Understanding Endowments: Key Insights and Examples

What Is an Endowment?

An endowment represents a gift given to a nonprofit organization for a specific purpose. Commonly, it refers to the total investable assets of institutions like universities. These assets, also known as “principal” or “corpus,” support operations or programs in line with the donor’s intentions.

Most endowments aim to keep the principal amount intact while utilizing the income to further the beneficiary’s cause. Restricted endowments must be held perpetually, with only their income available for use.

Key Takeaways

• Endowments are conferred by trusts, private foundations, or public charities.
• Institutions benefiting from endowments include educational and cultural establishments as well as service-oriented organizations.
• Typically, endowment usage is restricted to the investment income, not the principal sum.

Understanding Endowments

Endowments often organize as trusts, private foundations, or public charities, benefiting educational institutions, cultural establishments, religious entities, secondary schools, and service-oriented organizations such as hospitals. A set percentage of an endowment’s assets might be used annually, comprising both interest income and principal, adjusting according to market conditions.

Policies of Endowments

Endowment funds consist of three guiding policies: investment, withdrawal, and usage.

Investment Policy

The investment policy delineates permissible investments and risk levels. Endowment funds usually have long-term aims like achieving a specific return rate. Allocating assets accordingly helps meet these objectives. Larger institutions often manage numerous smaller funds pooled in varied asset classes for sustained long-term goals.

Withdrawal Policy

The withdrawal policy determines the allowed disbursement from the fund, typically restricting annual withdrawals to a percentage, e.g., 5%. Most university endowments aim for perpetuity, maintaining spending within set limits.

Usage Policy

Usage policies specify endowment purposes, ranging from supporting departmental financial health to funding scholarships and faculty positions. These designated uses ensure targeted revenue streams contribute meaningfully to their intended areas.

Types of Endowments

There are four primary endowment types:

• Unrestricted Endowment: Assets that can be used at the institution’s discretion.
• Term Endowment: Principal expendable after a specified period or event.
• Quasi Endowment: Aimed at specific purposes; institutions manage earnings as per donors’ guidelines while generally preserving the principal.
• Restricted Endowment: Principal maintained perpetually, with income expended per donor specifications.

Exceptional conditions might necessitate court intervention under the cy pres doctrine to adjust endowment terms, especially when institutions face severe financial distress.

Requirements for Endowments

Managers balance growth and utility to ensure sustainable fund growth while advancing institutional missions. Federal laws mandate philanthropic endowment payouts, imposing a 5% annual disbursal requirement to maintain tax-exempt status, with specific conditions for private operating foundations and community foundations.

Endowments and Higher Education

Endowments critically support U.S. academic institutions, supplementing operational costs beyond tuition. Historic educational bodies like Ivy League schools amassing considerable endowment funds owe much to lasting donations and astute management.

Real-World Examples of Endowments

The legacy of enduring endowments dates back to circa 176 AD with Marcus Aurelius. Many prestigious institutions globally followed suit. For instance, Henry VIII’s successive endowments established enduring academic funds.

Top 10 U.S. University Endowments (2023)

1. Harvard University - $49.5 billion
2. University of Texas - $45.0 billion
3. Yale University - $40.7 billion
4. Stanford University - $36.5 billion
5. Princeton University - $34.0 billion
6. Massachusetts Institute of Technology (MIT) - $23.4 billion
7. University of Pennsylvania - $21.0 billion
8. Texas A&M University - $19.2 billion
9. University of Michigan - $17.8 billion
10. University of California System - $17.7 billion

The Bottom Line

The prestigious universities’ endowments garner scrutiny, mainly when perceptions of hoarding surface. Yet the designated purposes and perpetuity of most endowment funds entail spending privileges limited to income generated. Consequently, these funds authentically sustain specific academic and operational intentions from year to year.

Related Terms: trust, private foundation, public charity, restricted endowment, cy pres doctrine.

References

1. Clemson University. “Endowment Definitions”.
2. New York State Office of the Attorney General. “FAQs - Endowments and Other Restricted Funds”.
3. Internal Revenue Service. “Private Operating Foundation - Endowment Test”.
4. American Council on Education. “Understanding College and University Endowments”, Page 12.
5. Harvard University. “Harvard’s Endowment”.
6. The San Diego Foundation. “Endowment Investment Policy”.
7. Harvard University. “Harvard’s Endowment”.
8. Pacific Lutheran University. “Named Endowments”.
9. Skidmore College. “Named/Endowed Scholarships: Frequently Asked Questions”.
10. The University of Texas at Dallas. “Endowed Chairs and Professorships”.
11. Harvard University. “Endowment”.
12. The Botanic Garden of Smith College. “2021 Impact Report”.
13. Robinhood. “What Is an Endowment?”
14. The University of Utah. “Quasi Endowments”.
15. Fordham University Urban Law Journal. “Cy Pres Powers of the Federal Bankruptcy Courts - New Hope for Financially Distressed Charities?”, Pages 3-6 of PDF.
16. New York State Office of the Attorney General Charities Bureau. “A Guide for New York Not-for-Profit Corporations Considering Expenditure of Endowment or Other Restricted Funds”, Pages 2-3.
17. Internal Revenue Service. “Administrative Expenses Treated as Qualifying Distributions for the Purposes of IRC Section 4942 - Taxes on Failure to Distribute Income”.
18. Internal Revenue Service. “Definition of Private Operating Foundation”.
19. Foundation Center. “Understanding and Benchmarking Foundation Payout”, Page 1.
20. United States Congress. “H.R.1 - An Act to Provide for Reconciliation Pursuant to titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018: Text: PART VIII–Exempt Organizations Sec. 13701. Excise Tax Based on Investment Income of Private Colleges and Universities”.
21. National Center for Education Statistics. “Fast Facts-Endowments”.
22. Medical College of Wisconsin. “Philanthropy Stirs Innovation”.
23. New York Magazine. “Harvard Has Too Much Money to Have So Few Students: Scott Galloway on Elite Universities’ Unethical Obsession with Exclusivity and Prestige”.
24. American Economic Association. “How University Endowments Respond to Financial Market Shocks: Evidence and Implications”.
25. Amherst College. “Divestment from South Africa”.
26. The New York Times. “After Trump’s Criticism, Harvard Turns Down Federal Relief Money”.
27. The Harvard Crimson. “Harvard Declines Federal Pandemic Aid for Third Consecutive Time”.
28. University of Cambridge. “About the University: Timeline”.
29. University of Oxford. “History”.
30. The Harvard Crimson. “COVID-19 Leaves Harvard in ‘Grave’ Financial Situation, Experts Say”.
31. The Harvard Crimson. “Harvard Endowment Returns 7.3 Percent for Fiscal Year 2020”.
32. Harvard University. “Financial Report Fiscal Year 2023”, Page 9.
33. Harvard University. “Financial Report Fiscal Year 2023”, Page 9.
34. American Council on Education. “Understanding College and University Endowments”, Page 8.

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