The University added nearly $700 million to its endowment fund during the last fiscal year, according to a report released this week by the National Association of College and University Business Officers.
The endowment, which is comprised of funds donated to the University, grew by 20.2 percent due to increased donations and increased returns on investment, University spokeswoman Julie Peterson said.
“We’re a good University, but with our donor support, we are able to be a world-class university,” she said.
With a total endowment of $4.1 billion, the University has the 11th largest endowment in the nation, and its 20.2 percent return is greater than the 15.1 percent average return achieved during the past fiscal year, which ended on June 30, by all college endowments surveyed by the association.
The investment returns generated by endowments are an important source for private universities as well as public ones, NACUBO president, James E. Morley, Jr. said in a written statement.
“Institutional expenses continue to increase, while some revenue sources — such as public funds — are decreasing,” he said. “These conditions, plus the growing need for student financial aid, make endowment income an increasingly vital funding element of most college and university budgets.”
This is true at the University where the state cut over $40 million of funding over two years. Still, if the University did not have the $327 million that the state provided last year, the endowment would need to total $10 billion in order for the University to have enough funds to make up for the loss, Peterson said.
In order to maintain the endowment, contributed funds are kept as part of the principal — the initial endowment — and the University spends the return on the principal.
Of the $100 million University alum Stephen Ross donated to the Business School, $25 million was designated for the endowment. Peterson said the $25 million will always remain in the endowment, and the University will spend income generated by investing the $25 million.
“The endowment sounds really big, but we only spend the interest. (The principal) is in a trust in perpetuity for the university,” she said. “This assures Michigan can continue to be a great University now and in the future.”
In order to achieve this assurance, the endowment is operated under a long-term investment strategy, and only 5 percent of the average market value of the endowment over a three-year period can be spent every year, according to the University’s financial report.
The endowment cannot be used to lower tuition but must be spent according to donors’ instructions. Still, it does help ameliorate the University’s costs.
“The endowment helps pay for endowed professorships, scholarships and those things that we would pay for out of a general fund,” Peterson said. “So the endowment helps defray costs.”
In addition to the endowment, the University has an investment pool of about $1.5 billion that helps pay for one-time projects such as the North Quad complex, Peterson added.