March 2, 2016
Members of Congress are again pursuing the matter of endowment spending at U.S. colleges and universities. As the chairman of the House Ways and Means Oversight Subcommittee stated, Congress feels the need to have a better understanding of how endowment funds and “the exorbitant cost” of higher education connect. Two Congressional committees recently sent letters to 56 private higher education institutions seeking information on endowment fees and spending policies, including naming rights and gift acceptance policies. These schools have endowments larger than $1 billion.
These schools also represent less than two percent of all the four-year institutions in the country.
But while this battle plays out between Congress and the tiny representation of all four-year institutions in the country, “endowments” risk getting a bad rap.
An endowment helps support an organization’s mission in perpetuity. It is generally never one fund but rather an aggregation of many endowed funds with varying restrictions. As is often quoted, “an endowed gift keeps on giving,” as its principal cannot be spent. An institutional endowment assures a relatively stable stream of income in the face of fluctuating economic and demographic conditions.
Endowments are vitally important for colleges and universities – for independent schools and many other organizations, really – although it is the higher education sector that is getting all the attention recently about the matter of endowment spending. While Congress and others may question the endowments that seem to grow exponentially, the American Council on Education reports that in 2012, more than half of four- and two-year private nonprofit colleges and universities had endowments of less than $10 million. In reality, many institutions depend on endowment earnings to provide stability with a steady stream of income.
Graham-Pelton Consulting works with a variety of higher education clients, some in the “huge” endowment category and many in the non-remarkable but highly significant smaller endowment category. We take very seriously our role in helping these institutions solicit prospective donors for endowment gifts, both restricted and unrestricted. While in years past we have heard the argument that endowments are not a compelling enough cause to ask donors to support in the face of more tangible bricks-and-mortar projects, we find the campaigns of our higher education clients often focus on endowed funds: commonly, unrestricted endowment gifts, scholarships, professorships, and chairs.
For a number of these institutions, building the scholarship funding pool helps attract a more qualified and diverse student body that in fact adds value to the educational experience of all attending the college. For public institutions, having this source of financial aid can be especially critical as state funding levels decrease. Professorships and chairs ensure that innovation in the classroom and scholarly research by faculty is valued, and these funds serve to attract exceptional talent to institutions – again, raising the stakes for a better experience for all who are a part of that institutional community. Unrestricted endowment gifts represent the greatest demonstration of belief that a donor can place in an institution. They signal that the donor understands the value of endowed funds as a means to support the long-term execution of educational mission, generations after the donor’s death – and that the donor chooses to allow the institution to determine the greatest needs to be funded by endowment earnings.
A lesser known but common corollary of these endowment dollars is the “rainy day” rationale. For example, if facilities are damaged in a natural disaster, an institution can choose to tap its endowment to help bring the school back up and running. Endowments help alleviate budgetary constraints that may be unplanned and assure that critical institutional programs and functions continue to be supported. Indeed, private support in the form of annual and major gifts remains a vital funding source; however, colleges and universities are hard-pressed to find donors who want to provide for items such as snow removal equipment, cleaning services for the recreation center, and operational costs for all the increasing accreditation requirements that government and other agencies demand of the institution. Endowment earnings can help supplement these budgetary drains.
The intersection of access, cost of education, and tuition increases is indeed a complicated one. A huge gap in understanding exists between those charged with making the college run effectively, according to mission and as financially solvent as possible, and essentially “everyone else.” Opinions abound on what a college degree should cost (and who to enroll, how much to pay faculty, budget for athletics, spending on dining/residence options…).
But as Congress’ actions and the media coverage draw attention to a battle of minds on justifying spending rates and tuition increases, what may very well result is a maligning of the endowment-building efforts in higher education. This only serves to make more difficult the noble effort of endowment fundraising for so many colleges and universities in desperate need for endowment support. Graham-Pelton sincerely hopes this unfortunate outcome is not realized, and remains committed to assisting our clients in this very important effort.
-Patricia B. House, Ed.D., Senior Vice President