Editor’s Note: Today’s story is the second in the Daily’s four-part “Anatomy of an Endowment” series discusses why the University isn't doling out more of its endowment in the form of financial aid for students. Subsequent stories in the series will try to answer other important questions about the endowment like how the global financial crisis will impact the endowment and how the University’s investors take into account social responsibility and ethics when investing the endowment’s funds. By the end of the series, our goal is to have dissected, described and analyzed in simple terms a massive, intricate financial portfolio — one that is critical to the University’s success.

In general, a single question has dominated the debate over college and university endowments in recent years: Why can’t more endowment money be used for financial aid?

At the same time that college and university endowments have reported record-high returns, tuition costs have steadily increased at schools throughout the country — and the University of Michigan is no exception.

Here in Ann Arbor, the University’s endowment has nearly quadrupled in the past 10 years. Yet during the same period of time, student tuition rates have increased by more than 50 percent.

This parallel trend of growing endowments and rising tuition costs is often cited by critics who question whether public universities’ multi-million or multi-billion dollar endowments should classify as not-for-profit, tax-exempt organizations under Internal Revenue Service tax laws.

CRITICS PUSH FOR MORE ENDOWMENT SPENDING

This debate over the use of endowment funds culminated in January 2008 when Sens. Max Baucus (D–Mont.) and Charles Grassley (R–Iowa), who serve as the chair and ranking member, respectively, of the U.S. Senate Finance Committee, sent a letter to 136 universities across the country with endowments of at least $500 million, asking them for information about endowment growth, how their endowments are managed and how endowment revenue is spent, specifically with an emphasis on how much is spent on student financial aid.

Grassley told The New York Times in January 2008, “Tuition has gone up, college presidents' salaries have gone up, and endowments continue to go up and up. We need to start seeing tuition relief for families go up just as fast.”

In the letter, Baucus and Grassley asked how tax policies, which exempt endowment funds and donations to the endowment from being taxed, have affected the management and the use of endowment revenue.

Unlike universities and public foundations, most private foundations are required to pay out a minimum of 5 percent of their assets each year toward their charitable missions. At the time the Senate Finance Committee sent out its letter, there was much talk about instituting a similar rule for universities and public foundations to make them spend more of their endowment each year.

THE UNIVERSITY’S DEFENSE OF CURRENT SPENDING LEVELS

In response to the Senate Finance Committee letter, University President Mary Sue Coleman sent a 21-page response to the Finance Committee in February 2008. In the University’s response, which was submitted by University President Mary Sue Coleman, she addressed 11 key points of concern voiced by Baucus and Grassley.

The response said the University’s endowment had grown 382 percent over the past 10 years as of June 30. At the beginning of 1998, the endowment was valued at $1.99 billion, but by the end of the 2008 fiscal year, the endowment had grown to approximately $7.6 billion. As of December 31, the endowment had lost 14.4 percent of its 2008 value, dropping to $6.5 billion.

On the one hand, the University’s response also said total financial aid awards from the University’s endowment had more than doubled over roughly the same time period.