Financial endowment

A financial endowment consists of funds or property donated to an institution or individual, with the stipulation that it be invested, and the principal remain intact. This allows for the donation to have a much greater impact than if it was spent all at once.

College and University Endowments

The total endowment of can be over a billion dollars at many of the United States' richest universities.Template:Ref 1 However, each university typically has numerous endowments, each of which are frequently restricted to funding very specific areas of the university. The most common examples are endowed professorships (also known as chairs), and endowed scholarships or fellowships.

At universities, typically 5% of the endowment's assets are spent every year, and any excess earnings are reinvested to compensate for inflation and recessions in future years and to grow the endowment.Template:Ref 2

Criticisms

Officials in charge of the endowment have been criticized for "hoarding" and reinvesting too much of the endowment’s income. Given a historical endowment performance of 10-11 percent, and a payout rate of 5 percent, around half of the endowment’s income is reinvested. Roughly 3 percent of the reinvestment is used to keep pace with inflation, leaving an inflation-adjusted 2 percent annual growth of the endowment. At some universities, if this growth rate was turned into current spending, tuition could be cut in half.

Two arguments against inflation adjusted endowment growth are:Template:Ref 3

1. The future needs the money less than the present – Trends strongly suggest that the future will be much richer materially than the present due to technological innovation and specialization. Sacrificing the present for the future could be considered comparable to the poor donating money to the rich.
2. A constantly growing endowment shields universities from competitive forces – As the endowment’s reinvestment starts becoming a larger part of its growth, the need for happy students and alumni to donate funds to the university’s budget and endowment are reduced. Therefore, traditional market forces that provide incentives to run a university efficiently disappear and the administration can not be held accountable for its actions.

References

Template:Ref 1National Association of Colleges and University Business Professionals' Endowment Study - Contains list of colleges ranked by endowment size, and information about endowment performance.

Template:Ref 2So Nicely Endowed! Newsweek: Kaplan College Guide

Template:Ref 3University endowment returns are underspent - Challenge, July-August, 2002, by Donald Frey

See also

University Endowments - A US/UK Comparison - Sutton Trust

A Primer for Endowment Grantmakers - Ford Foundation, 2001