Harvard University has an endowment of $41.9 billion, larger than the GDP of some small countries. Some question why a college or university cannot spend more of its endowment during times of financial hardship or emergency and argue that they should spend more.
TSL spent the semester researching endowments and talking to the undergraduate Claremont Colleges administration about how each college’s endowment is run — here’s what we learned.
In short, endowment funds provide continual support for short-term needs and long-term financial stability and welfare for the students, faculty and programs within the college. An endowment consists of financial assets, charitable donations and various kinds of investments.
Endowments are often controlled by the various schools’ Board of Trustees and the Uniform Prudent Management of Institutional Funds Act, a nationwide law excluding Pennsylvania, that provides guidance on investment and endowment decisions for nonprofit and charitable organizations.
An endowment cannot be likened to one large bank account — it is composed of many individual funds, some of which are restricted. Oftentimes, contributions donors make to an endowment are restricted for use in a specific area, such as scholarships or endowed professorships.
On the other hand, unrestricted funds are assets that can be spent, saved or invested for any purpose deemed necessary by the institution. Different parts of the endowment may also have various levels of liquidity: how easily the funds can be accessed for immediate spending.
Endowment funds can be invested in order to earn income for the school and help the endowment maintain and grow its value. Every year, the endowment’s purchasing power needs to grow in order to meet or beat inflation and provide the necessary funds for the school’s budget.
Pomona College’s current endowment is valued at $2.3 billion, Pomona spokesperson Mark Kendall told TSL via email. Pomona’s endowment in 2019 was around $2.3 billion as well, according to its audited financial statements.
The endowment provides 53 percent of Pomona’s annual operating budget and supports operations across Pomona such as need-blind financial aid, faculty and staff salaries and general operations. It consisted of around 1,800 individual funds as of 2019, according to that year’s financial report.
“While most institutions rely heavily on tuition for most of their annual budgets, Pomona’s endowment, carefully stewarded over decades, has allowed the college to make enduring commitments to recruiting students from all socioeconomic backgrounds and providing students with excellent financial aid,” Kendall said.
Kendall said that of the annual endowment payout, the spendable amount used to support the college’s expenditures, 56 percent is unrestricted.
“The endowment is in no way a rainy-day fund,” Kendall said. “It is a continual source drawn on year after year, in what must be a steady and sustainable way to maintain our lasting commitments to students.”
According to Robert Goldberg, Pomona vice president, COO and treasurer, there are two basic sources of the endowment: donors and investment returns.
“Donors can make gifts to the endowment,” Goldberg said. “We also have an in-house team that invests our money. We work with an outside consultant, and we are under the general supervision of the investments committee of the Board of Trustees to manage the endowment to make sure that its buying power is maintained and grows.”
To make sure Pomona can continue to “meet these commitments to students” regarding financial aid, facilities and the academic experience, the college has limits on how much they can take from the endowment each year, Kendall said.
Spending from the endowment is governed by the college’s spending rule, which currently allows the college to spend between 4.5 percent and 5.5 percent of the average endowment unit market value during the previous 20 quarters, Kendall said.
The precise amount is determined by applying a 2 percent growth rate to the previous year’s spending per unit, subject to the 4.5-5.5 percent lower and upper limits. The 2 percent growth rate represents the expected long-term annual inflation rate.
“Every year we have to grow the endowment so that it can fund the annual path of the budget and at least meet or beat inflation,” Goldberg said. “The buying power of the endowment has to grow every year. We are conservative in how we invest and we want to make sure that we’re taking advantage of the market and the range of investments to help protect the portfolio from ups and downs.”
Goldberg said that despite the “huge downturn in the stock market” in the spring due to COVID-19, the endowment has since “come back,” and the year ended up in better shape than predicted.
Scripps College’s endowment was established in 1926 with an initial gift of $500,000 from Ellen Browning Scripps and has since grown to $328 million as of June 30, 2020, according to Scripps spokesperson Rachael Warecki.
“Endowment gifts offer donors the opportunity to support the college with gifts that provide intergenerational support in perpetuity. They are essential in building the long-term fiscal health of Scripps,” Warecki said via email.
Allocations are largely determined by donors, as 90 percent of the endowment is comprised of restricted funds: funds that can only be used in accordance with donor designations. The remaining 10 percent of the endowment is spent at the college’s discretion.
“On a regular basis, unrestricted endowment funds and releases for scholarships and financial aid are covering approximately 20 percent of the operating budget, and provide a steady stream of income to support operations,” Warecki said.
In addition to financial aid and scholarship, the endowment is also used for faculty support and maintenance of facilities.
Scripps’ endowment spending is also guided by its Board of Trustees policy and the UPMIFA.
