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Why Do Universities (Still) Have Endowments?

Colleges and universities—especially the elite ones—often foreground their constructive engagement with causes and issues related to social justice. This often means calling attention to their successes in fostering diversity or supporting need-blind admissions and backing that support up with generous tuition assistance for middle- and lower-income families. But the role those elite institutions play in perpetuating and even deepening class inequality is very real. Their commitments to social justice seem to mitigate the obvious ways elite schools foster inequality—admitting poor kids and kids from traditionally excluded groups diminishes the injustice that was once a hallmark of such institutions’ functioning. But, despite these new commitments, such elite institutions are nevertheless aggressively accumulating resources, narrowing the path to success for all but a few individuals, putting anticompetitive pressures on competitors with inferior resources striving to keep pace, and participating in risky financial practices that have proven destructive not only for the universities whose endowments have undertaken them but for their communities and for society at large. Big endowments are everyone’s problem and it is a mistake to accept the talk of social justice at face value without understanding the problem they pose.

Last year, a member of Williams College’s Comparative Literature department, who is also a dean there, gave a talk about museums and culture in the Department of Art and Art History at William & Mary. The conversation turned to Williams’ store of artifacts from nineteenth-century Hawaii. Unsurprisingly, this collection evidences unfortunate historical dealings between members and alumni of the Williams community and the former Kingdom of Hawaii.[i] In the course of discussion, one topic that arose was the convenience of talking about recognizing past injustices at an institution with a $2.75 billion endowment. As if she were speaking from a set of talking points, the guest pointed out that the student body was now very diverse in the most familiar sense—around 40 percent of Williams’ students belong to U.S. nonwhite populations—and even economically diverse—22-percent Pell grant eligibility, as of 2015. The fact that she anticipated a response to the 40 percent figure—which is pretty good, even if black students are still underrepresented (8 percent), etc.—and had an impressive response on Pell grants was quite a surprise. Clearly, administrators have absorbed the lessons of Walter Benn Michaels’ The Trouble with Diversity and responded aggressively over the past dozen years.[ii] (Since median household income in the U.S. in 2018 was about $62,000, and almost all Pell grants go to students from households making $50,000 or less, 22 percent is still a little low, perhaps, but it’s better than the state school where the talk took place, with its 9-percent Pell grant rate.) All of this leads one to wonder, are prestigious institutions like Williams actually using their wealth to address economic (and not only identity-driven) inequalities?

The simple answer is no. The median family income of Williams College students’ families is still $185,800, and 67 percent of them come from families with household income in the top 20 percent of U.S. households.[iii] In fact, Williams’ generous need-based aid helps even solidly upper-middle-class households (see fig. 1). A household making $105,000 annually is in the 75th percentile of U.S. households. Using some reasonable assumptions about the family’s wealth, it turns out that Williams will offer them about $47,500 in financial assistance and expect a contribution of roughly $20,300.[iv] So, while that generous financial aid policy is a boon to upper-middle-class families, it’s a little misleading to represent it as an aggressive attempt to address income inequality. While Williams’ Pell grant rate is around 22 percent, only 5.3 percent of its students come from households in the poorest-paid quintile of the nation.

And even that statistic hides a darker truth. “Over 50 percent of the lower-income black undergraduates who attend elite colleges get there from boarding, day, and preparatory high schools,” as Anthony Abraham Jack has recently pointed out. For lower-income Latino students, it’s about one-third.[v] Jack calls this group the “Privileged Poor,” as opposed to the “Doubly Disadvantaged,” who attend high schools “close to home.” Both groups face serious challenges at elite institutions, but the Privileged Poor fare better in many ways, which means that admission and success at such colleges and universities is entangled with access to other, similarly exclusive and resource-intensive institutions. Diversity at elite schools like Williams is not a story about throwing the doors of America’s aristocracy open to everyone. It’s about the ongoing intensification of resources in privileged institutions. Schools with very large endowments are making inequality worse and putting economic pressures on schools without such advantages.

