERENCES

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Financial Endowment

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