If people knew enough about personal finance to be familiar with the 4% rule, the endowments would be much more widely understood. It’s the same damn thing.
It helps outline the basic idea, but isn't that predicated on retirement and a loss of income, whereas these universities still have access to the same means for generating funds that produced the endowment, right?
My point is that it is, in fact, a “very basic idea.”
Once you have a pool of investments worth 25x, then you can spend x every year without the principal falling over time. So an endowment only can create an income stream in perpetuity if you keep spending below x. (I think colleges can afford 5% instead of 4% because they have access to certain kinds of investment strategies that individuals saving for retirement don’t.)
And, to be fair, an individual can save to reach 25*their annual expenses, and then choose to keep working in order to get richer. In that sense, they “still have access to the same means for generating funds that produced” their retirement nest egg. They might still care about inflating their lifestyle, or leaving more inheritance for the generation to come.
The 4% rule represents a point of financial security. That’s important for retirees and for institutions that hope to exist long into the future.
The endowment was not "produced" by revenue. The money came from donations. Those donations must be used in a way which aligns with donor intent. Part of its value is spent each year to cover operating expenses.
I understand the money came from donations, but they continue to receive new donations! If universities had promised to no longer accept donations this would all make more sense to me.
The new donors to the endowment want to increase the size of the endowment so that the spend taken from it each year can support additional programs. If they want to give money that the school can use fully right away they give current use gifts - such gifts made up 10% of Harvards revenue in 2021 (in addition to 39% from the endowment spend). If they instead choose to give to the endowment they do not intend for their gift to be used for a one time project. Donor gifts must be used in accordance with donor intent.
Endowments are regulated to make sure that they’re used according to donor intent. Donors are under no obligation to give that money - if they give to the endowment it means it must be managed such that it can provide support for the school’s mission in perpetuity. Schools cannot use the endowment funds however they wish although they do have significant flexibility (I explain all of this in the piece). If donors want to give money that can be used immediately as the school sees fit they donate current use gifts - these sort of gifts covered another 10% of Harvards operating revenues in 2021 (in addition to the 39% covered by endowment income).
Donors *can* restrict donations but don't have to.
Beyond that donations to endowments can be used how schools want; they don't want to spend now, so they don't. Which IMO is a bad choice but it is still a choice.
You are confused between endowment gifts and current use gifts. If donors didn’t want their gift to be used to support the mission in perpetuity, and invested to achieve inter generational equity for that purpose, they would give a current use gift. Many do just this, as evidenced by the fact that Harvard got 10% of its revenue from current use gifts in 2021. When a donor gives to the endowment instead they are making a choice to have that money used more slowly such that it will support the institution into the far future. Donor funds must be used in accordance with donor intent.
"they are making a choice to have that money used more slowly"
The point is that colleges can (and should) make a different choice. Which they can, if they want to. They don't. Things like this: "In some states, such as California, spending above 7% of the endowment value is “presumptively imprudent”" can be rebutted—a presumption is rebuttable.
They cannot do that on an ongoing basis without showing they can generate high enough long term returns to justify it. They can do that in special cases where they can make the case that it is needed to serve the mission in the long term.
They don't because they're self-interested, and donors don't donate elsewhere, despite the tendency of colleges to pointlessly hoard money. IMO donors should stop donating to schools with >$1 billion endowments, and Congress should tax those endowments, but big-money donors generally don't consult me and neither does Congress.
They can give current use gifts if they don’t want the money to be managed in the way that endowments are required to be managed. Many do this. The regulations for endowments are to protect donors not to protect schools.
I've been baffled by university endowments for years, so I appreciate this helpful essay. However, the reasoning that endowments shouldn't be used for something because that's not what endowments are for is circular, and whether endowments are rainy-day funds is a separate question from whether they ought to be.
I appreciate the miracle of compounding returns and your point that spending the money means you won't have it to grow the endowment, but it's tempting to question whether infinitely growing endowments really should be such an insuperable objective. Again, it all seems quasi-circular: they need the money to increase the endowment to have more money to increase the endowment, and so on. But they can't ever manage to translate those ballooning funds into stuff like lower tuition rates?
