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Financial endowment

A '''financial endowment''' is a transfer of money or property donated to an institution. The total value of an institution's investments is often referred to as the institution's endowment and is typically organized as a public charity, private foundation or trust (law)|trust. Among the institutions that commonly manage an endowment are: academic institutions (e.g., colleges, universities, private schools), cultural institutions (e.g., museums, libraries, theaters, hospitals) and religious establishments. An endowment may come with stipulations regarding its usage. In some circumstances an endowment may be required to be spent in a certain way or alternatively invested, with the :wikt:principal|principal to remain intact in perpetuity or for a defined time period. This allows for the donation to have an impact over a longer period of time than if it were spent all at once.

College and university endowments

Academic institutions such as colleges and universities, will frequently control an endowment fund that funds a portion of the operating or capital requirements of the institution. In addition to a general endowment fund, each university may also control a number of restricted endowments that are intended to fund specific areas within the institution. The most common examples are endowed professorships (also known as named chairs), and endowed scholarships or fellowships. In the United States, the endowment is often integral to the financial health of private educational institutions, whereas public institutions are often funded partially or fully by state or local governments. Often alumni of the institution will contribute the bulk of capital to the endowment. By contrast, universities in the United Kingdom are frequently public rather than private institutions. There is therefore less of an endowment funding culture, with financial figures generally much lower. Endowment funds have also been created to support public secondary and elementary school districts in several states in the US.Kansas incorporated its first public school district endowment association in Paola, Kansas, a small town of 5000 population, in 1983. Today it has approximately two million dollars in endowed principal which generates approximately 0,000 annually to distribute in scholarships to high school graduates and fund special projects in the district which can not be afforded by the tax base. To promote the development of endowment associations across Kansas, USD 368 Endowment Association which received a statewide award recognizing has developed a "starter kit" to assist other Kansas school districts in the organization and establishment of new endowment associations."

Restricted endowments

Endowment revenue can be restricted by donors in numerous ways. Professorships and endowed scholarship/fellowships are the most common restriction on large donations to an endowment. The restricted/unrestricted distinction focuses on the use of the funds; see quasi-endowment below for a distinction about whether principal can be spent. An endowment can be restricted in order to persuade a university to receive a particular student, although ethical considerations and tax laws mitigate against this.

Endowed professorships

An endowed professorship (or '''endowed chair''') is a position permanently paid for with the revenue from an endowment fund specifically set up for that purpose. Typically, the position is designated to be in a certain department. The donor is allowed to name the position, which typically takes the format: ''First-name Last-name professorship of Department-name''. Endowed professorships aid the university by providing a faculty member who does not have to be paid entirely out of the operating budget, allowing the university to either reduce its student-to-faculty ratio, a statistic used for College and university rankings|college rankings and other institutional evaluations, and/or direct money that would otherwise have been spent on salaries toward other university needs. In addition, holding such a professorship is considered to be an honor in the academic world, and the university can use them to reward its best faculty or to recruit top professors from other institutions.Cornell's "Celebrating Faculty" Website Currently, a donation of US–3 million is required to endow a professorship at the most highly-regarded private and Flagship university|(flagship) public universities. At smaller state schools, donations in the low six figures may suffice. The earliest "endowed chairs" were those established by the Roman Empire|Roman emperor and Stoic philosophy|philosopher Marcus Aurelius in Athens in AD 176. Aurelius created one endowed chair for each of the major schools of philosophy: Platonism, Aristotelianism, Stoicism, and Epicureanism.http://www.rep.routledge.com/article/A068SECT1 Later, similar endowments were set up in some other major cities of the Empire.http://plato.stanford.edu/entries/alexander-aphrodisias/#1.1 The practice was adapted to the modern university system beginning in England in 1502, when Lady Margaret Beaufort, Countess of Richmond and grandmother to the future king Henry VIII, created the first endowed chairs in divinity at the universities of University of Oxford|Oxford and University of Cambridge|Cambridge.Lady Margaret's 500 year legacy - University of Cambridge. Nearly 50 years later, Henry VIII established the Regius Professorships at both universities, this time in five subjects: divinity, civil law, Hebrew, Greek, and physic—the last of those corresponding to what we now know as medicine and basic sciences. Today, the University of Glasgow has fifteen Regius Professorships. Private individuals soon adopted the practice of endowing professorships. Isaac Newton held the Lucasian Professor of Mathematics|Lucasian Chair of Mathematics at Cambridge beginning in 1669, more recently held by the celebrated physicist Stephen Hawking. A Brief History of The Lucasian Professorship of Mathematics at Cambridge University - by Robert Bruen.

