Yesterday I spoke to an “Ivy Plus” meeting of university fund raisers from Princeton, Harvard, Yale, Columbia, MIT, Cornell, Brown, Penn and Stanford. They had asked me to address a breakout session of the group (about 75 turned up at my session) on “Philanthropic Decisions in Today’s Economy.” I entitled my talk “More Is Less: Megaphilanthropy and the Elite University.” (Alas, for the unwise among you who would like to read the talk, it was delivered from notes, as is my wont.)
As it turned out, the topic was exceptionally timely, since yesterday in Washington, D.C. Senator Grassley and Rep. Peter Welch held another in their series of hearings on the role of university endowments in lowering the cost of college education. They had written last spring to 136 institutions (those with endowments of half a billion dollars or more) to ask for data (and explanations) on how much of annual return on endowment the colleges spend each year, and what impact those expenditures have on lowering the cost of college for students and their parents. They have been putting pressure on educational institutions by suggesting that Congress might want to impose a payout requirement on university endowments. That would mean that higher-education endowments would be treated in law in the same manner as those endowments that provide grant-making capital for private philanthropic foundations (like the Ford, Rockefeller and Carnegie Foundations) — a requirement, at present, that they expend at least 5 percent of return annually (or pay an excise tax on the amount they have failed to pay out).
The rationale for the payout rule is to make sure that philanthropic foundations are distributing some significant proportion of their assets. Five percent has been thought the level at which foundations could both preserve their capital worth (for they are perpetuities and will need money down the road), and yet serve the public by making grants. This is not an irrational notion. The foundations have learned to live with the 5-percent rule pretty comfortably. But as President Shirley Tilghman of Princeton pointed out in yesterday’s Washington hearing, although both (some) universities and (most) foundations are supported by endowment income, foundations use investment revenue to make grants. In years when their income declines, they have the option of reducing the amount of grants they make. But “colleges and universities do not have the same flexibility to respond to market volatility because we need to make long-term commitments in hiring faculty, creating programs, and constructing facilities.” This is an apt and correct response, I think. Most universities have a target percentage for annual endowment expenditures, and in fact 5 percent is very often that target figure. But they also average their income over several years to buffer their annual revenue from short-term fluctuations, and sometimes make additional allocations from investment revenue when their returns are exceptionally large. I think the universities have used good judgment in making these calculations.
Congressional interest is no doubt evoked by the coincidence of the extraordinary size of the largest university endowments, and the continual rise in the cost of college tuition, room and board. President Tilghman and others from wealthy institutions point out that a large proportion of endowment income in fact goes to student financial aid — at Princeton last year 80 percent of the scholarship budget came from its endowment. According to Kelly Field’s Chronicle report this morning, Senator Grassley seemed favorably impressed by the evidence of increased financial aid that the 136 institutions have provided, and suggested that if the colleges continued to “look inward,” there might not be a need for legislation.
This comes as a relief to the wealthy institutions, and I think it is good public policy. None of the colleges is behaving like Leona Helmsley and spending endowed funds foolishly (like Mrs. Helmsley’s huge endowment to support her dog). Led by Yale, the elite institutions have over the past 20 years figured out how to exponentially increase their endowment returns, however, and it is not surprising that concern is being expressed over how those returns are being expended. More can be less — as I will argue in a subsequent post.
