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The Role of Endowments

Those vaunted multibillion-dollar university and college endowments that get so much attention ($630 billion in total at the 774 institutions that report their endowment performance to the annual NACUBO-TIAA Study of Endowments) are worth a closer look. For one thing, only 13 institutions are in the $10 billion-or-more club; the median endowment is about $144 million. Nearly four in 10 have $101 million or less.

The Chronicle of Higher Education organizes the NACUBO-TIAA data into a searchable format that includes total endowment size and change in value from one year to the next.

What’s more important than the bragging rights is what they’re earning from investing all that money, how much they’re paying the fund managers, and how much is ultimately being generated by the endowments toward their operating costs.

First, the returns: University and college endowments “significantly underperform” market benchmarks, according to research by business professors David Yermack and Sandeep Dahiya of New York University and Georgetown University, respectively. They found that university endowments earn less than those that support nonprofit organizations in the arts, human services, health care and religion.

A separate study by scholars at MIT’s Sloan School of Management and the University of Illinois found that higher education endowment funds realized returns of 6.8 percent from 2009 to 2017, a period during which the S&P 500 index gained 11.2 percent.

Meanwhile, at schools including Harvard, Yale, Stanford and Princeton, fund managers have made more money than the endowments paid out to support students, Victor Fleischer, a tax expert who now teaches at the University of California, Irvine, found.

That revelation, which Fleischer wrote about in a New York Times op-ed, caused a dustup — in response to which many universities made it harder to find out what fund managers are paid, either by exempting the information from public records laws (at public universities) or by moving their endowment portfolios to private investment firms run by the same managers (at Harvard and other privates).

In general, management fees are now bundled into other expenses and fees, as you can see if you look at the fine print on Page 23 of Harvard’s annual financial report, making them pretty much impossible to track.

As for what they pay out (called the “effective spending rate”), universities and colleges return an average of 4.4 percent from their endowments to help pay for financial aid and other operating costs, NACUBO and TIAA say. This, despite the fact that other private foundations are required by the IRS to spend at least 5 percent a year in order to be tax-exempt.

Endowments contribute about $23 billion a year to university budgets, or an average of $31 million per campus, about half for financial aid, according to NACUBO and TIAA. By Fleischer’s math, that means endowments paid more to their fund managers than to support students.

It’s also a bad idea to pay out too much of the endowment, and some institutions have effective spending rates of more than 5 percent — another warning flag worth looking out for, as it can suggest that they’re not bringing in the revenue they need from other sources.

Updated May 2021