Also, have the endowments outpaced inflation historically? What were these endowments like, inflation-adjusted, back in the 80s when college was so much cheaper?
Sidenote: the fact that this is all done under the guise of intergenerational equity, given historical tuition prices and the fact that student loan debt is a source of growing intergenerational inequality in the US, is pretty absurd.
It's not "shouldn't be used for", it's "not legally permitted to be used for". We may wish to change the tax and financial rules in such away that the warranties made by the funds are now longer true, but that's not how any of this works and wishing it were otherwise seems fanciful.
This is accurate to a point, and would be 100% accurate if universities were 100% private enterprises. However, universities, even “private” ones, receive large amounts of federal and state funding through grants and student loans.
So the government pays large amounts of the cost of the day to day operations to these institutions allowing them to reinvest more of their endowments and spend less than a fully privately endowed enterprise would.
That’s doesn’t invalidate the need for them to be good fiscal stewards as you illustrate, but it is important to remember they are unique in their ability to not spend the money that is raised and pass their operational costs onto taxpayers.
While in general I agree with you, I do wonder when rates were ultra low during COVID, would it have been reasonable (legal?) to borrow against the endowment instead of selling assets and use the loan to fund the salaries of the laid off workers?
Maybe, I just don't think it's at all obvious that they should've done that or that it should be the responsibility of non-profits to maintain salaries of their contracted workers when they don't need them. And as I mention in the piece I think it's tough to argue that doing so is required to support Harvard's mission. I'm sure a case could've been made, but it's certainly not a "reputation cancelling event"
The point is that wealthy students paying absurd tuition rates so that smart but less wealthy students can get a free education can be seen as a progressive system, and one that doesn't require government subsidies to work. I'm not sure I understand your last point on capitalism.
Wow, I never suspected that there would be so much to know about endowments. I thought being envious and resentful would suffice. Thank you.
If people knew enough about personal finance to be familiar with the 4% rule, the endowments would be much more widely understood. It’s the same damn thing.
It helps outline the basic idea, but isn't that predicated on retirement and a loss of income, whereas these universities still have access to the same means for generating funds that produced the endowment, right?
My point is that it is, in fact, a “very basic idea.”
Once you have a pool of investments worth 25x, then you can spend x every year without the principal falling over time. So an endowment only can create an income stream in perpetuity if you keep spending below x. (I think colleges can afford 5% instead of 4% because they have access to certain kinds of investment strategies that individuals saving for retirement don’t.)
And, to be fair, an individual can save to reach 25*their annual expenses, and then choose to keep working in order to get richer. In that sense, they “still have access to the same means for generating funds that produced” their retirement nest egg. They might still care about inflating their lifestyle, or leaving more inheritance for the generation to come.
The 4% rule represents a point of financial security. That’s important for retirees and for institutions that hope to exist long into the future.
The endowment was not "produced" by revenue. The money came from donations. Those donations must be used in a way which aligns with donor intent. Part of its value is spent each year to cover operating expenses.
I understand the money came from donations, but they continue to receive new donations! If universities had promised to no longer accept donations this would all make more sense to me.
The new donors to the endowment want to increase the size of the endowment so that the spend taken from it each year can support additional programs. If they want to give money that the school can use fully right away they give current use gifts - such gifts made up 10% of Harvards revenue in 2021 (in addition to 39% from the endowment spend). If they instead choose to give to the endowment they do not intend for their gift to be used for a one time project. Donor gifts must be used in accordance with donor intent.
No, it’s not. Colleges can use it however they want. That they choose to hoard is up to them, and indicative of their own values.
Endowments are regulated to make sure that they’re used according to donor intent. Donors are under no obligation to give that money - if they give to the endowment it means it must be managed such that it can provide support for the school’s mission in perpetuity. Schools cannot use the endowment funds however they wish although they do have significant flexibility (I explain all of this in the piece). If donors want to give money that can be used immediately as the school sees fit they donate current use gifts - these sort of gifts covered another 10% of Harvards operating revenues in 2021 (in addition to the 39% covered by endowment income).
Donors *can* restrict donations but don't have to.
