A financial endowment is a transfer of money or property donated to an institution. The total value of an institution's investments is often referred to as the institution's endowment and is typically organized as a public charity, private foundation, or trust.

Among the institutions that commonly manage an endowment are: academic institutions (e.g., colleges, universities, private schools), cultural institutions (e.g., museums, libraries, theaters, hospitals) and religious establishments.

An endowment may come with stipulations regarding its usage. In some circumstances an endowment may be required to be spent in a certain way or alternatively invested, with the principal to remain intact in perpetuity or for a defined time period. This allows for the donation to have an impact over a longer period of time than if it were spent all at once.

College and university endowments[link]

Academic institutions, such as colleges and universities, will frequently control an endowment fund that finances a portion of the operating or capital requirements of the institution. In addition to a general endowment fund, each university may also control a number of restricted endowments that are intended to fund specific areas within the institution. The most common examples are endowed professorships (also known as named chairs), and endowed scholarships or fellowships.

In the United States, the endowment is often integral to the financial health of private educational institutions, whereas public institutions are often funded partially or fully by state or local governments. Oftentimes, alumni of the institution will contribute the bulk of capital to the endowment. By contrast, universities in the United Kingdom are frequently public rather than private institutions. There is, therefore, less of an endowment funding culture, with financial figures generally much lower, with the exception of Cambridge and Oxford universities, which are exceptionally wealthy even by US standards. Endowment funds have also been created to support public secondary and elementary school districts in several states in the US.^[1]

Restricted endowments[link]

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. The restricted/unrestricted distinction focuses on the use of the funds; see quasi-endowment below for a distinction about whether principal can be spent.

Endowed professorships[link]

An endowed professorship (or endowed chair) is a 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 the position, which typically takes the format: First-name Last-name Professor of Department-name. Endowed professorships aid the university by providing a faculty member who does not have to be paid entirely out of the operating budget, allowing the university to either reduce its student-to-faculty ratio, a statistic used for college rankings and other institutional evaluations, and/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.^[2]

The earliest "endowed chairs" were those established by the Roman emperor and Stoic philosopher Marcus Aurelius in Athens in AD 176. Aurelius created one endowed chair for each of the major schools of philosophy: Platonism, Aristotelianism, Stoicism, and Epicureanism.^[3] Later, similar endowments were set up in some other major cities of the Empire.^[4]

The practice was adapted to the modern university system beginning in England in 1502, when Lady Margaret Beaufort, Countess of Richmond and grandmother to the future king Henry VIII, created the first endowed chairs in divinity at the universities of Oxford and Cambridge.^[5]

Nearly 50 years later, Henry VIII established the Regius Professorships at both universities, this time in five subjects: divinity, civil law, Hebrew, Greek, and physic—the last of those corresponding to what we now know as medicine and basic sciences. Today, the University of Glasgow has fifteen Regius Professorships.

Private individuals soon adopted the practice of endowing professorships. Isaac Newton held the Lucasian Chair of Mathematics at Cambridge beginning in 1669, more recently held by the celebrated physicist Stephen Hawking.^[6]

Endowed scholarship/fellowship[link]

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 students for whom 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. The amount that must be donated to start an endowed scholarship can vary greatly.

Fellowships are similar, although they are most commonly associated with graduate students. In addition to helping with tuition, they may also include a stipend. Fellowships with a stipend may encourage students to work on a doctorate. Frequently, teaching or working on research is a mandatory part of a fellowship.

Financial operation[link]

A financial endowment is typically overseen by a board of trustees and managed by a trustee or team of professional managers. The financial operation of the endowment is typically designed to achieve the stated objectives of the endowment.

At universities, typically 4-6% of the endowment's assets are spent every year to fund operations or capital spending. Any excess earnings are typically reinvested to augment the endowment and to compensate for inflation and recessions in future years.^[7] This spending figure represents the proportion that historically could be spent without diminishing the principal amount of the endowment fund. However, the financial crisis of 2007–2010 had a major impact on the entire range of endowments globally.

