Information about Financial Endowment

A financial endowment is a transfer of money or property donated to an institution, with the stipulation that it be invested, and the remain intact. This allows for the donation to have a much greater impact over a long period of time than if it were spent all at once.

College and university endowments

In the United States, the total endowment can be over one billion dollars at many of the richest universities.^[1] However, each university typically has numerous endowments, each of which are frequently restricted to funding very specific areas of the university. The most common examples are endowed professorships (also known as named chairs), and endowed scholarships or fellowships. For instance, Harvard University has 10,800 separate endowments.^[2]

At universities, typically 5% of the endowment's assets are spent every year, with any excess earnings reinvested to augment the endowment and to compensate for inflation and recessions in future years.^[3] "Endowment funds have also been created to support public secondary and elementary school districts in several states. Kansas incorporated its first public school district endowment association in Paola, Kansas, a small town of 5000 population, in 1983. Today it has approximately two million dollars in endowed principal which generates approximately $110,000 annually to distribute in scholarships to high school graduates and fund special projects in the district which can not be afforded by the tax base. To promote the development of endowment associations across Kansas, USD 368 Endowment Association which received a statewide award recognizing has developed a "starter kit" to assist other Kansas school districts in the organization and establishment of new endowment associations."

Restricted endowments

Endowment revenue can be restricted by donors in numerous ways. Professorships and endowed scholarship/fellowships are the most common restriction on large donations to an endowment.

Endowed professorships

An endowed professorship (or endowed chair) is a position permanently paid for with the revenue from an endowment fund specifically set up for that purpose. Typically, the position is designated to be in a certain department. The donor is allowed to name the position, which typically takes the format: First-name Last-name professorship of Department-name. Endowed professorships aid the university by providing a faculty member who does not have to be paid out of the operating budget, allowing the university to either reduce its student-to-faculty ratio, a statistic used for college rankings and other institutional evaluations, or direct money that would otherwise have been spent on salaries toward other university needs. In addition, holding such a professorship is considered to be an honor in the academic world, and the university can use them to reward its best faculty or to recruit top professors from other institutions.^[4] Currently, a donation of $1-3 million is required at most universities to endow a professorship.

The practice of endowing professorships began in England more than five centuries ago, in 1502, when Margaret, Countess of Richmond -- and grandmother to the future King Henry VIII -- created the first endowed chairs in divinity at the universities of Oxford and Cambridge.^[5]

Nearly 50 years later, Henry VIII established the Regius Professorships at both universities, this time in five subjects: divinity, civil law, Hebrew, Greek, and physics -- the last of those corresponding to what we now know as medicine and basic sciences.

Private individuals soon adopted the practice of endowing professorships. Isaac Newton held the Lucasian chair of mathematics at Cambridge beginning in 1669, and today that chair is held by the celebrated physicist Stephen Hawking.^[6]

Endowed scholarship/fellowship

An endowed scholarship is tuition (and possibly other cost) assistance that is permanently paid for with the revenue of an endowment fund specifically set up for that purpose. It can be either merit-based or need-based (which is only awarded to those where the college expense would cause their family financial hardship) depending on university policy or donor preferences. Some universities will facilitate donors meeting the students they are helping. Given the cost of college, finance is frequently a factor when students decide where to go to college. By offering them money, colleges are sometimes able to lure students away from other universities. The amount that must be donated to start an endowed scholarship can vary greatly.

Fellowships are similar, although they are most commonly associated with graduate students. In addition to helping with tuition, they may also include a stipend. Fellowships with a healthy stipend can lure students away from the workforce, to work on a doctorate. Frequently, teaching or working on research is a mandatory part of a fellowship.

Criticisms

Officials in charge of the endowments of some universities have been criticized for "hoarding" and reinvesting too much of the endowment’s income. Given a historical endowment performance of 10–11%, and a payout rate of 5%, around half of the endowment’s income is reinvested. Roughly 3% of the reinvestment is used to keep pace with inflation, leaving an inflation-adjusted 2% annual growth of the endowment. At some universities, if this 2% were spent, then tuition costs could be significantly lowered.

Two arguments against inflation adjusted endowment growth are:^[7]

1. The future needs the money less than the present – Trends strongly suggest that the future will be much richer materially than the present due to technological innovation and specialization.
2. A constantly growing endowment shields universities from competitive forces – As the endowment’s reinvestment starts becoming a larger part of its growth, the need for happy students and alumni to donate funds to the university’s budget and endowment are reduced. Therefore, traditional market forces that provide incentives to run a university efficiently may be greatly reduced and at least theoretically lead to university administration not being held accountable for its actions. (This might also be considered a worthy goal, as it would mean the freedom of academia from financial concerns, which could cause a wider range of research topics to be available to students and faculty.)

Notable endowment funds

• The United Negro College Fund
• National Wildlife Federation
• Bill & Melinda Gates Foundation

See also

• Lists of institutions of higher education by endowment
• Endowment tax

References

External links

• Sutton Trust: University Endowments - A US/UK Comparison
• Ford Foundation: A Primer for Endowment Grantmakers