Endowment

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An endowment is the total investments held by an institution which it is not at liberty to spend. Non-profit or charitable institutions receive gifts. In some years, an institution may receive more money than it spends. In general, when an institution saves money, it is free to spend it later for any purpose consistent with the mission of that institution. However, when a gift is given on the condition that the money cannot be spent (but any interest income earned by the gift can be spent), that is called an endowment.

The definition of "endowment" varies from charity to charity and from state to state. For example, a donor may give money to a charity on the condition that the income from the investment of the gift is paid to his widow for as long as she lives and then what is left can be used by the charity. In some states, that gift would be considered a part of the endowment as soon as it is received. In other states, those funds would have to be invested separately until the widow dies.

Sometimes charities are criticized for setting aside too much money and not spending more each year. For example the Wikimedia Foundation has been criticized for using persistent fundraising to receive much more money than it plans to spend. Some colleges have been criticized for paying out only a portion of endowment income (to hedge against future inflation) rather than using more of the income for financial aid or for lowering tuition.[1] In general, conservatives try to protect endowment so that it can meet the needs of future generations, while liberals seek to maximize the present benefits of endowments.

Colleges and universities try to have as large an endowment as possible so that the income from those financial investments can subsidize the operating expenses of the institution. Here is a table of the the United States universities which have the largest endowments:[2]

RankSchoolSize
1Harvard University$31.7 billion
2Yale University$19.4
3University of Texas System$17.1
4Princeton University$17.1
5Stanford University$16.5
6Massachusetts Institute of Technology$9.7
7University of Michigan$7.8
8Columbia University$7.8
9Northwestern University$7.2
10Texas A&M University System$7.0

Although endowment size is a relative measure of a college's financial strength and stability, there are many other factors that influence the quality of a school. For example, public universities generally have lower endowments than private institutions, but public universities receive annual taxpayer appropriations that can make up for a lower annual endowment income. In general, over time, universities earn an average of 4% per year on their endowment investments. So, a $100 million endowment investment may subsidize annual operations by $4 million per year.

References

  1. Arenson, Karen. "Senate Looking at Endowments as Tuition Rises", New York Times, January 25, 2008. Retrieved on November 21, 2012. 
  2. 2011 NACUBO-Commonfund Study of Endowments. Retrieved on November 20, 2012.
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