University Endowments Have Grown Dramatically. How Should Officials Allocate the Earnings?
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Columbia university. carlo deviti/shutterstock
In the early days of the pandemic, many were calling on university administrators to increase annual endowment spend rates, which are typically 4–5% of the value of a university’s endowments, to plug budget gaps and provide emergency student support.
As it turns out, some officials seem to have done just that, if by a small margin. Back in February, the National Association of College and University Business Officers found that the average annual endowment spending rate increased from 4.36% in 2019 to 4.59% for the fiscal year July 1, 2019–June 30, 2020.
We should take this data point with two pinches of salt. First, it only applies to a three-month stretch (March–June 2020) coinciding with the pandemic. And while the figure was an increase over the previous fiscal year, it probably disappointed experts like Paul F. Campos, a law professor at the University of Colorado, who argued that affluent schools should boost payout rates to as high as 8%.
This debate first took place at a time when the stock market was in freefall. Needless to say, conditions have improved since then. The median return at U.S. colleges for the last fiscal year was 27% and 34% for endowments with more than $500 million of assets, enabling administrators and advancement officials to breathe a sigh of relief after a tumultuous and anxiety-ridden 2020. In fact, for a change, fundraisers didn’t need to lift a finger. The magic of compounded interest did all the work, presenting officials with a different kind of challenge—how to allocate their massive windfalls beyond paying down pandemic-incurred costs.
Some playbooks are beginning to emerge. Washington University in St. Louis announced it would earmark $1 billion in earnings toward financial aid after its endowment realized a 65% gain in fiscal year 2021, growing its total by around $6 billion. Amherst College eliminated legacy admissions after officials concluded that its surging endowment could help them withstand any short-term decreases in donations from aggrieved alumni funders whose children will no longer have an edge in the admissions process.
In December, Howard University announced staff pay raises for 2022, noting that its “endowment and financial posture continues to improve, positioning it to implement this latest round of pay increases.”
At this point, it’s worth remembering that the debate around what to do with huge endowment returns applies to a limited number of institutions. According to the American Council on Education, only 62 institutions—that’s 1.6% of all colleges and universities—have endowments exceeding $1 billion. Of these, 46 were private and 16 were public.
And therein lies the bigger problem, says The American Prospect’s Alexander Sammon. “Few institutions have exposed the absurdity of our COVID-era inequality more aggressively than the country’s elite private university systems, which, not unlike the country’s cabal of centibillionaires, have entered a runaway-train phase of capital accumulation,” he wrote. “There’s simply nothing that these institutions can do to meaningfully spend down that total, without investing in assets that appreciate in value (aside from, of course, making tuition free, paying workers well, massively expanding enrollment, and submitting themselves to heavy taxation, all of which seems to be off the table).”
Sammon’s argument may sound familiar. Long before the pandemic struck, experts noted that universities could afford to boost their spending rates. Now it’s 2022, and endowments are substantially larger. While a higher endowment balance means administrators will distribute more than the previous year, it also gives officials more flexibility to up their payout rates. Given the market’s stunning run, will flush administrators nudge their distribution rates up a fraction of a percentage point or two? Past behavior suggests we shouldn’t hold our breath.
As noted, officials seem to have bumped up endowment spending rates during that three-month window in early 2020. But the increase was marginal compared to the gravity of the crisis and universities’ relative wealth. At the same time, administrators have plenty of incentive to stick to the status quo.
A soaring endowment balance quantifies a school’s prestige, and a more aggressive payout would hinder its rate of growth, thereby eroding the school’s perceived value. Administrators didn’t want to have that on their resumes, and nothing suggests that the pandemic has fundamentally altered this impulse toward reputational self-preservation. Throw in the likelihood that the market will cool off in the coming year, and we can assume that payout rates will either remain flat or regress to the pre-pandemic mean.
And so we’re left with the question of what universities will do with the cash generated from recent and future disbursements. Howard University’s staff raises and WU’s $1 billion allocation to financial aid suggest that meaningful action is on the table. Speaking to Bloomberg about WU’s plans, Brian Galle, a Georgetown University law professor, said that’s “exactly what I’d like to see schools do with the money.”
While I agree with Galle, I also don’t want to minimize the power of enlightened self-interest. Increasing financial aid helps officials and alumni donors—who, after all, are the ones providing the endowments in the first place—attract low-income students and fend off charges that their wealthy institutions are bastions of elitism and exclusivity.
Instead, the big question is how far administrators are willing to go to spread the wealth in ways that may conflict with their own self-interest. For example, administrators and donors continually express a desire to boost access for low-income and middle-class students, and using endowment proceeds to expand enrollment would do precisely that. But the move would also instantly dilute the school’s finely cultivated air of, well, elitism and exclusivity.
All of which brings me to recent developments out of New York City. In early November, roughly 3,000 Columbia University graduate workers, who earn anywhere between $29,000 and $41,500, went on strike, demanding, among other things, higher pay. That’s the same Columbia that received returns on their endowment of 32.3% in fiscal year 2021, increasing its value to $14 billion and ending the fiscal year with a $150 million operating surplus.
This point wasn’t lost on the United Auto Workers (UAW), which is representing graduate workers. “Columbia made $3.1 billion in returns on its investments this past year alone,” the union said, noting that its demands for a three-year contract would amount to a mere “3% of its increase in net assets from investments.” The school responded by saying it offers Ph.D. students “one of the most generous packages of any university in the country.”
On January 7, Provost Mary C. Boyce issued a press release that the university and the Student Workers of Columbia-UAW reached a tentative agreement on a four-year labor contract. “We are proud of this agreement, which would make Columbia a leader in higher education on a long list of issues affecting student employees, and we look forward to sharing more details in the coming days,” Boyce said.
Boyce didn’t get into the agreement’s fine print, but we can assume it includes a raise for student workers—something I suspect administrators would have been less inclined to back if Columbia’s endowment held flat or declined during the previous fiscal year.
A similar phenomenon is playing out at a select group of schools where administrators are determining where to spend their annual investment income. If history is any guide, they will direct their windfalls to strengthen financial aid, academic programs, faculty positions and research.
The big open question is the extent to which they’ll widen the lens to bankroll more ambitious and less conventional equity-minded reforms. We’re not holding our breath, given the host of factors cited in this piece, such as concerns of prestige and market uncertainty, but we’d be more than happy to be proven wrong.
