A financial endowment is a proper donation of money or property to an institution. The total value of an institution's investments is often referred to as the institution's endowment and is typically organized as a public charity, private foundation, or trust.
Among the institutions that commonly manage endowments are academic institutions (e.g., colleges, universities, and private schools), cultural institutions (e.g., museums, libraries, theaters, and hospitals), and religious establishments.
An endowment may come with stipulations regarding its usage. In some circumstances, an endowment may be required to be spent in a certain way or alternatively to be invested, with the principal to remain intact in perpetuity or for a defined period, which allows for the donation to have an impact over a longer period than if it were spent all at once.
- 1 College and university endowments
- 2 Financial operation
- 3 Quasi-endowments
- 4 Types of endowment funds
- 5 Criticisms
- 6 See also
- 7 References
- 8 Further reading
- 9 External links
College and university endowments
Academic institutions, such as colleges and universities, will frequently control an endowment fund that finances a portion of the operating or capital requirements of the institution. In addition to a general endowment fund, each university may also control a number of restricted endowments that are intended to fund specific areas within the institution. The most common examples are endowed professorships (also known as named chairs), and endowed scholarships or fellowships.
In the United States, the endowment is often integral to the financial health of educational institutions. Alumni or friends of institution sometimes contribute capital to the endowment. The endowment funding culture is strong in the United States and Canada but less pronounced overseas, with the exceptions of Cambridge and Oxford universities. Endowment funds have also been created to support secondary and elementary school districts in several states in the United States.
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. The restricted/unrestricted distinction focuses on the use of the funds; see quasi-endowment below for a distinction about whether principal can be spent.
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 a "First-name Last-name Professor of Department-name" format. Endowed professorships aid the university by providing a faculty member who does not have to be paid entirely 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, and/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. 
The earliest "endowed chairs" were those established by the Roman emperor and Stoic philosopher Marcus Aurelius in Athens in AD 176. Aurelius created one endowed chair for each of the major schools of philosophy: Platonism, Aristotelianism, Stoicism, and Epicureanism. Later, similar endowments were set up in some other major cities of the Empire.
The practice was adapted to the modern university system beginning in England in 1502, when Lady Margaret Beaufort, Countess of Richmond and grandmother to the future king Henry VIII, created the first endowed chairs in divinity at the universities of Oxford (Lady Margaret Professor of Divinity) and Cambridge (Lady Margaret's Professor of Divinity). Nearly 50 years later, Henry VIII established the Regius Professorships at both universities, this time in five subjects: divinity, civil law, Hebrew, Greek, and physic—the last of those corresponding to what we now know as medicine and basic sciences. Today, the University of Glasgow has fifteen Regius Professorships.
Private individuals soon adopted the practice of endowing professorships. Isaac Newton held the Lucasian Chair of Mathematics at Cambridge beginning in 1669, more recently held by the celebrated physicist Stephen Hawking.
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 students for whom 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. 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 stipend may encourage students to work on a doctorate. Frequently, teaching or working on research is a mandatory part of a fellowship.
A financial endowment is typically overseen by a board of trustees and managed by a trustee or team of professional managers. The financial operation of the endowment is typically designed to achieve the stated objectives of the endowment.
At universities, typically 4-6% of the endowment's assets are spent every year to fund operations or capital spending. Any excess earnings are typically reinvested to augment the endowment and to compensate for inflation and recessions in future years. This spending figure represents the proportion that historically could be spent without diminishing the principal amount of the endowment fund. However, the financial crisis of 2007–2010 had a major impact on the entire range of endowments globally.
Most notably, large U.S.-based college and university endowments, which had posted large, highly publicized gains in the 1990s and 2000s faced significant losses of principal across a range of investments. The Harvard University endowment fund, which held $37 billion on June 30, 2008, was reduced to $26 billion during the following year. Yale University, the pioneer of an approach that involved investing heavily in alternative investments such as real estate and private equity, reported an endowment of $16 billion as of September 2009, a 30% annualized loss that was more than predicted in December 2008. At Stanford University, the endowment was reduced from about $17 billion to $12 billion as of September 2009. Brown University's endowment fell 27 percent to $2.04 billion in the fiscal year that ended June 30, 2009. George Washington University lost 18% in that same fiscal year, down to $1.08 billion.
In Canada, after the financial crisis in 2008, University of Toronto reported a loss of 31% ($545 million) of its previous year-end value in 2009. The loss is attributed to over investment in hedge funds.
A quasi-endowment, or fund functioning as an endowment, are funds merely earmarked by an organization’s governing board, rather than restricted by a donor or other outside agency, to be invested to provide income for a long but unspecified period, and the governing board has the right to decide at any time to expend the principal of such funds. Separately from the endowment versus quasi-endowment distinction, there's another 2-way categorization of restricted and unrestricted, which focuses on the use of the funds. As an example, a quasi-endowment might be restricted by the donor to supporting the tennis team; the use is restricted to one purpose, but the governing board could "invade principal" to support the tennis team.
Types of endowment funds
- True endowment funds are received from external donors with restriction that the principal or gift amount is to be retained in perpetuity and cannot be spent.
- Term endowment funds all or part of the principal may be expended only after the expiration of a stated period of time or occurrence of a specified event, depending on donor wishes.
- Quasi endowment funds must retain the purpose and intent as specified by the donor or source of the original funds and earnings may be expended only for the specified purpose.
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. Of course, many endowments fail to earn 10-11%.
Two arguments against inflation adjusted endowment growth are:
- The future needs the money less than the present
Some claim that the future will be much richer materially than the present due to technological innovation and specialization. In counterpoint, Nobel laureate James Tobin makes a case for intergenerational equity.