Most notably, large U.S.-based college and university endowments, which had posted large, highly publicized gains in the 1990s and 2000s faced significant losses of principal across a range of investments. The Harvard University endowment fund, which held $37 billion on June 30, 2008, was reduced to $26 billion during the following year.^[8] Yale University, the pioneer of an approach that involved investing heavily in alternative investments such as real estate and private equity, reported an endowment of $16 billion as of September 2009, a 30% annualized loss that was more than predicted in December 2008.^[9] At Stanford University, the endowment was reduced from about $17 billion to $12 billion as of September 2009.^[10] Brown University's endowment fell 27 percent to $2.04 billion in the fiscal year that ended June 30, 2009.^[11] George Washington University lost 18% in that same fiscal year, down to $1.08 billion.^[12]

Quasi-endowments[link]

A quasi-endowment, or fund functioning as an endowment, are funds merely earmarked by an organization’s governing board, rather than restricted by a donor or other outside agency, to be invested to provide income for a long but unspecified period, and the governing board has the right to decide at any time to expend the principal of such funds.^[13] Separately from the endowment versus quasi-endowment distinction, there's another 2-way categorization of restricted and unrestricted, which focuses on the use of the funds. As an example, a quasi-endowment might be restricted by the donor to supporting the tennis team; the use is restricted to one purpose, but the governing board could "invade principal" to support the tennis team.

Types of Endowment Funds[link]

True Endowment funds are received from external donors with restriction that the principal or gift amount is to be retained in perpetuity and cannot be spent.

In Term Endowment funds all or part of the principal may be expended only after the expiration of a stated period of time or occurrence of a specified event, depending on donor wishes.

Quasi Endowment funds must retain the purpose and intent as specified by the donor or source of the original funds and earnings may be expended only for the specified purpose.

Criticisms[link]

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. Of course, many endowments fail to earn 10-11 percent.

Two arguments against inflation adjusted endowment growth are:^[14]

1. The future needs the money less than the present
   Some claim that the future will be much richer materially than the present due to technological innovation and specialization. In counterpoint, Nobel laureate James Tobin makes a case for intergenerational equity.
2. 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 is 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. (This might also be considered a worthy goal, as it would mean the freedom of academia from financial concerns, which could cause a wider range of research topics to be available to students and faculty.)

Large endowments have been criticized for "hoarding" money.^[15][16][17] Most philanthropies are required by federal law to distribute 5% of their assets per year,^[18][19] but university endowments are not required to spend anything.^[18] Many universities with very large endowments would require less than 5% to pay full tuition for all their students. For example, it has been estimated that if in 2006 all the Harvard students paid the maximum in tuition and fees, it would amount to less than $300 million.^[20] In 2007, if Harvard had spent 5% of its $34.6 billion endowment,^[21] all Harvard undergraduate and graduate students could attend for free and the university would still have $1.3 billion left over.^[16] It would require less than 1% of the endowments of Harvard and Yale to allow all students to attend tuition-free;^[18] Stanford, MIT, Princeton and Rice would require less than 2% of their endowments and 29 schools would require less than 3% for all their students to attend tuition-free.^[18] Despite the decreasing values of endowments, congressmen, including Charles Grassley, have questioned whether the endowments are contributing enough to maintain their tax-exempt status.^[17] After reviewing work in developing nations by 50 higher education institutions with endowments over $1 billion, Peter Hotez of George Washington University has stated that "pharmaceutical companies are doing more for the poorest people [in the world] than most of our wealthiest universities."^[17]

Size[link]

Financial endowments range in size depending on the size of the institution and the level of community support. At the large end of the spectrum, the total endowment can be over one billion dollars at many leading private universities. As an example, Harvard University has the largest endowment in the United States with $32 billion in assets as of April 30, 2012.^[22] 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 named chairs), and endowed scholarships or fellowships. For instance, Harvard has 10,800 separate endowments.^[23]

Socially and Environmentally Responsible Investing[link]

Many college and university endowments have come under fire in recent years for investing in practices such as "land grabs" in poor countries^[24] and high-risk, high-return investment practices that led to the financial crisis.^[25]

See also[link]

• List of colleges and universities in the United States by endowment
• List of wealthiest charitable foundations
• Lists of institutions of higher education by endowment
• Endowment tax
• Endowment invasion

References[link]

Further reading[link]

• Newfield, Christopher (2008). Unmaking the public university: the forty-year assault on the middle class. Harvard University Press. p. 162. ISBN 978-0-674-02817-3. http://books.google.com/books?id=sjVExLWolxIC&pg=PA162. 

External links[link]

• Sutton Trust: University Endowments - A US/UK Comparison
• Ford Foundation: A Primer for Endowment Grantmakers
• Dada, Kamil (February 1, 2008). "Congress investigates endowment". Stanford Daily. http://www.stanforddaily.com/2008/02/01/congress-investigates-endowment/. 
• 12 SMA for Financial Endowments

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