Endowed scholarship/fellowship

An endowed scholarship is tuition (and possibly other cost) assistance that is permanently paid for with the revenue of an endowment fund specifically set up for that purpose. It can be either merit-based or need-based (which is only awarded to those students for whom the college expense would cause their family financial hardship) depending on university policy or donor preferences. Some universities will facilitate donors' meeting the students they are helping. Given the cost of college, finance is generally a factor when students decide where to go to college. By offering them money, colleges are sometimes able to lure students away from other universities. The amount that must be donated to start an endowed scholarship can vary greatly. Fellowships are similar, although they are most commonly associated with graduate students. In addition to helping with tuition, they may also include a stipend. Fellowships with a healthy stipend can lure students away from the workforce, to work on a doctorate. Frequently, teaching or working on research is a mandatory part of a fellowship.

Financial operation

A financial endowment is typically overseen by a board of trustees and managed by a trustee or team of professional managers. The financial operation of the endowment is typically designed to achieve the stated objectives of the endowment. At universities, typically 4-6% of the endowment's assets are spent every year to fund operations or capital spending. Any excess earnings are typically reinvested to augment the endowment and to compensate for inflation and recessions in future years.''So Nicely Endowed!'' Newsweek: Kaplan College Guide This spending figure represents the proportion that historically could be spent without diminishing the principal amount of the endowment fund. However, the financial crisis of 2007–2010 had a major impact on the entire range of endowments globally. Most notably, large U.S.-based college and university endowments, which had posted large, highly publicized gains in the 1990s and 2000s faced significant losses of principal across a range of investments. Harvard University, which held billion in its endowment fund on June 30, 2008, was reduced to billion during the following year.Harvard fund loses B, a September 11, 2009 article from the ''Boston Herald'' At Yale University, the pioneer of an approach that involved investing heavily in alternative investments such as real estate and private equity, reported an endowment of billion as of September 2009, a 30% annualized loss that was more than predicted in December 2008. Yale Endowment Down 30%, a September 10, 2009 article from ''The Wall Street Journal'' At Stanford University, the nation's List of colleges and universities in the United States by endowment|third-wealthiest university, was reduced from about billion to billion as of September 2009.Stanford University endowment loses big, a September 3, 2009 article from the ''San Francisco Chronicle'' Additionally, Brown University's endowment fell 27 percent in the fiscal year that ended June 30, 2009, to .04 billion.Brown’s Endowment Investments Drop 23% in Year, a September 9, 2009 article from Bloomberg L.P.|Bloomberg George Washington University lost 18% in that same fiscal year, down to .08 billion.GW endowment drops 18 percent, an August 27, 2009 article from ''The GW Hatchet''

Quasi-endowments

A quasi-endowment, or fund functioning as an endowment, are funds merely earmarked by an organization’s governing board, rather than restricted by a donor or other outside agency, to be invested to provide income for a long but unspecified period, and the governing board has the right to decide at any time to expend the principal of such funds. Separately from the endowment versus quasi-endowment distinction, there's another 2-way categorization of restricted and unrestricted, which focuses on the use of the funds. As an example, a quasi-endowment might be restricted by the donor to supporting the tennis team; the use is restricted to one purpose, but the governing board could "invade principal" to support the tennis team.

Criticisms

Officials in charge of the endowments of some universities have been criticized for "hoarding" and reinvesting too much of the endowment’s income. Given a historical endowment performance of 10–11%, and a payout rate of 5%, around half of the endowment’s income is reinvested. Roughly 3% of the reinvestment is used to keep pace with inflation, leaving an inflation-adjusted 2% annual growth of the endowment. Of course, many endowments fail to earn 10-11 percent. Two arguments against inflation adjusted endowment growth are:Donald Frey, "University endowment returns are underspent", ''Challenge'', July–August 2002.
- '''The future needs the money less than the present'''
Some claim that the future will be much richer materially than the present due to technological innovation and specialization. In counterpoint, Nobel laureate James Tobin makes a case for intergenerational equity.
- '''A constantly growing endowment shields universities from competitive forces'''
As the endowment’s reinvestment starts becoming a larger part of its growth, the need for happy students and alumni to donate funds to the university’s budget and endowment is reduced. Therefore, traditional market forces that provide incentives to run a university efficiently may be greatly reduced and at least theoretically lead to university administration not being held accountable for its actions. (This might also be considered a worthy goal, as it would mean the freedom of academia from financial concerns, which could cause a wider range of research topics to be available to students and faculty.)

Size

Financial endowments range in size depending on the size of the institution and the level of community support. At the large end of the spectrum, the total endowment can be over one billion dollars at many leading private universities. As an example, Harvard University has the largest endowment in the United States with close to billion in assets as of June 30, 2009. However, each university typically has numerous endowments, each of which are frequently restricted to funding very specific areas of the university. The most common examples are endowed professorships (also known as named chairs), and endowed scholarships or fellowships. For instance, Harvard University has 10,800 separate endowments.The Harvard Guide: Harvard's Endowment Funds