Which recalls to mind Harvard’s embarrassment at being forced to admit in October 2018, in connection with the lawsuit brought by Asian-American applicants, that—even while it was aggressively pursuing both racial/ethnic diversity and economic diversity—it was even more precisely targeting applicants connected to major donors. Harvard is not special in this respect. Obviously, other schools with similar franchise value are targeting applicants with major giving capacity even as they pursue better Pell grant rates. Williams still draws 2.8 percent of its students form the top 0.1 percent of U.S. households by income. That might not seem like a large percentage, but it’s 2800 percent as many of those students than one would expect in a random sample. (And at least an order of magnitude greater than their representation at William & Mary, which does well with the upper middle class, but poorly with the super-rich.) But Williams is hardly unusual in this respect, either. A quick glance at some similarly elite institutions makes the point: Harvard’s median family income is $168,800. Three percent of its students come from the top 0.1 percent of households, while 67 percent are from the top quintile and only 4.5 percent are from the lowest. Yale’s median family income is $192,600. The top 0.1 percent supplies 3.7 percent of its students; 69 percent come from the top quintile, and 2.1 percent from the bottom quintile. Princeton’s median family income is $186,100. The top 0.1 percent of households supplies 3.1 percent of Princeton’s students, while 72 percent of them come from the top quintile and 2.2 percent from the lowest-earning quintile. It’s not just the Ivy League, either. The median family income of households sending students to USC is $161,400. The top 0.1 percent contributes 2.6 percent of USC’s students, while the top quintile supplies 63 percent and the lowest quintile 4.9 percent.[vi] And so on.

Back to the large endowments. They’re the reason admissions skew toward high-income households and the reason elite schools can afford to support the admission of students who make their demographics look better. Those endowments finance what progressive reforms such schools enact. In Williams’ case, the college’s budget is small in relation to the endowment. For the year ending June 30, 2018, Williams got $113.4 million in tuition and fees and $26.5 million in room and board, gave roughly $55.0 million back in financial aid and used about $110 million of the income from the endowment to support the budget.[vii] Given that the endowment has produced an annualized rate of return over the past five years (as of 2017) of 10.9 percent,[viii] that’s a pretty ordinary payout—applying about 4 percent of the endowment to the budget. Obviously, a considerable part of the growth of the endowment remained in the endowment.

Alumni giving comes on top of all this asset management. Williams’ recently completed “Teach It Forward” campaign received $665 million in donations from 27,294 individual donors.[ix] This is good news because it puts Williams well on the way to another billion. But it’s also success insofar as development specialists rank participation rate right up there with total donations. A lot of small donations are better than a few big ones. Still, that’s $24,364.33 per donor, on average, which shows how well Williams has cultivated giving capacity in its alumni. The same document that links to the Teach It Forward success story—a summary of the January 2019 meeting of the college’s board—celebrates two new named spaces on the campus “in honor of alumni and their philanthropic support.”[x] So there’s still room for the big donors, too. Of course, the Teach It Forward campaign involves other kinds of engagement, including mentoring, and is devoted to fostering the kinds of inclusion and equity we began with.

On the other hand, $665 million is $665 million. Any contribution, no matter the purpose that recruited it, becomes part of the wealth of the college. Even if it is spent immediately on some budget item consistent with its advertised purpose, it frees up other money for other purposes—money that might have been used for the purpose featured in the giving campaign. That is, the connection between the proceeds of the campaign and actual line-items in the budget will surely not be fully determined by the theme of the campaign.

Maybe this would be the place to point out that “endowment” is not technically the right term for the fund colleges and universities set aside and manage in the ways I’ve been discussing. Some of your university’s “endowment” is actually funds that must be held in perpetuity—true endowment—, but a lot of it is also “quasi-endowment,” or funds your university has set aside when it could have spent them. Such funds may be bound to a purpose, but they and their returns can legally be spent. This is important. The term endowment makes accumulation seem like the rightful purpose of the college’s funds. But that is only the case, legally, for true endowment funds; for the rest of the college’s money, accumulation is a choice.