“This provides guidance on how the board invests and spends from the endowment at a rate that will preserve the purchasing power of the principal over the long term,” Warecki said. “It requires the board to act prudently and consider general economic conditions, expected return and appreciation, effects of inflation and deflation, other resources and the need to fund distributions and preserve capital.”
The Board of Trustees has set a target spending rate of 4.5 percent of a 20-quarter moving average of the endowment. California’s UPMIFA includes a provision that says this spending rate should remain under 7 percent.
In the shifting economic climate of the pandemic, Scripps will increase endowment spending for the 2020-21 fiscal year from the original spending rate of 4.7 percent from 2019-20 to 6.6 percent, Warecki said, and then revert back to 4.5 percent for 2021-22.
Pitzer College’s endowment is currently valued at $144 million, according to Laura Troendle, Pitzer’s treasurer and vice president of finance and administration.
Pitzer’s spending rate was 4.3 percent and saw a 3.5 percent increase in the one-year return on investments, which was “pleasantly expected given the market impact from the pandemic in the first quarter of the calendar year,” Troendle said via email.
According to Troendle, Pitzer’s perpetual endowment — funds for which the investment capital can never be spent — is approximately $35 million. Other donor-restricted funds make up $23 million, which is put toward student scholarships, internships and research. The rest of the funds, which are unrestricted, are worth approximately $86 million and are used to fund professorships, student support systems and residence hall and building maintenance.
“Pitzer College has run a few campaigns to help grow the endowment with specific projects being the focus. In our most recent campaign that ended in June 2014 for the residence halls construction and renovation for the conservancy and Gold Center, the College raised $6M to help fund these valuable projects,” Troendle said.
Aligning with the environmentally driven residence hall projects, Pitzer has made sure that the endowment itself is sustainable through divestment and new investment strategies.
“One of the most notable investment strategies Pitzer has executed is to divest from all fossil fuel related investments and to invest in a new concept, an ESG fund – Environmental, Social and Corporate Governance fund concept which are three key factors in measuring the sustainability for investment companies and businesses and their impact on society,” Troendle said.
Harvey Mudd College
Harvey Mudd College’s endowment was valued at $319.7 million as of June 30 of this year, according to HMC’s 2019-20 financial report.
The endowment has decreased since 2019, when it was valued at around $328.6 million.
According to HMC’s website, the endowment serves to provide an ongoing stream of revenue to support current students and activities while also preserving the value for future students and projects.
Every year, 20 to 25 percent of HMC’s operating budget is derived from the endowment, according to the website. The endowment also funds scholarships, professorships, fellowships, prizes and support for research and experiential learning.
Of the $15.6 million endowment payout, around 91 percent does not have donor restrictions, while the other 9 percent does, according to this year’s financial report.
Restricted endowment investments added up to $253.2 million — 79.2 percent — and those without donor restrictions amounted to $66.5 million.
“The Board of Trustees has designated a portion of net assets without donor restrictions to function as endowment, loan funds and for other specific purposes,” the 2019-20 financial report said.
On the other hand, net assets with restrictions primarily include gifts of cash, long-term assets and endowment gains available to be set aside for a specific purpose under the college’s spending policy.
“Investments are made with the goal of maintaining the purchasing power of endowment gifts over the long term while providing a steady and predictable stream of funds to be spent in accordance with the terms set forth by the donor,” the website states.
Claremont McKenna College
Claremont McKenna College’s endowment reached a record high value of $865 million on June 30, 2019, according to the financial report for the 2018-19 fiscal year. After a volatile year in the pandemic financial market, the value of the endowment decreased down to $855 million for the 2019-20 fiscal year.
Approximately 77.1 percent of CMC’s endowment investments are donor-restricted, while the rest — $196 million — is unrestricted.
Endowment income funded approximately 30 percent of CMC’s operating expenses, according to Erin Watkins, associate vice president for finance, in this year’s financial report.
Out of the endowment income, 40 percent is used for faculty and academic purposes, 29 percent is used for student aid and 13 percent is used for institutes, Gilien Silsby, CMC spokesperson, said via email.
The college’s 2020 spending rate remained the same as 2019, flattening at 4.7 percent, according to the 2019-20 financial report.
“The formula is designed to preserve the endowment’s real (inflation-adjusted) purchasing power while providing a predictable, stable, and constant (in real terms) stream of operating budget support,” Watkins said in this year’s financial report.
CMC purchased eight acres of land along the east border of campus with intentions to eventually house Claremont-Mudd-Scripps athletic fields there, according to Watkins.
In times of economic downturn, endowments offer a buffer for operating costs, but colleges often reduce spending to conserve endowment resources.
“As part of its planning, the college implemented a wide array of cost-cutting measures, including responsible limits on hiring and salaries, targeted reductions in operating budgets, reductions in executive salaries and reductions in retirement benefits,” Watkins said.
Jaimie Ding contributed reporting.