Financial Endowment - Criticisms

Criticisms

Officials in charge of the endowments of some universities have been criticized for "hoarding" and reinvesting too much of the endowment’s income. Given a historical endowment performance of 10–11%, and a payout rate of 5%, around half of the endowment’s income is reinvested. Roughly 3% of the reinvestment is used to keep pace with inflation, leaving an inflation-adjusted 2% annual growth of the endowment. Of course, many endowments fail to earn 10-11 percent.

Two arguments against inflation adjusted endowment growth are:

1. The future needs the money less than the present
   Some claim that the future will be much richer materially than the present due to technological innovation and specialization. In counterpoint, Nobel laureate James Tobin makes a case for intergenerational equity.
2. A constantly growing endowment shields universities from competitive forces
   As the endowment’s reinvestment starts becoming a larger part of its growth, the need for happy students and alumni to donate funds to the university’s budget and endowment is reduced. Therefore, traditional market forces that provide incentives to run a university efficiently may be greatly reduced and at least theoretically lead to university administration not being held accountable for its actions. (However, this might also be considered a worthy goal, as it would mean the freedom of academia from financial concerns, which could cause a wider range of research topics to be available to students and faculty.)

Large endowments have been criticized for "hoarding" money. Most philanthropies are required by federal law to distribute 5% of their assets per year, but university endowments are not required to spend anything. Many universities with very large endowments would require less than 5% to pay full tuition for all their students. For example, it has been estimated that if in 2006 all the Harvard students had paid the maximum in tuition and fees, it would have amounted to less than $300 million. In 2007, if Harvard had spent 5% of its $34.6 billion endowment, all Harvard undergraduate and graduate students could have attended for free and the university would still have had $1.3 billion left over. It would require less than 1% of the endowments of Harvard and Yale to allow all students to attend tuition-free; Stanford, MIT, Princeton and Rice would require less than 2% of their endowments and 29 other schools would require less than 3% for all their students to attend tuition-free. Despite the decreasing values of endowments, congressmen, including Charles Grassley, have questioned whether the endowments are contributing enough to maintain their tax-exempt status. After reviewing work in developing nations by 50 higher education institutions with endowments over $1 billion, Peter Hotez of George Washington University has stated that "pharmaceutical companies are doing more for the poorest people than most of our wealthiest universities."