Super-Sized University Endowments: Is Your Alma Mater Richer (or Poorer) Than You Think?

stockxpertcom_id795202_size0.jpgNew 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.

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4 Responses

  1. A.J. Sutter says:

    I don’t understand at all why this should be an issue for Congress. It strikes me as perverse that instead of focusing on regulating private companies, hedge funds, etc., Congress should move to force non-profit institutions to spend their money. Is that just a tactic to divert money from “super-rich” non-profits into the pockets of lobbyists and legislators themselves?

    Can you please explain what’s the rationale for prioritizing this?

    And if your idea is that Congress should only seek to “encourage” institutions to spend their endowments, in the sense of some sort of carrots-only measure, why should this be limited to super-rich institutions?

  2. I agree that this is not what I want Congress to concentrate on but then there is very little I want Congress focused on (is it August yet?)…but part of me says why not: better Harvard gets picked on than Congress focus on tax increases, trendy enviro solutions and other ways to further get the feds into my life. In a way then Harvard, Yale etc. are reaping what they’ve sown.

    on the practical side, I’m sure any restrictions will carve out restricted endowments…which will then be an excellent way to get around the restrictions

  3. Sarah Waldeck says:

    The Senate Finance Committee is interested in this primarily because of the extent to which the federal government subsidizes university endowments and higher education more generally . While I can’t put a precise dollar figure on the extent of the subsidy, here’s just a couple of examples (and there are many): (1) if endowments were subject to the corporate tax, the federal government would have collected about $18 billion last year; (2) in 2008, the deductibility of gifts to educational institutions is projected to cost upwards of $4 billion in forgone income tax. With tuition costs continuing to escalate (while some institutions have huge financial reserves), Congress is wondering whether the public is receiving adequate benefit in exchange for these subsidies.

    What Congress giveth, Congress can taketh away. I’m not sure whether to call that a carrot or a stick. Whether new Congressional measures should apply to all universities and colleges or just the “super-rich” depends on the nature of the measure, and on whether we believe that some amount of accumulation is appropriate. I’ll be posting more about specific proposals over the next couple of weeks, but wanted to get a quick response off to you tonight.

    Sarah Waldeck

  4. A.J. Sutter says:

    Thanks for your quick reply. But why is it appropriate to compare universities and corporations anyway, given the different functions and missions in society of the two types of institutions? Who is in the role of shareholders as universities’ sole consituency? My understanding is that universities already pay tax on profit-making ventures in which they may engage. But even if the analogy were apt, maybe Congress should instead, say, make it more difficult for companies to use corporate offshore tax havens. Might there be more than $18 billion buried there? (Is the Hoover Institute, American Enterprise Institute or some other conservative think tank somewhere in your stat’s provenance, BTW?)

    As for adequate benefits, at least in the case of Harvard, see, e.g., http://www.news.harvard.edu/gazette/2008/05.29/07-financialaid.html . A partial quote: “Families with incomes of $60,000 or less will pay nothing; those with incomes up to $120,000 will pay on a sliding scale topping out at 10 percent; and those families making up to $180,000 will pay an average of 10 percent of income for undergraduate education. (About 70 percent of current Harvard undergraduates already get some kind of financial aid.) Students will also no longer have to take out loans, which will be replaced by grants — a guarantee that students starting with the Class of 2012 will graduate debt-free. And Harvard will no longer use home equity to calculate income levels for aid.” (Full disclosure: I too received a Harvard College scholarship some 30+ years ago.)

    Maybe in a future post you could also mention to what extent the “subsidies” (which sound prima facie like a Bad Thing) universities receive are actually earmarked for specific purposes.

    I’m not in favor of everything universities do, by a long shot, and that certainly includes Harvard. But that this should be an issue at this time smells like continued cowardice on the part of Congress, who miraculosuly have never let up dashing the hopes that were raised in November 2006. Making Harvard and other pointy-headed institutions look like bloated bad guys is low-hanging fruit compared to even considering a tougher political decision that might ruffle corporate donors’ feathers. I wish I could add “especially in an election year,” but I’m afraid off-years aren’t any better.