$12 billion dollars of … what? Understanding the University’s endowment
The recent tuition increase passed by the Board of Regents as part of the fiscal year 2020-21 budget for the University of Michigan has thrust the University’s $12 billion endowment into the spotlight. Students, Regents and parents alike have pointed to the money as a possible way to avoid increasing tuition on families that are struggling as a result of the COVID-19 pandemic.
Put simply, the endowment is the pool of the assets given to the University by its donors — but the way these funds are used is anything but simple. Endowments are better understood not as a piggy banks, but as an actual bank in terms of the limits on appropriations of its seemingly ample funds and the way it generates income.
As of October 2019, 11,700 different funds made up the University Endowment Fund, and each of these individual funds represents the money given to the University. Among the first funds added to the endowment were the proceeds from the sale of land ceded to the University in the Treaty of Fort Meigs by three Native American tribes. Over time, through contributions and investment revenues, the Endowment Fund has grown to $12.7 billion as of June 30, 2019.
However, not all of those funds can be spent at will. In the 2019 fiscal year financial statements, the University listed $4.47 billion in restricted endowed funds, with $2.38 billion in “funds-functioning-as-endowment,” a designation which holds the initial investment inviolate (meaning it can’t be spent in any way). These restricted funds are further split into expendable and non-expendable funds. The latter references the initial investment for endowed funds and the former represents both FFE and the growth of permanent endowments.
Outside of the restricted funds, the endowment also includes unrestricted reserves. These are funds that can be spent at the Regents’ discretion. The Regents have elected to distribute 4.5 percent of the endowment each year. The University explains this decision in an FAQ from the Office of Public Affairs.
“The 4.5 percent distribution rate helps to insulate the endowment from anticipated market volatility that includes lower investment returns and higher inflation,” the FAQ says. “It also ensures continued, steady support of university operations during uncertain economic times - including funding for student scholarships, faculty salaries and academic programs. The distribution from the endowment has steadily increased each year since 2003.”
Most schools generally spend between 4 and 5 percent of their respective endowment every year, according to Connor Murnane, a spokesman for the American Council for Trustees and Alumni (ACTA). At the University, this strategy of spending a little and investing the rest has led to handsome returns. Since 2010, the fund has doubled in size and since 2000, nearly $5 billion has been distributed from the endowment.
This year, as the global economy has plunged into recession, students and Regents alike are calling on the University to spend some of the $6.7 billion in unrestricted assets to combat tuition increases. Schlissel has mentioned a $400 million distribution (about 3.15 percent of the fund’s value last year) from the endowment. Sticking to the 4.5 percent rule using the endowment’s FY2019 value, the University could distribute roughly $571.5 million, more than enough to cancel the tuition increase, which brings in roughly $32 million in revenue for the University. In 2009, the University distributed roughly 4 percent of its $6.0 billion endowment ($244 million) despite a $1.9 billion drop in the value of the endowment.
Murnane, told The Daily in an email that if there was ever a time universities should be using their endowments, that time is now.
“This is definitely a governance question for each particular university, but this seems like the right time to dip into those funds if there ever was one,” Murnane wrote. “With that in mind universities have to be careful, any individual university endowment is actually a vast network of smaller endowments. Much of a university’s endowment is from numerous, smaller restricted gifts. Restricted gifts severely limit what a university can spend its endowment on, and the university must always honor the intent of the donor.”
Even within the Board of Regents, however, views on the use of endowment funds diverge.
Regent Denise Ilitch (D), one of two Regents who consistently voted against the recent tuition increase, has taken aim at the University’s current percentage of discretionary funds, arguing the percentage should be raised temporarily in response to the current financial crisis.
“The University has multiple financial levers to pull to maintain tuition costs (and not raise other costs, ie. housing, health, Covid) during this pandemic,” Ilitch wrote in an email to The Daily. “One of the levers is the 12 Billion (sic) dollar endowment. We have a spending policy of 4.5% that is used for general operations for the University. My position was to temporarily change this percentage to accommodate the pandemic crisis we are in at the moment.”
Ilitch added that she believes the University’s current strategy disproportionately burdens students with addressing financial losses, in spite of having alternatives at the University’s disposal in the form of the endowment.
“The sacrifices made routinely by our students and their families is not commensurate with the sacrifices made by the University,” Ilitch wrote. “Students and their families are being asked to sacrifice more.”
Conversely, Regent Ronald Weiser (R) has consistently emphasized various restrictions on the endowment. In the June 30 special meeting in which the Regents voted in favor of the tuition increase, Weiser alluded to both “moral and federal” obligations that limit the appropriation of funds from the endowment toward recovering from a financial deficit. Weiser elaborated on these obligations in an interview with The Daily, speaking from his perspective as both a Regent and a major donor to the University.
“People don’t understand you have contracts,” Weiser said. “I’ve given a lot of money to the University; much of it’s in the endowment. If I put it in for diabetes research or for food allergy research, and they try to use it for something else, then, you know, I would ask for it back because I put it in for a specific purpose.”
Many donors to the University do gift endowed funds with restrictions on how they can be used. These are all expendable restricted funds. For example, donors can specify that their funds be used for a student scholarship such as the Blavin scholarship for students who have experienced foster care. Other donors endow certain professorships (sometimes known as endowed chairs) or designate funds to be used for buildings. The University has a legal obligation to follow the donors’ intent in many cases, and, even where there is not a legal requirement, Murnane says that universities ought to follow a donor’s stated intent.
“If universities decide to dip into their endowment to cover COVID-related expenses, they must be careful to avoid violating donor intent,” Murnane wrote in an email to The Daily. “During times of economic downturn, there is a temptation to get ‘creative’ with restricted gifts. Universities must avoid this temptation and must honor their commitments to their donors.”
University employees’ wages, which are often supported by endowment funds, are also at stake in times of financial crisis. Wesier also emphasized a tradeoff that could emerge between supporting wages and maintaining tuition.
“When you have a limited amount of money … coming in each year, and you have to spend it to take care of certain basic things, including people’s wages and so forth, you have a choice,” Weiser said. “If there’s not enough money there, you either fire people, or you … lay them off or furlough them.”
While some students critical of the tuition increase have pointed to the endowment as an alternative to burdening students with a tuition increase, others are more concerned with the conversation surrounding the endowment itself.
LSA sophomore Renee Boudreau is one such student. Boudreau helped organize a growing coalition of students campaigning for an increase in student representation to the Board of Regents. She told The Daily that recent conversations between members of the coalition and the Board of Regents have shifted their outlook on the endowment, but not on the tuition increase itself.
“I think we’re coming to acknowledge that … the endowment funds are probably not a source of, I guess, financing these losses,” Boudreau said. “But we don’t think that any increase in tuition for low income students should be either.”
Instead, the coalition wants to see a budget that is more accommodating to out-of-state students, international students and students on the University’s Flint and Dearborn campuses who are disproportionately affected by tuition increases, according to Boudreau.
Boudreau said that what they’re ultimately campaigning for is not alternative appropriations of the endowment, but rather more transparency surrounding the endowment and University finances.
“We’re, like, regular undergraduate students,” Boudreau said. “Most of us aren’t … financially savvy in terms of what an endowment means and what it is, and so I kind of wish they were more transparent and like, ‘Hey … I recognize that you’re concerned about the endowment. This is why we can’t do it,’ instead of just kind of treating us as people who wouldn’t understand.”