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Rethinking the Concept of Endowment

BusinessWeek is running a compelling article that questions the emphasis placed on university endowments. What good is endowing a gift, it asks, when you can get the same yearly benefit for only five percent the cost?

A particularly illuminating anecdote with Cornell and David Skorton is highlighted:

By force of circumstance, some richer schools may be coming around to the virtues of spending the money as it comes in instead of socking it away. They have always solicited donations for the "general fund," but this could become a higher priority. Cornell University President David Skorton, at a lunch meeting with reporters on Feb. 27, said that when he tried to hit up one generous graduate recently for $1 million to endow a scholarship, the alum said that all he could commit to was giving $50,000 per year for the next four years. That's equal to the income that $1 million would throw off at a 5% return. Not a bad alternative to an endowment gift, really, especially if it's renewed.

Of course, the benefit of an endowment is that it provides a store of wealth that can be drawn upon when times are dear to smooth out an institution's investments over time -- especially when the resources available for philanthropy are in decline. And it is precisely times like these when higher education should be making aggressive investments for the future.

But as we noted in January, it's not necessarily evident that more endowment is always a good thing. Measuring wealth as endowment relative to operating budget, Princeton is eight times wealthier than Cornell, but it's unclear to me that Princeton is any more productive at conducting research and educating students than Cornell.

The article also makes the good point that investments in endowment are prioritizing the education of future students over current students :

For example, it's often said that endowments help future generations of students, and that's true. But [as a Yale legal scholar] points out -- that by saving donations rather than spending them now, universities are giving advantages to future students at the expense of current ones.

If we assume that living standards continue to rise, that amounts to taking from the poor to give to the rich.

Matthew Nagowski | Posted on March 02, 2009 (#)

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