Why aren’t universities spending their endowments?

By Felix Salmon
August 10, 2009
paper makes a pretty compelling case that if anything, Harvard is spending too little from its endowment, and has been for years:

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Is the problem with Harvard University that it was spending too much, and therefore is now facing a nasty crunch in the wake of endowment losses? Not according to Peter Conti-Brown, whose recent paper makes a pretty compelling case that if anything, Harvard is spending too little from its endowment, and has been for years:

From 2003 through 2008, Harvard’s annual budget grew an average of 7% per year, starting at $2.43 billion in 2003 and ending at $3.46 billion. Including an estimated 30% loss to the endowment in 2008, the endowment grew an average of 10.15%, from $16.24 billion to $25.59 billion. In absolute terms, while the budget grew annually at an average of $206 million, the endowment grew an annual average of $1.56 billion. More strikingly, Harvard’s payout rates during this period remained a steady 4.4%, an average of more than 5.5% less than endowment growth. Far from spending like “drunken sailors,” universities were, if anything, not spending enough.

Conti-Brown also looks at the makeup of Harvard’s endowment in 2008, and concludes that fully 70% of it was invested in liquid instruments. “This data may not present the full story of Harvard’s liquidity problems,” he concedes, “but it does present enough information to at least shift the burden of proving illiquidity away from those with access to only the public reports and toward the insiders who make the claim that illiquidity prevents universities from dipping further into their endowments to prevent budgetary instability.”

Conti-Brown makes a strong case that it’s not illiquidity preventing America’s largest university endowments from being put to aggressive use during this crisis, so much as a fear of realizing losses, combined with the institutionalization of the endowments themselves: “the endowment has become a symbol of status and prestige,” he writes, “similar to the university’s libraries, art museums, and architecture”.

The upshot of the paper is that the move to tax university endowments made quite a lot of sense when it was first mooted in 2007-8, and that it still makes sense. There never was much reason for university endowments to exist at all, let alone to exist in the ultra-bloated form that we see at Harvard and Yale. If these institutions aren’t going to spend the money in their endowments on providing educational services, they should pay tax on it.


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What do you do with $20billion? It’s a silly amount of money. Money itself has become silly. It’s a world of status based upon make believe.

They better make as much as they can even more liquid because it’s going to continue to go down.

Posted by rapier | Report as abusive

I don’t have a problem with the sheer existence of universities endowments. They can be a good way to smooth out the use of major gifts over time. Obviously, if universities could count on a particular stream of gift (i.e. donations), and that that stream would ever be increasing, there would be no need to smooth them out. But that is not the case.

The greater issue is the rate of spending from the endowments, as this post and the original paper mention. Should universities have to spend them down at a rate equal to their average growth over some period? Should there be caps on their net rate of growth? Perhaps a cap on their size as a % of operating budget, capital budget or some combination thereof? Perhaps these sorts of questions could help us to determine what we might tax, the impact of taxing university endowment, or alternative mechanisms to address our underlying concerns.

My point is that we can look at certain endowments as problematic without saying there is no reason for their existence. We can certainly be a bit more thoughtful about what we are calling for.

Well it seems to me that a creative use for any “tax” on university endowments would be to use the money to assist other colleges and university in meeting their educational missions. Schools with strong endowments might want to seriously consider that.

Posted by wsb - Bethesda, MD | Report as abusive

If these institutions aren’t going to spend the money in their endowments on providing educational services, they should pay tax on it.______

So the government can provide social services?

Posted by dvictr | Report as abusive

Well our increasingly statist government is moving sharpingly in the direction of taxing all pools of idle cash. Its called inflation and its already baked in. Obama is a lot like Bush in that he loves to spend money without paying for it, and the only remaining release valve is devaluation.

So universities, draw up some plans now and spend while prices are good.

Posted by Dan | Report as abusive

What a lot of people don’t realize is that much of Harvard’s endowment is made up of restricted funds that are slated to go only toward very specific causes – like the study of frogs in Africa, a professorship in Slavic Languages and Literatures, or financial aid. It’s not like Harvard’s $26 billion endowment is money that can be spent on anything, which is simply sitting there. The Harvard Corporation can increase its endowment payout to each of Harvard’s schools, rather than have decreased it by 8% for this coming year. But even much of the funding that does come from the endowment can’t just be spent on some new project. Any new large project has to be approved by the Corporation, like development in Allston, so that they can then deplete Harvard’s schools of their limited unrestricted funds with a yearly Allston tax.

Posted by ring | Report as abusive

When you take much money sitting around, and combine it with an institutionalized unwillingness to spend it, one invariably comes to the conclusion that that money may not really be there. See Bernie Madoff.