How central is accumulation to the purpose of large endowments? Consider who manages them and how. These funds are managed semi-autonomously. Williams runs its own fund; Yale hires an external asset manager. But from a practical point of view, the difference is minimal. Collette Chilton, who runs the Williams College Investment Office, last served as the Chief Investment Officer and President of Lucent Asset Management Corporation ($40 billion in assets under management). In recent decades, there has been a busy revolving door between endowment management and other sectors of the shadow banking system. Presumably she made the move because it’s a better position than running Lucent Asset Management and the same kind of work. So, one assumes that, logically, from her point of view, Williams is a hedge fund whose investor withdraws its money at a steady rate of around 4 percent—enough to keep the fund growing during good times. Even without new assets from wealthy families with gifted high-school juniors. Seen that way, the economic diversity of the student body is a secondary consideration. That is, from its point of view as an asset management corporation, Williams’ endowment’s contribution to the college’s budget is just part of the cost of doing business (and seeding a new crop of donors). Another way to put this would be to say that, rather than an engine for reducing inequality, such a school is a mechanism for concentrating wealth.

As the New York Times explains, Daniel Markovits, a professor of law at Yale University and the author of The Meritocracy Trap: How America’s Foundational Myth Feeds Inequality, Dismantles the Middle Class and Devours the Elite (New York: Penguin Press, 2019), believes that, “if growth trends continue,”

the 10 richest schools will “own the entire country” by the middle of the 22nd century.

Unless, that is, either populist resentment—or even “societal collapse,” as he ominously puts it—destroys them first.[xi]

Let’s be optimistic and assume that something other than societal collapse can prevent the Ivy League from ruling the world. Markovits is still pointing to a very real problem.

Should something be done about this? There have been periodic calls to deprive university endowments of their tax-free status. Senator Chuck Grassley has been vocal about this.[xii] Some of the very wealthiest universities may now start paying a 1.4-percent tax on their wealth. There may even be a possibility of bi-partisan support for some kind of proposal that connects rising tuition costs to regulation or taxation of endowment income. One widely read study suggests taxing a university’s endowment if it grows while that university’s tuition simultaneously increases.[xiii] What we’ve seen at Williams, however, makes the merits of such a proposal, as attractive as it may seem at first glance, less than clear. If Williams uses its endowment income to render its tuition effectively progressive—middle-class families pay only a fraction of the full ticket while the 0.1-percenters pay the sticker price—maybe, rather than tax the endowment or link such a tax to the nominal tuition, the right thing to do is simply to press the school to get more serious than it already is about recruiting promising students from lower-income households.

A more interesting—certainly more fundamental—question might be, why does it work this way? Or rather, to borrow the title of a 1990 essay by the legal scholar Henry Hansmann, why do universities have endowments?[xiv] The question itself is surprising. Of course universities have endowments! How else would they support their teaching, research, outreach, etc., missions?

Hansmann’s argument was that endowments were managed too conservatively and that rethinking their purpose might help schools with large endowments refocus their approach to investing. Businesses generally turn to debt to finance capital outlays. And universities usually have tremendous assets against which they could borrow (“Why,” 3-5). Huge financial reserves are too inefficient for businesses, so why were they considered indispensable to universities? In fact, since Hansmann’s writing, universities have taken to borrowing against their endowments (both in order to increase gains and to exploit tax and interest advantages that derive from their status as very safe nonprofits). That still doesn’t answer the question, though. Why do they need endowments? The classic answer, offered in 1974 by James Tobin is the concept of “intergenerational equity”:

The trustees of an endowed institution are the guardians of the future against the claims of the present. Their task is to preserve equity among generations. The trustees of an endowed university…assume the institution to be immortal. They want to know, therefore, the rate of consumption from endowment which can be sustained indefinitely. Sustainable consumption is their conception of permanent endowment income. In formal terms, the trustees are supposed to have a zero subjective rate of time preference.

