University Business - March 2008 - (Page 68) the endowment at Southern Illinois University. At most colleges, the endowment can never be more than a small supplement to the budget: too much money to ignore, but not a replacement for tuition, donations, or government support. Even for colleges boasting hefty assets, only a portion of the earnings can go to offset tuition. Most endowments have a large percentage of restricted assets, which can be spent only as the donors intended. Funds designated for support of the music school or for research in the college of engineering can’t be spent on undergraduate tuition. The courts have repeatedly held that such restrictions must be honored. Because endowments have to serve donor spending requirements but not any from the IRS, they can be run to meet different needs. Some spend nothing, instead building assets for a future time when the institution will be in a different situation. Some endowments are used almost like emergency funds, drawn upon in years when the budget is stretched or a capital problem emerges. Still others are designed to generate a fixed percentage of the budget, a fixed dollar amount each year, or to contribute a set percentage of principal that will, in theory, increase each year because PHOTO BY MUNS, USED UNDER CREATIVE COMMONS ATTRIBUTION 3.0 Harvard Square in Cambridge trustees are trying to match competitive spending, they might ask the endowment manager to come up with more money each year. In theory, the manager could make changes in the fund’s investments. For example, the manager may take more investment risk. This could generate a bigger return that would help meet increased spending requirements while also, it is Increasing the level of risk taken by endowment funds wouldn’t be enough to solve the problem of college costs. investment returns will be higher than the spending rate. RESPONSIBLE SPENDING No matter the size of the endowment, spending 5 percent of the principal responsibly can be an enormous challenge; the more money floating around, the greater the potential for waste, corruption, and general foolishness. And institutions don’t change their spending rules lightly. When university hoped, grow the principal at former rates. Or instead, that person may put more money into bonds and liquid assets, making it easier to generate cash for the spending needs at the expense of much lower growth for the principal. Finally, the manager may change nothing, figuring that someone else in the budget or development office has the responsibility to find funds that would offset reduced endowment growth from increased endowment spending. Given the current state of the financial markets, even the hugest endowments could find themselves constrained by poor returns, Griswold explains. He adds that most of the endowment managers survyed by Commonfund are taking appropriate risks. Still, there is always room for improvement, and while changes could generate small increases, those increases wouldn’t be enough to solve the problem of college costs. “You have to look elsewhere to solve the problem of access to quality higher education,” Griswold says. “Getting Harvard and Yale to spend more isn’t going to solve the overall problem of higher education costs.” In fact, the silver lining to 2008’s poor economic outlook may be that it will reduce the pressure on colleges to spend endowment money. If next year’s Commonfund Benchmark Study indicates less spectacular performance, the higher ed news cycle will move on. Ann C. Logue is a Chicago-based freelance writer who specializes in covering finance. 68 | March 2008 universitybusiness.com http://universitybusiness.com
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