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1 The tweet below from the amazing @itsafronomics inspired me to write a short thread on the subject of university endowments and how they can or cannot be used. Here goes. https://twitter.com/itsafronomics/status/1302628467276742660">https://twitter.com/itsafrono...
2 Roughly speaking, one can think of philanthropic gifts to universities being categorized along two dimensions. Unrestricted v. restricted in how it can be used. And current use v. endowment.
3 Unrestricted gifts can be used at the discretion of the university. Restricted gifts are limited to a particular set of uses, such as scholarships, or supporting a center or a professorship. The donor and university must both agree to these uses as part of a gift agreement.
4 Current use gifts can be spent as the money arrives. Endowment gifts are invested in the university endowment and can be spent only according to the university endowment’s payout rules. A typical payout rule would be something like “4% of past 5 year average starting value.”
5 As a Dean, I encourage unrestricted current use gifts whenever I can because those dollars can always be put to good use immediately. In Gies, I use such gifts to fund scholarships, invest in faculty, and invest in innovative new programs.
6 But many donors like the idea of a permanent endowment as a way of creating a legacy. If I put $100,000 into an endowment, it will provide about $4,000 per year to support scholarships (or other specified purpose) forever (and hopefully will grow over time).
7 Although endowment gifts can be restricted or unrestricted in their use, many are restricted to a stated purpose. In Gies, the single largest category of restricted endowment gifts I have raised have been for scholarships. Second place is support for faculty.
8 The gift from Larry & Beth Gies. Not only was this an amazing size ($150 million), but they placed no restrictions on its use (other than being for the benefit of the College of Business). We put part of it to use immediately for scholarships, faculty and programs.
9 When you see the value of a university’s endowment, you are not seeing the current use gifts. Many of those gifts are going straight to supporting scholarships, and never affect the size of the endowment.
10 Importantly, this means that more philanthropic dollars are flowing to financial aid than what you might think from looking at endowment payouts. That is certainly true in Gies.
11 For example, we raised about $500k for emergency scholarships to help students during the pandemic. That will not show up in our endowment b/c we are giving the money away in same year.
12 For endowment gifts, different gifts are comingled for investment purposes, but for spending purposes you should think of each gift fund as its own entity with its own purpose.
13 There are legal restrictions against spending the principle balance of an endowment. So university is limited in how much it can “dip into” an endowment during lean times.
14 Even so, one might want to spend a bit more aggressively during lean times, and be a bit more cautious in good times. But research shows this is – unfortunately - NOT what most endowments do. https://www.aeaweb.org/articles?id=10.1257/aer.104.3.931">https://www.aeaweb.org/articles...
15 As for criticism that “rich people” get to decide how money gets spent, I would make a few observations.
16 First, I am grateful every time a donor decides to support higher education or another charitable cause rather than spending the money on themselves.
17 Second, some donors are more likely to give if they have confidence that the money will be used for the purposes it was raised (e.g., scholarships). The restriction ensures this.
18 Third, the university must agree to any restriction. Normally, they are fine (scholarships, for example). But there are times when one has to be willing to say no to a gift if the restriction is not aligned with a university& #39;s values. This does happen, though rarely publicly.
19 I would love to raise enough money to cover all unmet financial need that remains after federal, state and institutional aid. I don& #39;t know a single Dean that would not love to do this. And I am grateful for every penny of gift money we receive.
20 But if a past, present, or future donor wants their gift to go to support faculty research, or a building, or some other worthwhile initiative, I have an obligation to honor that.
21 (and last) So much more could be said here! And maybe I will say more in response to comments. But it is labor day, and I am going to take my dog for a walk!
