December 19, 2008
By Lynne Munson and Donald Frey
School endowments: Saving for what?
YALE UNIVERSITY- President Richard Levin admitted this week that the institution's endowment has lost 25
percent of its value, or over $5 billion. Harvard University's endowment is down $8 billion. These losses are
difficult to appreciate unless their value is translated into real goods. For $8 billion Harvard could have
provided 25 years of Crimson undergraduates with a free education. Or built the largest particle accelerator in
Many colleges and universities have spent decades amassing huge fortunes, unprecedented in scale. Part of
the reason their endowments have become so large is that they are so aggressively invested. Another reason
is that, despite their incredible gains, these institutions continue to engage in the Depression-era practice of
spending very little of their treasure. Today's losses are an indictment of that longstanding practice and proof
that colleges and universities should have been spending more from their endowments all along.
A comparison between two fictitious institutions with strikingly different approaches to endowment payout
makes this obvious. Say that two institutions - let's call them Scrooge U and Visionary U - each had an
endowment worth $100 million in 1995. Both employed skilled managers who generated annual returns
averaging 16 percent - until this year.
But whereas Scrooge used only four percentage points of that return each year to support the work of the
university, Visionary used 6 percentage points, or half as much more. This resulted in Visionary spending $35
million more than Scrooge, blessing its students with generous financial aid and the world with the benefits of
Both endowments grew handsomely over the years. All the while, Scrooge shared far fewer of its resources,
based on the notion that miserliness would help it to be better prepared for a "rainy day." And in 2008 a terrible
day did come, and all endowments lost 40 percent of their value in a single year.
By being stingy and reinvesting so much of its endowment in good times, Scrooge's endowment climbed to
$435 million. Meanwhile, the more generous Visionary's endowment reached $345 million. However, when the
rainy day came, Scrooge's loss totaled $174 million, whereas Visionary's smaller endowment lost $138 million.
The difference in the losses was $36 million, or almost precisely the additional amount Visionary had chosen
to spend and Scrooge had not. Scrooge's attempt to "save" millions in fact ended up being a foolish gesture
that resulted in real losses for real people.
A school's endowment should not be treated as an untouchable treasure chest but as an active fund
contributing to the institution and its potential to serve society. Low payout practices are outdated and need to
be revised upward. Payouts have steadily declined for decades. On average, colleges and universities spent
just 3.9 percent from their endowments in FY2007.
Since colleges and universities pay no taxes on their endowments or on the income they earn, the public has
a keen interest in knowing whether schools are adopting payout policies that make sense. The rainy day so
many colleges and universities have saved for is here. The question is whether these institutions will have the
wisdom to step up spending in response.
Donald Frey is professor of economics at Wake Forest University. Lynne Munson is an independent scholar
and former deputy chairman of the National Endowment for the Humanities.