What is a university endowment?

Endowments are funds or other financial assets donated for the benefit of universities or colleges and aim to invest capital to provide additional income for future investment and expenses. Endowment funds typically follow a somewhat strict set of long-term guidelines that dictate the allocation of assets to achieve targeted returns without bearing too much risk.

Most endowments have policies outlining how much of the investment income can be spent each year.

For many universities, this amount is around 5% of the total value of the endowment assets, and since some desirable colleges like Harvard have endowments valued in the billions of dollars, that 5% can equal a significant amount of money.

How do endowments work?

Endowments mean donating money or designating property to a non-profit institution, which uses the resulting investment income for a specific purpose. The term "endowment" can also refer to the total investable assets of a non-profit institution known as "the principal," which is intended to be used in operations or programs that align with the donor's wishes. Most endowments are designed to preserve the original amount unchanged while using investment revenues for charitable efforts.

The oldest foreign university endowments still active today were established by King Henry VIII and his relatives, where his grandmother, the Countess of Richmond, established an endowment for religious purposes at both the University of Oxford and Cambridge, while Henry VIII employed professors in a variety of disciplines at them, and Marcus Aurelius founded the first recorded endowment for schools of philosophy in Athens around AD 176.

The University of Al Quaraouiyine in Fez, Morocco, is considered the oldest continuously operating university in the world, endowed by Fatima al-Fihri - may she rest in peace - from her own wealth in the time of the Idrisids in 859 AD.

Occasionally, endowment donors may restrict how schools and universities spend these funds through an investment policy statement. For example, donors can decide to use a portion of the endowment income earmarked for a merit-based or need-based scholarship.

Another restricted use of endowment income is to finance talented faculty members intended to attract world-class teachers.

Aside from these restrictions, universities may use the remaining allocated spending amount as general income, while decisions regarding whether to spend it on hiring professors or improving and repairing facilities or funding more scholarships are left to university officials.

Endowment investment income can also significantly reduce student education costs. For instance, if the university's endowment generated $150 million and had a spending limit of 5%, this would provide $7.5 million of available income. If the university had originally allocated $5.5 million from the endowment funds, that would mean the $2 million surplus could be used to pay off debts and other expenses, and savings can be provided to students.

However, since universities rely on investment returns for additional income, there can be a problem if investments do not yield an adequate return. Therefore, most endowments are managed by professionals to ensure that the investments align with the aforementioned policy allocation.

Types of endowments

There are four different types of university endowments:

1- Unrestricted endowment.

2- Term endowment.

3- Quasi-endowment.

4- Restricted endowment.

Typically, a term endowment specifies that the principal amount cannot be spent except after a certain period or during a specific event, while unrestricted endowments are assets that can be spent, saved, invested, and distributed at the discretion of the institution receiving the donation.

The quasi-endowment represents a donation by an individual or institution intended to serve a specific purpose, with the principal amount typically retained while profits are spent or distributed according to the donor's stipulations.

These endowments are usually initiated by the institutions that benefit from these funds through internal transfers or by utilizing already established unrestricted endowments.

Restricted endowments have a permanent capital base while profits from the invested assets are spent according to the specifications of the granting party, except in a few cases where the terms of these endowments cannot be violated.

If an institution approaches bankruptcy or declares it but still has assets in the endowments, a court can issue a quasi-judgment allowing the institution to use these assets while being financially prudent and meeting the donor's wishes as much as possible.

The gradual withdrawals that institutions make from endowments to pay off debt or operational expenses are known as "invading" or "endowment raiding," and sometimes require state approval.

Criticisms of endowments

Harvard University and other institutions of higher education have faced criticism over the size of their endowments, with critics questioning the benefit of large endowments amounting to billions of dollars, likening it to hoarding, especially as education costs began to rise in the late 20th century. Large endowments were seen as private savings for educational institutions, but during the 2008 recession, many endowments cut their payouts.

A U.S. economic study in 2014 closely examined the incentives behind this behavior and found a trend toward an excessive focus on endowment health rather than the institution as a whole.

It is not uncommon for activist students to critically examine where their colleges and universities invest their endowments. In 1977, Hampshire College divested from South African investments in protest of apartheid, a move followed by many educational institutions in the United States.

The call for divestment from industries and countries that students find ethically concerning remains common among student activists, although the practice evolves to improve effectiveness.

Author:

ALBERT PHUNG

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