Posted by Jeff | Report as abusive

At fiscal year end June 2008, Harvard’s total net endowment assets were $36.927 billion (before the market plunge). Of this amount, only $6.141 billion or 16.6% were “unrestricted,” which allows the university to use them as it sees fit. $26.170 billion (70.9%) were “temporarily restricted,” and $4.616 billion (12.5%) were “permanently restricted” (http://vpf-web.harvard.edu/annualfinanc ial/). As ring points out above, Harvard may have fewer degrees of freedom to work with its endowment that Conti-Brown suggests.

Furthermore, Harvard is famously decentralized, and while each of its major divisions has mandated Harvard Management to manage their own funds in the endowment, it is not clear to me where the decision lies to change spend rates. While I do not disagree completely with Conti-Brown, I am not sure he has captured all the elements at play, at least at the largest university endowment.

The Harvard Corporation decides on a uniform spending rate from the endowment for all of Harvard’s schools every year. The Corporation is comprised of Harvard’s president and six alumni chosen by a Corporation vote whenever a member chooses to leave: http://en.wikipedia.org/wiki/President_a nd_Fellows_of_Harvard_College

Posted by ring | Report as abusive

// comprised of Harvard’s president and six alumni chosen by a Corporation vote whenever a member chooses to leave.

If it adds six alumni every time a member leaves, it will grow much faster than the endowment it’s managing.

I see top universities with their massive endowments, tax free status, and generally state of the art and connected financial planning as becoming the new Church.

From the dark ages, to the middle ages and somewhat beyond the Church became an ever increasing landholder.

Yale in 2007 bought the nearby 137 acre Bayer Labs Complex [1] which now makes it similar in size to the Vatican City.

Over the next hundred years, I see rich universities hoarding and growing their endowments and then then splurging occasionally to buy up properties.

Are there any countervailing forces that will prevent Yale from owning one quarter of Connecticut 100 years from now?

[1] http://www.yaledailynews.com/articles/vi ew/21084

Posted by MonkeyBoy | Report as abusive

- pay tax so government can, in turn, pay inflated prices for “research”. Or should universities, instead, spend more on art – or students! Are academics (and universities) real assets? Doesn’t commissioned research bear some similarities to commissioned art? But how on earth can art be compared with an asset like gold as the following attempts to show:

“…When the value of money declines, the value of real assets-unleveraged, irreplaceable assets such as art-rises. In recognition of this fact financial intuitions have already begun to allocate to art. The Harvard and Yale University Endowments have already considered this development by allocating a great share of its investments to real assets. Brandeis University and Deutsche Bank among other institutions have also invested in real assets and specifically in art over the past years and doing so built ["respectable"] art portfolios…” http://www.hedgeweek.com/articles/detail .jsp?content_id=347531

Posted by ac | Report as abusive

but how to tax government profits now that it too is officially in the business of maximizing returns – or is that to done by taxing bank bonuses which are then funnelled into?


“…The 4th largest landowner on earth is the Federal Government of the United States…” http://www.whoownstheworld.com/about-the -book/largest-landowner/

Posted by ac | Report as abusive

That was a mistake – the remaining Corporation members select one new member whenever someone chooses to leave, but that’s rare. The Harvard Management Company manages the endowment, not the Corporation, but the Corporation decides on the spending rate from the endowment every year, as Harvard’s chief governing board.

Posted by ring | Report as abusive

The original idea of endowments was so that colleges and universities could use the income from that money to pay professors and other staff rather than soaking current students and their parents for the full cost of running the place (modulo grant-and-contract income). So if Harvard weren’t spending on the order of a half a billion a year in investment income, there’s a first-order argument to be made that the poor twits going there right now would have to pony up roughly $30K a year of additional money for their Ivt-League education, or else be attending a much smaller Harvard.

Now obviously some of the people who currently give money to the university endowment would be giving money to the Tuition Subsidy Fund (or whatever fancy name it got called), many of them probably wouldn’t. (Especially considering the kinds of people who give money to ivy-league capital drives). And even if they did, to first order again, the financial effects for the university and its students would be the same only if all of Harvard’s alumni are on average at least as good at managing a portfolio as Harvard’s endowment managers (which may be true in the current debacle but probably isn’t in general.)

Oh, and another reason for universities to have endownments, but not a good one: when there’s an estate tax, the government subsidizes rich people’s gifts to endowments at rates from roughly 50-95%.

It’s not uncommon for conservative university endowment spending policies to be less than 5% of assets per year. Modern endowment spending policies don’t care about growth, only total assets.

There’s no story here, except that yes, universities should be taxed on their endowments.