Consuming endowment income so defined means in principle that the existing endowment can continue to support the same set of activities that it is now supporting. This rule says that current consumption should not benefit from the prospects of future gifts to the endowment. Sustainable consumption rises to encompass an enlarged scope of activities when, but not before, capital gifts enlarge the endowment.[xv]

As Hansmann points out, these views are not Tobin’s, but those he attributed to the trustees who actually oversaw the management of the typical university’s endowment. As the bulk of Hansmann’s essay argues, intergenerational equity, whatever the place it holds in the mind of the typical university trustee, cannot explain the actual, historical behavior of universities. One way to see the failure of intergenerational equity as an account of the actual behavior of universities would be to consider what happened during the 2008 financial crisis, when income from endowments was actually suspended: educational institutions slashed budgets to protect endowments. Of course, belt-tightening during a recession sounds like common sense. But what it does not sound like is endowments rushing in during a crisis to “support the same set of activities” that the previous generation of students received.[xvi]

An astounding report by Joshua Humphreys and a team of researchers explains a lot about the transformation of endowments and their relationship to the institutional and civic benefits they are alleged to offer. In fact, Humphreys traces the fallout of the call for more aggressive investment strategies, a phenomenon called the Endowment Model of Investing. Roughly, that means an investing approach based on the insights of Modern Portfolio Theory (in the development of which Tobin was a key figure)—an approach that seeks maximum total returns and diversifies widely to control risk. Hence the leveraging. Assuming that one can invest in a wide array of products the risks of which are minimally correlated, failures in some parts of the portfolio will not produce net losses, even if the portfolio’s holdings are generally aggressive, because those failures won’t imply failures in other holdings—that’s why the low correlation among investments is key. So, beginning in the 1980s, endowments left the 60/40 equities/fixed income approach that had guided them in the past and began leveraging aggressively to invest in unregulated derivatives, hedge funds and other attractions of the shadow-banking world. Endowment portfolios became illiquid (a hedge fund, for example, can prevent investors from withdrawing money to preserve its assets in adverse conditions) and risky. But, to reiterate, such risks are isolated under this approach to investing. At least, they are in theory.

What happened in 2008 shows the weakness of this approach. Big endowments with deep commitments to the Endowment Model lost big—Yale and Harvard lost between a quarter and a third of their money—and the losers were not the investment managers. The losers, Humphreys and his researchers found, were the communities, the schools and their faculty and staff. Big projects were cancelled and workers were laid off, wages were frozen and communities dependent on universities felt the pain. Obviously, these untaxed behemoths might have used their wealth to ensure the stability of their operations during this massive recession. That would serve the interests of intergenerational equity. But they didn’t.

In other words, it’s not that trustees have a “zero subjective rate of time preference”; rather, they positively disadvantage present students and their institutions as a whole in favor of future students. And when those future constituencies become present constituencies, trustee behavior will disadvantage them, too. That’s because it’s not about students at all. It’s about the endowments themselves—about concentrating wealth under the control of a cadre of managers who enrich themselves and answer to weak boards often hobbled by conflicts of interest or a kind of general alignment of sympathies with the investment managers.[xvii]

But isn’t this just the way the world works, and isn’t this the good version of the way the world works because of precisely the sorts of stories we began with? After all there’s the issue we began with, the mission of diversity—economic or otherwise. If a huge endowment like Williams’ is making its very high tuition affordable for students who would otherwise not be able to pay it, is it not doing precisely what an endowment is meant to do? In fact, this is the only scenario in which Hansmann allows that a large endowment actually does what it’s meant to do. He argued that endowments do serve the cause of intergenerational equity when costs increase and demand remains inelastic (i.e., people still want to go to your very expensive school, despite the rising price). And since Williams’ endowment is not just helping the students of today and tomorrow attend a school that is becoming unaffordable (for all but a few), but is making that tuition progressive by linking the student’s share of the costs to his or her family’s resources, the endowment’s contribution is serving not only intergenerational equity but intragenerational equity, too.

Or is it? According to the latest data from the National Association of College and University Business Officers (NACUBO), 802 U.S. institutions of higher education and affiliated foundations held $617 billion in endowment assets. This represents the better part of a trillion dollars in largely tax-free managed asset funds.[xviii] That does not include the universities’ other assets. Their endowments alone amount to a value somewhere around the market capitalization of Facebook.