Beyond that donations to endowments can be used how schools want; they don't want to spend now, so they don't. Which IMO is a bad choice but it is still a choice.
You are confused between endowment gifts and current use gifts. If donors didn’t want their gift to be used to support the mission in perpetuity, and invested to achieve inter generational equity for that purpose, they would give a current use gift. Many do just this, as evidenced by the fact that Harvard got 10% of its revenue from current use gifts in 2021. When a donor gives to the endowment instead they are making a choice to have that money used more slowly such that it will support the institution into the far future. Donor funds must be used in accordance with donor intent.
"they are making a choice to have that money used more slowly"
The point is that colleges can (and should) make a different choice. Which they can, if they want to. They don't. Things like this: "In some states, such as California, spending above 7% of the endowment value is “presumptively imprudent”" can be rebutted—a presumption is rebuttable.
They cannot do that on an ongoing basis without showing they can generate high enough long term returns to justify it. They can do that in special cases where they can make the case that it is needed to serve the mission in the long term.
In general it would be better for foundations and colleges with huge endowments to spend more now: https://search.issuelab.org/resources/1421/1421.pdf. Or https://www.nytimes.com/1999/10/05/us/foundations-can-give-more-and-protect-assets-study-says.html
They don't because they're self-interested, and donors don't donate elsewhere, despite the tendency of colleges to pointlessly hoard money. IMO donors should stop donating to schools with >$1 billion endowments, and Congress should tax those endowments, but big-money donors generally don't consult me and neither does Congress.
They can give current use gifts if they don’t want the money to be managed in the way that endowments are required to be managed. Many do this. The regulations for endowments are to protect donors not to protect schools.
I've been baffled by university endowments for years, so I appreciate this helpful essay. However, the reasoning that endowments shouldn't be used for something because that's not what endowments are for is circular, and whether endowments are rainy-day funds is a separate question from whether they ought to be.
I appreciate the miracle of compounding returns and your point that spending the money means you won't have it to grow the endowment, but it's tempting to question whether infinitely growing endowments really should be such an insuperable objective. Again, it all seems quasi-circular: they need the money to increase the endowment to have more money to increase the endowment, and so on. But they can't ever manage to translate those ballooning funds into stuff like lower tuition rates?
Also, have the endowments outpaced inflation historically? What were these endowments like, inflation-adjusted, back in the 80s when college was so much cheaper?
Sidenote: the fact that this is all done under the guise of intergenerational equity, given historical tuition prices and the fact that student loan debt is a source of growing intergenerational inequality in the US, is pretty absurd.
It's not "shouldn't be used for", it's "not legally permitted to be used for". We may wish to change the tax and financial rules in such away that the warranties made by the funds are now longer true, but that's not how any of this works and wishing it were otherwise seems fanciful.
This is accurate to a point, and would be 100% accurate if universities were 100% private enterprises. However, universities, even “private” ones, receive large amounts of federal and state funding through grants and student loans.
So the government pays large amounts of the cost of the day to day operations to these institutions allowing them to reinvest more of their endowments and spend less than a fully privately endowed enterprise would.
That’s doesn’t invalidate the need for them to be good fiscal stewards as you illustrate, but it is important to remember they are unique in their ability to not spend the money that is raised and pass their operational costs onto taxpayers.
You are an annoying dumb rich girl and I will not further be reading your blog.
Colleges can use it however they want. That they don’t choose to is up to them.
While in general I agree with you, I do wonder when rates were ultra low during COVID, would it have been reasonable (legal?) to borrow against the endowment instead of selling assets and use the loan to fund the salaries of the laid off workers?
Maybe, I just don't think it's at all obvious that they should've done that or that it should be the responsibility of non-profits to maintain salaries of their contracted workers when they don't need them. And as I mention in the piece I think it's tough to argue that doing so is required to support Harvard's mission. I'm sure a case could've been made, but it's certainly not a "reputation cancelling event"
The point is that wealthy students paying absurd tuition rates so that smart but less wealthy students can get a free education can be seen as a progressive system, and one that doesn't require government subsidies to work. I'm not sure I understand your last point on capitalism.