The University's endowment earned $700 million last year, upping its worth to $4.9 billion and providing much-needed stability to the University's finances at a time when state funding is uncertain.

The state has dropped its allocation to the University by 13 percent since 2002.

Strengthening the endowment will allow the University to be less reliant on state funding, University spokeswoman Julie Peterson said.

But the endowment only pays for a small percentage of the University's operating costs. "State funds are the core of the University, but donor support creates the margin of excellence," Peterson said. It would take an endowment twice as large to make state funding unnecessary, she added.

The University determines how much of the endowment to spend each year by averaging its worth over the last three years and earmarking 5 percent of the result for spending. Benefactors generally dictate how they would like their money to be used, and the University divides these endowment profits among all the causes chosen by benefactors.

"The methodology for an endowment is like a savings account," said Timothy Slottow, University chief financial officer. "It's all about financial stability. You only take out enough to support day-to-day operations, and at the same time allow it to increase in value."

Over the past five years, the rate of return for the University's investments has been far higher than the national median.

Since 2000, the median return on investments made by all universities has been 4.3 percent, while the University's investments have returned an increase of 6.5 percent over the same time period.

Slottow said the reason for the endowment's success is its diversified holdings. Money is invested in both U.S. and foreign markets, and the University also invests heavily in bonds. About 75 percent of its funds are invested in marketable securities, and the other 25 percent are invested in nonmarketable securities such as energy.

"We have implemented more sophisticated strategies because of our endowment's size, the quality of our financial managers and the support of our alumni," Slottow said.

University President Mary Sue Coleman's Michigan Difference campaign, designed to increase charitable donations with the goal of raising $2.5 billion, has already raised more than $1.89 billion. She hopes for $800 million of that to be funneled into the endowment.

Last year, $25 million of Business School benefactor Stephen Ross's $100-million gift to the University went into the endowment.

The endowment has grown rapidly in recent years. In 1995, it was worth $1.3 billion. It now ranks 11th in the country among university endowments.

Still, it pales in comparison with Ivy League heavyweights such as Harvard University, which leads the pack with an endowment of about $25.9 billion. Yale University's endowment is $15.2 billion, a distant second to Harvard's.

Prestigious private universities have traditionally relied more heavily on their endowments than public universities, meaning the University of Michigan's chances of catching up are slim.

"Harvard and Yale just had a hundred years on us," Slottow said.