But as recently as fiscal year 2015, only 85 universities had endowments of a billion dollars or more, and the top 120 institutions held 74 percent or $405 billion of the U.S. total of $547 billion in endowments funds.[xix] So 15 percent of the schools held three quarters of the endowments assets. On a per-student basis, the concentration is equally remarkable. According to NACUBO data from 2015, Princeton University held $2.809 million in endowment funds per student, followed unsurprisingly by Yale ($2.073 million/student). Williams held $1.141 million in endowment funds for each student.[xx]

Why does this matter? Because this is what subsidizes the total cost of a year at Princeton, Yale and Williams for each student. And other schools feel pressure to keep up and to compete for students. This is a real factor in driving increasing expenditures per full-time-equivalent student, which were $54,200 at private nonprofit schools in 2014-15 and $31,800 at public schools.[xxi] This amounts to powerful pressure on other schools with smaller endowments attempting to remain competitive with their peers with larger endowments. Another way to put that would be to say that it increases competition to enter the richest schools and puts pressure on other schools to maintain enrollments by offering more services and resources while trying to keep price growth under control. So, while large endowments permit wealthy schools to promote equity—intergenerational and intragenerational—for their students, they do precisely the reverse for everybody else, which amounts to the vast majority of students. That is the opposite of equity.

Of course, this means that schools trying to keep up with the peers with large endowments have to increase tuition. But this pressure can have other, insidious effects, such as undermining access for economically disadvantaged students. A recent Washington Post report offers a glimpse of how this plays out. Increasingly, universities and colleges with shrinking state support or little endowment income—tuition-sensitive schools, as they are sometimes called—feel pressure to recruit students who are likely to enroll and even to seek out and privilege applications from students who have the means to pay tuition. The Post report shows that at least 44 public and private schools were engaged in collecting information, working with consultants and using predictive analytics to assess prospective students. This activity ranges from using cookies to track students’ use of university web pages—including those associated with financial aid—to connecting students to ZIP code and other information that can be linked to their consumer behaviors. As the report’s authors explain,

The practices may raise a hidden barrier to a college education for underprivileged students. While colleges have used data for many years to decide which regions and high schools to target their recruiting, the latest tools let administrators build rich profiles on individual students and quickly determine whether they have enough family income to help the school meet revenue goals.[xxii]

Some of the predictive work seems benign—trying to identify students who are interested in areas in which the school specializes—but, clearly, some of the services the consultants offer aim to help the schools address the competitive pressure produced by peers with huge endowments. And doing so can undermine the cause of equality of access to education.

What does it look like, the pressure less rich schools feel to keep up? What kind of mischief does it cause? Take an interview from just a few years ago with Carmen Ambar, published September 1, 2017, on the occasion of her accession to the presidency of Oberlin College. Oberlin sees itself, or Ambar sees it, as a “bellwether” institution—“So goes Oberlin, so goes the rest of higher education.”[xxiii] Another way to say that would be, Oberlin is aware of the stakes of losing its position as a leader among institutions of higher learning. And Ambar was feeling the pressure. She had already conceded that Oberlin would need to find a way to get sagging enrollments back up. But that acknowledgement sat in the midst of a “conundrum.” Getting the kind of students who are a good fit for Oberlin to choose it (over, say, some peer competitor) means attracting them; however, the enrollment pinch means there is less money to finance such efforts in the school’s enrollment-revenue stream, so the institution must also “reduce our expenditures.” The obvious question follows immediately: “how do we do both those things?”

The remarks about Oberlin’s status as a bellwether, in fact, comes near the end of Ambar’s discussion of the challenges facing Oberlin, of the need for the institution’s constituencies to put the institution’s needs first and their particular needs after them. Indeed, she puts this imperative in precisely the terms in which we’ve prepared to hear it:

Here’s what I know is true—that some group of people at Oberlin has to decide to be good stewards of this institution’s resources. When I say good stewards, I mean deciding that we’re gonna make the difficult decisions that we have to make to ensure its long-term sustainability. And when I say “long-term,” I’m talking about how … we make sure it’s here for 400 years, not tomorrow. Oberlin’s gonna be fine. … But we do have a long-term projection that says if we don’t make some changes, then we’re gonna have to start making some choices that we really don’t want to make. (“Off the Cuff”)

So in what terms does Oberlin see itself making its case?

