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Why aren't colleges taking more out of their endowments?
I'm not an expert by any means, but I've been elected to my college's budget committee so I spent some time today looking through the annual PUBLIC financial statement.
Here's what I (think I) learned: https://twitter.com/mcsweeneys/status/1261364474113490944
I'm not an expert by any means, but I've been elected to my college's budget committee so I spent some time today looking through the annual PUBLIC financial statement.
Here's what I (think I) learned: https://twitter.com/mcsweeneys/status/1261364474113490944
Generally speaking, many colleges like mine plan on using 4.5% of their total long term investment holdings as operating revenue annually. (I learned this in an econ of higher ed class in 2004, and it seems to still be the case.)
4.5% of $772 million = $35 million
4.5% of $772 million = $35 million
Can we spend it on whatever we want? Nope.
Fully 2/3 of the planned revenue from the endowment is restricted in how it can be used.
Fully 2/3 of the planned revenue from the endowment is restricted in how it can be used.
Another punchline: If you sell assets now, you get to have less operating revenue later.
4.5% * ($772 million-X) < 4.5% * $772 million
(Unless you change the formula. But as I said, I learned the formula in 2004, so for whatever reason, people seem to hang on to it.)
4.5% * ($772 million-X) < 4.5% * $772 million
(Unless you change the formula. But as I said, I learned the formula in 2004, so for whatever reason, people seem to hang on to it.)
In order to sustain this plan, colleges have to target an average rate of return that is higher than 4.5%.
At my college, we made 7.2% net of fees last year.
So there's an extra 2.7% * $772 million this year, right?
At my college, we made 7.2% net of fees last year.
So there's an extra 2.7% * $772 million this year, right?
Can we spend it? Not much of it. 81% of the extra earnings are restricted in how they can be used. Probably obligated to be added to the principle.
You better bet that if donors have contracted restrictions on what EARNINGS can be spent on, they have even tighter restrictions on what PRINCIPLE can be spent on.
i.e. Colleges probably couldn't legally sell assets to prop of current operating revenue even if they wanted to.
i.e. Colleges probably couldn't legally sell assets to prop of current operating revenue even if they wanted to.
Now as I said: I'm not an expert, I took one class in the economics of higher ed and I've only been looking at these public statements for a couple days now, but this is what I think I learned.
Bottom line for me: Don't yell at your administration/president/provost/dean. They don't have a lot of options.
Instead, cajole the people in advancement to cajole the donors to rewrite their contracts. It's a freaking global pandemic people. Give us a little leeway.
Instead, cajole the people in advancement to cajole the donors to rewrite their contracts. It's a freaking global pandemic people. Give us a little leeway.
Interested in the public statements I'm looking at?
They're here: https://www.coloradocollege.edu/offices/finance/college-financial-information/annual-reports/index.html
You can find yours by searching "School name financial report" or "School name 990"
They're here: https://www.coloradocollege.edu/offices/finance/college-financial-information/annual-reports/index.html
You can find yours by searching "School name financial report" or "School name 990"
