Keeping watch over educational endowments

The University of Minnesota has the largest educational endowment in the state by far. The market value of the university's half-dozen separate endowments climbed 26 percent in 2007 to almost $3 billion.

But the tuition students paid also climbed during that time.

University of Minnesota Chief Financial Officer Richard Pfutzenreuter said endowment money and tuition funds offset university operating costs. Much of the endowment spending, however, is restricted by donors.

"If they give us the money to endow a faculty chair in medicine, we can't take that money and lower tuition in the college of liberal arts," Pfutzenreuter said. "It would literally be illegal. There's a signed agreement with the donor as to where that money is going."

The university raised more than $200 million of unrestricted money to provide scholarships to low-income students.

The U.S. Senate Finance Committee is reviewing the endowment spending of 136 colleges across the country, including the U of M.

Iowa Senator Charles Grassley suggests universities spend at least five percent of the what their endowments are currently worth to lessen the burden on taxpayers.

To this idea, Pfutzenreuter quoted Nobel Prize winning economy James Tobin, who helped develop a model for long-term investment equilibrium:

We think endowments are well managed. That's why donors continue to entrust their gifts with colleges and universities.

"What the trustees of endowments need to do is really be guardians of the future against the claims of the present. While it looks good now, the market will go up and the market will go down."

The university aims to spend between 4.5 percent and 4.8 percent of the total value the endowment averaged over the past five years.

It's a conservative approach that lets the endowment build while still paying for research and faculty positions and provides student scholarships.

It added up to about $38 million that helped students in the 2006 academic year. It's money that freshman Sysouda Sarah Yabandith couldn't do without.

"There's no way I could afford it," Yabandith said. "There's no way my family could help me out either. If anything my family needed more help than they could help me."

Yabandith's siblings started college, but quit to help earn money for her Laotian immigrant parents. Now, for the first time, she envisions a life of academic research to help other people. Private non-profit colleges depend on their endowments for much more of their operating costs.

Carleton College's $664 million endowment covers about one-third of the school's operating costs.

Chief Financial Officer Fred Rodgers said it's important to have a predictable, steady source of income. He compared Carlton's careful endowment management to a fixed rate home mortgage, as opposed to the short-term gains of a variable rate loan.

"So in a reverse way, that's kind of what endowments are trying to do: to provide a median rate that will be maybe too low at some points when people think there's more money, but be too high when markets have gone down and over time, will be about right," Rogers said.

Carlton, the Univ. of Minn. and nearly every other educational institution's endowment in the state enjoyed double digit increases in value in the past three or four years. But the three years before that saw bruising market declines across the board.

In the past year, Ivy League schools with flush endowments, such as Yale, Princeton and Dartmouth, have upped their endowment spending. They and others are aiming aid to burdened middle income students. One program buys down tuition to ensure students graduate without any student loans.

Macalester College Investment Officer Craig Aase said it's possible such practices will filter down to schools, like his, with fewer resources.

"There's a tremendous waterfall effect in higher education," Aase said. "So, to the extent that Harvard does it, then Yale does it, then Princeton does it. Then before you know if, Bowdoin and Colby are doing it--taking loans out of portfolios and so on. Soon as you get down one layer in that hierarchy there's plenty of overlap with Macalester. So it has implications for us."

Macalester's $676 million endowment is second in size only to the U of M's. But unlike the University, three quarters of Macalester's students receive institutional aid.

In the end, one of the main reasons endowments continue to grow is continued support by donors. Matt Hamill with the National Association of College and University Business Officers said donors seem to appreciate careful, conservative progress.

"We think endowments are well managed. That's why donors continue to entrust their gifts with colleges and universities," Hamill said.

While Grassley and other congressional leaders indicate a desire for colleges to dig deeper into their endowments, no one knows yet what will come from the added scrutiny.

The most recent reports on endowment earnings were positive, but indications are that the coming years will be much leaner, triggering more caution by endowment managers.

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