Super-Sized University Endowments: Is Your Alma Mater Richer (or Poorer) Than You Think?
New York Times recently published an opinion piece by a Harvard alum who was refusing to make a donation to her alma mater, which in 2007 reported an endowment of more than $34 billion. Yesterday the Times reported on a group called Harvard Alumni for Social Action, whose goal is to convince Harvard to use its endowment in untraditional ways, such as for the support of colleges in Africa. As the Harvard alum opined, “Many colleges may genuinely still need alumni contributions to stay solvent, but Harvard isn’t one of them — nor are Yale, Princeton or several other super-rich universities.”
Endowments provide plenty of fodder for discussion and this month I plan to do at least a couple of posts about them. Today I want to start with the preliminary question of how to determine whether a university or college is “super-rich.” This is a critical inquiry, because everyone agrees that if Congress adopts measures designed to spur endowment spending, most of these measures should apply only to the wealthiest institutions. In my estimation, this means those institutions with an endowment per full-time student of $300,000 or more. In 2006, about 30 universities and colleges fit this description.
Policymakers have three choices for evaluating endowments: absolute size, the endowment-to-expense ratio, and the amount of endowment per full-time student. The first measure—absolute size—is what has dominated in Congressional discussions and media accounts. Critics of university spending policies typically rail against institutions with endowments of $1 billion or more. One billion undoubtedly has appeal in part because it sounds so large and is therefore useful in helping to shock the public conscience. But the absolute size of an endowment is a crude measure of its strength. After all, the primary value of an endowment stems from its ability to subsidize university operations. Because the magnitude of activity is smaller at a liberal arts college, it needs fewer resources than a large research university. In relative terms, $1 billion buys more at a small institution than at a large one.
The endowment-to-expense ratio, in contrast, acknowledges that the strength of an endowment depends on the extent to which it can pay for institutional activities. Some economic research has categorized any ratio in excess of 2:1 as excessive; other commentators have argued that an endowment is too large once it reaches 5:1. In a piece that is forthcoming in the Fordham Law Review, I use data from 2006 to calculate approximate endowment-to-expense ratios for the private universities with the 60 highest absolute endowment amounts. The analysis shows that an institution’s place in the endowment hierarchy changes when we consider its actual expenditures. For example, in 2006, Harvard had the largest absolute endowment, at $28.9 billion; Grinnell was in twenty-fifth place with $1.47 billion. But when those same institutions are ranked by endowment-to-expense ratios, Grinnell leaps to first place (with a ratio of 15:1), while Harvard falls to number nine (with a ratio of 9.6:1). Even more important, in 2006 some colleges (for example, Bowdoin and Hamilton) had endowments that were significantly less than $1 billion ($673 million and $587 million, respectively), but endowment-to-expense ratios that exceeded 5:1. On the flip side, some institutions (for example, the University of Pennsylvania and Cornell) had endowments well over $1 billion ($5.3 billon and $4.3 billion, respectively), but endowment-to-expense ratios below 2:1. If absolute endowment value determined whether an institution was subject to new tax rules, some extraordinarily prosperous schools would remain untouched, while some significantly poorer ones would be affected.
So far all of this suggests that policymakers should rely on endowment-to-expense ratios to determine which institutions are super-rich. But several disadvantages make the ratio an impractical choice for regulatory purposes. For instance, an institution adjusts its operating budget in response to changes in its endowment. As such, the ratio can change significantly from year to year, making it a moving target. In addition, universities presumably will prefer to remain immune to any Congressional action and will thus be eager to lower their ratios. This could be accomplished by spending more—exactly the behavior Congress is seeking to encourage. But one can also imagine a series of, dare I say it, U.S. News-ranking-like maneuvers designed to manipulate the ratio.
This leaves policymakers with the measure of endowment per full-time student, which relies on the number of full-time students as a rough proxy for institutional expenses. This number is more difficult to manipulate and less likely to vary significantly from year to year. As one might expect, a university’s endowment per full-time student roughly correlates with its endowment-to-expense ratio. My analysis suggests that an endowment of $300,000 or more correlates with an endowment-to-expense ratio of 5:1 or higher. Therefore an endowment per full-time student of at least $300,000 suggests that a university could spend more without jeopardizing its long-term prospects. These are the universities with endowments that warrant Congressional attention and that are well-served by groups like the Harvard Alumni for Social Action, which encourage a sharing of the wealth.