Will Colleges Tap Large Endowments During Pandemic?

The Yale Endowment Justice Coalition is calling for Yale University to help ease the economic burden of the pandemic on students, faculty, staff and the surrounding city of New Haven, Conn.

The group of students and New Haven residents is focused on the university’s $30 billion endowment, which is the third-largest endowment in the country behind Harvard University's and the endowment for the University of Texas system, according to recent data from the National Association of College and University Business Officers.

Coalition leaders are asking the university to freeze rent collection on all university properties (the university has already stopped collecting rent on some, the group said) and to make unoccupied housing available to New Haven residents who need a place to social distance, among other requests.

“Yale has a huge amount of wealth and power in their endowment,” said Alex Cohen, a junior math student at Yale who has studied the university’s endowment spending. “It’s a tremendous amount of power to help people in the Yale community.”

So far, Yale has not indicated it plans to increase its endowment spending rate in response to the pandemic, Cohen said.

In a letter to students, Yale president Peter Salovey said that though the university will not increase its rate of spending, it will be pulling a greater portion of the endowment as its value decreases.

"Yale’s policy for spending from the endowment does mitigate the immediate effects of a financial disruption. When the value of the endowment drops, we spend a greater percentage of the endowment’s value than when the endowment’s value is rising," he wrote. "This 'smoothing' component of the policy has proven over time to be a very effective way to blunt the immediate shock of a drop in the endowment on our budget. Nonetheless, when endowment investment returns are smaller than originally anticipated, our spending over time must decrease."

The coalition’s request and Yale’s response illustrate a looming question facing well-endowed colleges across the country: Should colleges leverage their endowments to patch temporary revenue holes and prevent pandemic-necessitated cost cutting, or should they hold spending rates steady to ensure endowments' long-term strength?

The answer, like those to most college finance questions, varies greatly by institution and investment philosophy, and experts come down on both sides.

To really understand the options colleges have, it’s important to know how endowments are managed. Jim Hundrieser, NACUBO’s vice president for consulting services, emphasized that not all endowment funds are accessible for spending.

“It’s just not a savings account waiting to be tapped,” he said. “It’s a designated long-term fund to help support operations and students in their efforts.”

Some portion of all endowment funds is restricted, which means they are earmarked for a specific project, scholarship or other activity designated by whoever donated the money. Restricted funds cannot be spent on anything beyond their designated purpose.

Small institutions’ endowments typically contain a greater percentage of restricted funds than endowments at larger, more prestigious colleges, Hundrieser said. Small institutions also tend to rely less on endowment returns to support their operating budgets and more on student tuition and fees.

For wealthy colleges that lean heavily on endowment returns to make up their operating budgets, shifts in spending rates can more drastically impact future endowment outlook.

For example, Princeton University president Chris Eisgruber said in a May 4 letter to students that, absent growth, the university would deplete its entire $26.1 billion endowment at its current spending rate after 20 years. Princeton is one of a few that have announced they will likely increase their endowment spending rate amid the pandemic -- from 5 percent to 6 percent.

“We believe that an average annual endowment spend rate slightly above 5 percent is in fact sustainable. With this year’s decline in endowment value, however, we expect to be spending more than 6 percent of our endowment. That rate is not sustainable,” Eisgruber wrote. “We therefore need to reduce the University’s operating expenditures, especially because there is a substantial risk that greater economic distress may lie ahead. That is why Provost Deborah Prentice has rightly called for salary freezes, tighter vacancy management, and reductions to non-essential expenditures.”

Another prevailing argument to maintain and not raise endowment spending rates year to year is that a consistent rate preserves intergenerational equity -- the belief that past, present and future students are getting the same quality of education regardless of the economy’s health at the time.

But not all experts buy it.

“It’s sort of a joke to say that the problem is to maintain intergenerational equity,” said Charlie Eaton, an economic sociologist and assistant professor at the University of California, Merced. “Because if you look at, say, Harvard or Princeton, the endowment is 1,000 percent larger than it was in the 1970s.”

Eaton attributes the difference to a change in investment strategy. Today, endowments are managed to get a maximum return on investment, he said. This is a shift from earlier investment strategies that mostly sought to maintain endowment strength at given levels.

More recently, endowment values took a hit during the Great Recession. According to a report by John Griffith, vice president and endowment specialist at Hirtle Callaghan​, a financial planning firm, endowments experienced declines of 25 to 30 percent below their peak value during the 2008 financial crisis. NACUBO data indicate many top endowments went on to recover and reach new peaks in the ensuing decade.

Still, some wealthy colleges increased their endowment spending during the recession and are likely to do so again this time around, Eaton said.

“What’s more at risk than intergenerational equity is the welfare of students and especially low-wage employees now,” Eaton said. “Especially schools with large endowments -- they will do fine preserving intergenerational equity, but they need to take care of their workers and students today.”

For now, the question over endowment health is a hypothetical one. The stock market plummeted in late March, but many valuations have since almost fully recovered. The predicted economic downturn has yet to impact endowments, said Hundrieser.

“Right now, the market is pricing in a lot of the good news we have heard, like potentials with the vaccine and the good news there, as well as the Fed stepping in,” said Susan McEvoy, director and investment officer at Hirtle Callaghan.

A lot is still unknown, especially as businesses across the country remain closed and colleges are still uncertain whether they will be able to reopen in the fall. The uncertainty presents opportunities for colleges, though, said Griffith.

“In recovery time, you move to more active managers who are moving away from indexes,” he said. “This is when people are going to need untraditional loans, so private credit, that’s a great opportunity.”

He added that high-demand investment managers often have openings after other clients choose to liquidate assets. The crisis “gives you an opportunity to invest with some of the best managers in the world,” Griffith said.