Oberlin is relevant because the types of students that I think we are sending out into the world are the types of students who are going to be changing the world for good and responding to the message that they were trying to deliver at Charlottesville. We are more relevant today than we’ve ever been. Our willingness to make the tough decisions so that we can sustain ourselves for the future is important not just for Oberlin, not just for higher ed, but for the nation, and that’s the reason why I think we will have the will to do it. (“Off the Cuff”)

And we are back to the thesis of this discussion. This is where the deep compatibility of the aims of a certain vision of social justice with the impulse toward institutional accumulation rises nearly to visibility before being obscured by obviousness. The aims of inter- and intragenerational equity are made out to be justifications for protecting an endowment that is in reality treated as the purpose and end in itself.

Within a year or so of Ambar’s remarks, Oberlin’s total endowed funds had risen from $820.3 million as of June 30, 2017, to $887.4 million on June 30, 2018–an increase of $67.1 million. This accompanied a rise in the general investment pool (which comprises almost all of the endowed funds) to $887.0 million from $819.9 over the same period, “the result of changes in the market values of … pooled investments and the many donor- and board-designated gifts received from generous alumni and friends during the fiscal year, offset by the distribution of cumulative investment earnings.”[xxiv] During that year, “net total investment return for the General Investment Pool was 12.4%” (“Assets under Management”). Distributions from the endowment’s earnings to “provide long-term funding for student financial aid, support faculty compensation and fund academic programs” totaled $41.6 million. That’s 5.1% of the general investment pool at the start of the fiscal year—more than Williams spends, but a lot less than the 12.4% rate of return the general investment pool earned over that period. That’s the sort of prudence that stands behind the call to tough decisions.

What kind of tough decisions are we talking about? As of March 5, 2020, Oberlin College planned to “replac[e] 108 unionized dining hall and maintenance workers with lower-paid non-union subcontractors. The cost savings, claimed to total $2 million per year, will primarily come from the fact that Oberlin’s unionized workers currently have decent health care benefits while replacement non-union sub-contractors will have none.”[xxv] This in a small town with a 23.5% poverty rate.[xxvi]

In short, while diversity efforts like Williams’ look like a strong commitment to social justice and equality, the institutions that implement such efforts remain—and remain committed to being—bastions of privilege. Worse still, the same large university endowments that fund these efforts at economic and racial and ethnic diversity are vast and growing concentrations of wealth and are, in fact, major players in the shadow banking system that threatens equality and stability for our society as a whole. Further, while the modest endowments of otherwise tuition-sensitive colleges and universities protect their missions in hard times, the huge endowments held by a few schools do the reverse of fostering equity in higher education. By making inefficient use of surplus capital (and avoiding taxes) in order to support a mission of providing superior educational and social opportunities to the upper 20 percent of the U.S. income structure, they funnel resources upwards and put anticompetitive pressures on more modestly funded institutions. So it’s closer to the truth to say that, while trustees of institutions with large endowments may think they’re guarding intergenerational equity or intragenerational equity (in the form of expanded access in the present), they are really merely mounting vigorous campaigns of wealth accumulation that increase inequality. So why do these universities still have endowments?


All of the above predates the COVID-19 crisis. And the analysis was already damning enough. What happens now? Now, the problem isn’t just small, private liberal arts colleges like Oberlin trying to figure out how to compete with Williams, to be a bellwether and a force for a certain vision of social justice with a fraction of Williams’ endowment. This year’s return on the general investment pool will not be 12.4%—not for Oberlin and likely not for any other university endowment. That means everyone has a choice to make. Tuition-sensitive schools will make cuts, which makes one wonder all over again about the wisdom and the viability of treating post-secondary education as a private good to be supplied by a market in post-secondary degrees.

Schools with big endowments will face choices, too. Joshua Humphreys showed in gory detail what they did when they were last faced with such choices—because the shadow-banking world where university endowments live faced new, unpredictable and destructive interference from hidden patterns of risk exposure, workers and communities bore the pain to protect endowments. Will it go the same way this time? Or will they spend their quasi-endowments to answer the claims of inter- and intragenerational equity? Will they turn their backs on the staff and communities who depend on them or will they shut down operations to protect the endowment? It’s at times like these that schools with heavyweight endowments show us how they answer the question about why they have those endowments. If the answer is simply that they have endowments for the sake of accumulation, they’ll do just exactly what Humphreys et al. found them doing in 2008. In which case, we have to ask ourselves why we tolerate tax-free hedge funds participating in the shadow banking system, reaping windfalls in good times and wreaking havoc in our cities and in our post-secondary educational system when times are hard.

