Financial endowment
A financial endowment consists of funds or property donated to an institution or individual, with the stipulation that it be invested, and the principal remain intact. This allows for the donation to have a much greater impact than if it was spent all at once.
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College and University Endowments
The total endowment can be over a billion dollars at many of the United States' richest universities.[1] 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, and any excess earnings are reinvested to compensate for inflation and recessions in future years and to grow the endowment.[2]
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
A professorship is position permanently paid for with the revenue from an endowment fund specifically set up for that purpose. Typically, the position is designated to be in a certain department. The donor is allowed to name position, which typically takes the format of: First-name Last-name professorship of Astrology. Professorships aid the university by providing a faculty member that does not have to be paid for out of the operating budget, allowing the university to either reduce its faculty to student ratio or direct money that would otherwise have been spent on salaries toward other university needs. In addition, holding a professorship is considered to be an honor in the academic world, and the university can reward its best faculty with it.[3] 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 endowment have been criticized for "hoarding" and reinvesting too much of the endowment’s income. Given a historical endowment performance of 10-11 percent, and a payout rate of 5 percent, around half of the endowment’s income is reinvested. Roughly 3 percent of the reinvestment is used to keep pace with inflation, leaving an inflation-adjusted 2 percent 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:[4]
- 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. Sacrificing the present for the future could be considered comparable to the poor donating money to the rich.
- 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 disappear and the administration can not be held accountable for its actions.
References
[1]National Association of Colleges and University Business Professionals' Endowment Study - Contains list of colleges ranked by endowment size, and information about endowment performance.
[2]So Nicely Endowed! Newsweek: Kaplan College Guide
[3]Cornell's "Celebrating Faculty" Website
[4]University endowment returns are underspent - Challenge, July-August, 2002, by Donald Frey
See also
University Endowments - A US/UK Comparison - Sutton Trust
A Primer for Endowment Grantmakers - Ford Foundation, 2001