- 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 is 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. (However, 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.)
Large endowments have been criticized for "hoarding" money. Most philanthropies are required by federal law to distribute 5% of their assets per year, but university endowments are not required to spend anything. Many universities with very large endowments would require less than 5% to pay full tuition for all their students. For example, it has been estimated that if in 2006 all the Harvard students had paid the maximum in tuition and fees, it would have amounted to less than $300 million. In 2007, if Harvard had spent 5% of its $34.6 billion endowment, all Harvard undergraduate and graduate students could have attended for free and the university would still have had $1.3 billion left over. It would require less than 1% of the endowments of Harvard and Yale to allow all students to attend tuition-free; Stanford, MIT, Princeton and Rice would require less than 2% of their endowments and 29 other schools would require less than 3% for all their students to attend tuition-free. Despite the decreasing values of endowments, congressmen, including Charles Grassley, have questioned whether the endowments are contributing enough to maintain their tax-exempt status. After reviewing work in developing nations by 50 higher education institutions with endowments over $1 billion, Peter Hotez of George Washington University has stated that "pharmaceutical companies are doing more for the poorest people [in the world] than most of our wealthiest universities."
Financial endowments range in size depending on the size of the institution and the level of community support. At the large end of the spectrum, the total endowment can be over one billion dollars at many leading private universities. As an example, Harvard University has the largest endowment in the world with $32.7 billion in assets as of June 30, 2013. 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 has 10,800 separate endowments.
Socially and environmentally responsible investing
Many college and university endowments have come under fire in recent years for investing in practices such as investing in fossil fuels, "land grabs" in poor countries and high-risk, high-return investment practices that led to the financial crisis.
- List of colleges and universities in the United States by endowment
- List of Australian universities by endowment
- List of wealthiest charitable foundations
- Lists of institutions of higher education by endowment
- Endowment tax
- Endowment invasion
- Kansas incorporated its first public school district endowment association in Paola, Kansas, a small town of 5,000 people, in 1983. Today, it has approximately $2 million 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.
- Cornell's "Celebrating Faculty" Website
- Frede, Dorothea (2009). "Alexander of Aphrodisias > 1.1 Date, Family, Teachers, and Influence". Stanford Encyclopedia of Philosophy. Stanford University. Retrieved 6 September 2012.
- Lynch, John Patrick (1972). Aristotle's school; a study of a Greek educational institution. University of California Press. pp. 192–207; 213–216. ISBN 9780520021945.
- Lady Margaret's 500‑year legacy - University of Cambridge.
- Bruen, Robert (May 1995). "A Brief History of The Lucasian Professorship of Mathematics at Cambridge University". Robert Bruen. Retrieved 6 September 2012.
- So Nicely Endowed! Newsweek: Kaplan College Guide
- Harvard fund loses $11B, a September 11, 2009 article from the Boston Herald
- Yale Endowment Down 30%, a September 10, 2009 article from The Wall Street Journal
- Stanford University endowment loses big, a September 3, 2009 article from the San Francisco Chronicle
- Brown’s Endowment Investments Drop 23% in Year, a September 9, 2009 article from Bloomberg
- GW endowment drops 18 percent, an August 27, 2009 article from The GW Hatchet
- Burrows, Malcom D. (2010). "The End of Endowments?". The Philanthropist 23 (1): 52–61.
- "Not-for-Profit Organizations". AICPA Audit and Accounting Guide (American Institute of Certified Public Accountants): 367. May 1, 2007.
- Donald Frey, "University endowment returns are underspent", Challenge, July–August 2002.
- Gregg Easterbrook (October 4, 2007). "Come clean, Marino and Aaron!". ESPN.com. Retrieved 4 September 2010.
- Gregg Easterbrook (October 2, 2008). "No more battles of the unbeaten this season". ESPN.com. Retrieved 4 September 2010.
- Goldie Blumenstyk (March 7, 2010). "Financial Affairs: Why the Endowment-Spending Debate Matters Now More Than Ever". The Chronicle of Higher Education. Retrieved 2 September 2010.
- Lynne Munson (April 2008). "Endowment Reform: Why Universities Should Share Their Vast Wealth and in the Process Make Higher Education More Affordable" (PDF). Center for College Affordability and Productivity. pp. 11–14. Retrieved 4 September 2010.
- Minnesota Council on Foundations. "Frequently Asked Legal Questions: 5% Payout Rule". Retrieved 2 September 2010.
- Bryan Murphy (September 4, 2007). "Harvard Endowment Should Mean Free Tuition". The Daily Campus. Retrieved 2 September 2010.
- "2007 NACUBO Endowment Study" (PDF). National Association of College and University Business Officers (NACUBO). 2007. Retrieved 2008-07-08.
- "Endowment Value Rises to $32.7 Billion". Harvard Magazine. November–December 2013. Retrieved December 7, 2013.
- The Harvard Guide: Harvard's Endowment Funds
- "The Great Land Grab: Rush for World’s Farmland Threatens Food Security for the Poor" (PDF). Oakland Institute. Retrieved December 7, 2011.
- "Educational Endowments and the Financial Crisis" (PDF). Tellus Institute. Retrieved December 7, 2011.
- Newfield, Christopher (2008). Unmaking the public university: the forty-year assault on the middle class. Harvard University Press. p. 162. ISBN 978-0-674-02817-3.
- Sutton Trust: "University Endowments - A US/UK Comparison'
- Ford Foundation: A Primer for Endowment Grantmakers
- Dada, Kamil (February 1, 2008). "Congress investigates endowment". Stanford Daily.
- 12 SMA for Financial Endowments