Which direction will the schools with big endowments take? How do they express their understanding of the purpose of their endowments? The response to 2020’s crisis is far from clear at this point. But there are signs.[xxvii] From Peter Salovey, president of Yale University:

Our spending policy seeks to balance two objectives: to provide a steady flow of funding for current operations, and to preserve purchasing power for future generations. Over the course of every five years, we spend about one-quarter of the value of the endowment. This is as much as we can responsibly spend without unfairly taking from those who will come after us. The strength we enjoy today derives from the generosity and care of those who came before us, and we have similar obligations to the future students, faculty, and staff of this university.[xxviii]

Salovey is just reiterating the account, which we’ve seen debunked, that a university’s endowment exists to ensure the provision of the same services to future generations as those enjoyed by present members of the university’s community. To point out that an endowment spends a quarter of its resources every five years is, roughly speaking, to note as we did at the beginning, that a school (like Williams) that spends four percent of its funds every year will consistently—in the long term—end up banking more than that. In other words, Salovey is making the same move we’ve been discussing—treating the endowment as an engine of accumulation while making it look like the tool of social equity.

Princeton’s president, Christopher Eisgruber, says something very similar:

            Princeton is blessed to have an exceptional endowment, built up through the generosity of our donors, leveraged by the impact of Annual Giving, and sustained over time by the careful stewardship and disciplined spending policies of past generations. That endowment buffers our University from some of the more extreme pressures affecting other institutions of higher education. It helps us to pursue our mission during the crisis and to emerge from it as energetically as possible. But the endowment does not save us from having to make tough choices or exercise financial discipline; indeed, as I have noted already, endowment returns have declined along with the University’s revenue streams.

People sometimes mistakenly regard endowments as though they were savings accounts or “rainy day funds” that can be “tapped” or “dipped into” during hard times. That is an error: endowments are more like lifetime annuities. They must support active operations of the University each year and last as long as the University does.

Our budget model in fact presupposes that we will “tap” or “dip into” our endowment every year. We spend about 5 percent of our endowment each year by design. Put differently, Princeton spends more than $1.3 billion from its endowment every year, including years where endowment returns are negative. We spend at a rate such that, absent growth, the entire endowment would be gone in 20 years.[xxix]

Eisgruber’s version is a little longer than Salovey’s, but it’s well worth the extra attention, if only for the scare quotes. In lots of ways, however, they are remarkably similar. They both invoke a wild counterfactual assumption—twenty years of spending at the current rate, and in an environment that requires spending at the current rate (i.e., with undiminished prices despite zero economic growth), but without giving or returns on investment—to show the extreme precariousness of the university’s position. That’s quite a set of assumptions. It’s much closer to the truth to assume that elite university endowments will continue to grow, on average, far faster than they spend, and that the language of zero subjective rate of time preference will continue to cover for a policy of endless accumulation. This is built into the way we think about university endowments as opposed to other, similarly charitable endowments.[xxx] If the name of the game is to maximize the return on the investment pool in any given year in the future, the preference for future spending will always be positive, and no one’s needs but the pool’s inform that goal. University endowments can be forces for inequality or for equity. It is one or the other. And the current crisis is a crisis for higher education in this country, so this is precisely the moment to recognize the nature of the problem.


I’d like to thank John Stein for his invaluable generosity and help. I do not expect him to accept any feature of my analysis. A number of people have made useful or crucial suggestions, including (but not limited to) Katherine Rader and Marci Smith. Any errors are mine alone.


[ii] Walter Benn Michaels, The Trouble with Diversity: How We Learned to Love Identity and Ignore Inequality (New York: Picador, 2006).

[iii]; accessed March 7, 2019.


[v] Anthony Abraham Jack, The Privileged Poor: How Elite Colleges Are Failing Disadvantaged Students (Cambridge, Mass.: Harvard University Press, 2019), 10-11.






