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President's Perspective: Endowed with Wisdom

Explaining what endowments are—and are not

By John Lippincott




The election of a new president and new members of Congress in the United States offers new hope for federal policies that support educational advancement. CASE will work hard to help government officials understand the impact, both positive and negative, of proposed laws and regulations on voluntary support for schools, colleges, and universities.

One area in which we expect continued legislative attention is endowments. That attention—whether at the federal or the state level, whether in the United States or elsewhere in the world—is both welcome and worrisome.

The attention is welcome because it provides an opportunity to explain to policymakers as well as the public at large what endowments are and what they are not. Let’s start with what they are.

As funds invested to provide ongoing support for worthy projects, endowments are a particularly important part of an institution’s finances. While the annual payout from endowments may represent a relatively small portion of the total budget, those payouts are one of its more reliable portions. Endowments, by design, provide the campus with a steady and predictable flow of funds year in and year out. Other revenue sources, such as state appropriations, can swing wildly in response to changing economic, social, and political circumstances.

Endowments are also an important part of educational quality. Indeed, they both result from and contribute to quality. Donors give to endowments because they believe in the institution’s mission and have confidence in its track record of using endowed funds wisely and effectively. The funds generated by endowments enable the institution to further strengthen the quality of its programs and services beyond levels that tuition or tax dollars alone could support.

Let’s turn to what endowments are not. They are not universally large. On the contrary, most are quite small (the median size of U.S. higher education endowments is less than $100 million). They are especially small when considered in relation to the cost and the value of higher education’s role in our nation’s global competitiveness. In fact, only a handful of institutions have built up—through very hard work and the generosity of their alumni and friends—endowments sufficient to guarantee their preeminence for generations to come.

Endowments are also not institutional slush funds. The majority of funds held in endowments are restricted for purposes specified by the donor. The funds in an endowment established to promote Alzheimer’s research cannot be shifted at the whim of the institution or the legislature to support, for example, student scholarships. To do so would violate not only the terms of the gift agreement but the very trust on which the relationship with donors is founded.

Why then is legislative interest worrisome? Three reasons stand out.

First, often when legislation is adopted two laws take effect: the law as written and the law of unintended consequences. Many legislators have argued that requiring U.S. colleges and universities to spend a minimum amount or percentage each year from their endowments will help reduce tuition increases. Yet, endowment payout rates have little connection to tuition rates, which are influenced primarily by increasing costs (such as energy and employee health care) and by decreasing government support.

The real consequence of mandating payout rates would be to reduce a college’s or university’s ability to manage its resources in response to changing conditions in the stock market, which, as the past few months have shown, can decline rapidly and radically. If endowment managers do not have broad flexibility to make adjustments based on market conditions, they simply cannot ensure the long-term income stream needed to support the purposes for which the money was given (such as Alzheimer’s research).

Second, further regulating U.S. college and university endowments (which are already highly regulated) opens the door to treating charitable gifts as government resources. In one state, the movement to tax donations held in endowments by nonprofit organizations sends a clear and chilling message: When the legislature can’t balance its own budget, it will appropriate funds from college and university budgets that were freely and purposefully donated by private individuals to support work they valued. Not only would this be a disservice to those donors, it would be a disincentive to future donors.

Finally, recent legislative proposals regarding college and university endowments are inherently punitive. And what are they punishing? They are punishing hard work and success. American society was built on the fundamental principle that hard work and success should be rewarded. When institutions of higher education do an excellent job of securing their financial futures by serving their students well, by treating alumni as partners, and by actively seeking resources beyond tuition and tax dollars, we should hold them up as shining examples. Instead, some legislators appear to be suggesting we should simply hold them up.

About the Author John Lippincott John Lippincott

John Lippincott served as president of the Council for Advancement and Support of Education from 2004 through 2015.

 

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