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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