[xi][xi] Jennifer Schuessler, “The Meritocrat Who Wants to Unwind the Meritocracy,” New York Times, Sept. 9, 2019, updated Sept. 13, 2019,



[xiv] Henry Hansmann, “Why Do Universities Have Endowments?” The Journal of Legal Studies 19, no. 1 (January 1990): 3-42.

[xv] “Why,” 14; citing James Tobin, “What Is Permanent Endowment Income?” American Economic Review 64, no. 2 (May 1974): 427-32. The quotation comes from page 427.

[xvi] “Taxing and Tuition,” 1674; Willie relies in this part of his discussion on Peter Conti-Brown, “Scarcity Amidst Wealth: The Law, Finance, and Culture of Elite University Endowments in Financial Crisis,” Stanford Law Review 63, no. 5 (March 2011): 699-749.

[xvii] Joshua Humphreys, Educational Endowments and the Financial Crisis: Social Costs and Systemic Risks in the Shadow Banking System, a Study of Six New England Schools (Boston, Mass.: Center for Social Philanthropy/Tellus Institute, 2010).

[xviii] A new law imposes a 1.4% tax on certain university endowments, but only affects schools with endowments of more than half a million dollars per student—about thirty schools in total.


[xx], which in turn cites NACUBO’s “2015 NACUBO-Commonfund Study of Endowments” (2015).


“Average total expenditures of institutions per full-time-equivalent (FTE) student in 2014–15—shown in constant 2015–16 dollars throughout this paragraph—varied by institution control and level, as did changes in average total expenditures per FTE student between 2009–10 and 2014–15 (after adjustment for inflation). In 2014–15, average total expenditures per full-time-equivalent (FTE) student at public degree-granting institutions were $31,800 (table 334.10). These 2014–15 total expenditures per FTE student were 10 percent higher than in 2009–10. In 2014–15, public 4-year institutions had average total expenditures per FTE student of $41,100, compared with $14,700 at public 2-year institutions. At private nonprofit institutions, total expenditures per FTE student in 2014–15 were 7 percent higher than in 2009–10 (table 334.30). In 2014–15, total expenditures per FTE student at private nonprofit institutions averaged $54,200 at 4-year institutions and $20,200 at 2-year institutions.”

[xxii] Douglas MacMillan and Nick Anderson, “Student Tracking, Secret Scores: How College Admissions Offices Rank Prospects Before They Apply,” The Washington Post (October 14, 2019).

[xxiii] Melissa Harris and Christian Bolles, “Off the Cuff: Carmen Ambar, President of Oberlin College,” The Oberlin Review (September 1, 2017).

[xxiv] “Assets under Management.”

[xxv] Les Leopold, “When Gown Crushes Town: The Corporatization of Oberlin College,” Common Dreams (March 5, 2020).

[xxvi] Data USA, “Oberlin, OH,” cited in “When Gown Crushes Town.”

[xxvii] For an excellent analysis of one elite institution and its message, see an extraordinarily incisive op-ed by Katherine Rader on University of Pennsylvania:

[xxviii] Peter Salovey, “Yale in the Months Ahead,” Yale News (April 21, 2020), n.p.

[xxix] “Message to the Princeton Community from Christopher L. Eisgruber,” The Office of Communications, Princeton University, May 4, 2020.

[xxx] Celia Dallas, “Why Mandatory Spending Limits for College Endowments Could Backfire,” Institutional Investor (September 12, 2015), n.p. “Unlike foundations, which can cope with a reduction in grant making when investment returns are low, universities cannot modulate spending with such agility. University endowments fund several operations that would be devastated by big cuts to research, compensation and student aid. Therefore, universities seek to maintain predictability in their annual dollar level of spending by paying out a lower percentage of assets when market values rise to compensate for their limited ability to readily cut expenditures when market values fall.”

Again, this means that, when the university’s endowment grows, it must be saved; when it declines, it must be preserved. The contradiction is glaring.


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  • by Take It Down!: Symbolic Politics Is Just That – Radio Free
    Posted July 6, 2020 4:24 pm 0Likes

    […] every day? Did contingent faculty lose salary and healthcare to protect an endowment (or because an endowment was so heavily invested in risky, illiquid funds that the university suddenly experienced a cashflow problem)? These are the […]

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