Is the donor-led pure restricted endowment really helping?
This article caught my attention because firstly, it is misleading and secondly, it made me think (again) about how endowments are structured within higher education and the fundraising behind them.
Stanford's woes in the article are not unusual at this time. Universities and colleges around the nation are making challenging decisions, from furloughs to retirement contribution halts to layoffs to athletic program cuts, -and I recognize in today's environment these types of decisions are necessary. But I think this crisis should also bring the industry to also question how endowments are structured and how fundraisers are fundraising to increase them.
Here are a few more articles in the news as of late:
I choose these articles based on the university's endowment size. Stanford: $27.7b, University of Colorado: $1.04b, University of Arizona: $1.03b, Georgetown University: $1.62b, University of Oregon: $912m, and Brown University: $4.2b.
Assuming a 4% payout rate (industry standard is between 3-5%), each university received anywhere between $36m - $1.1b in FY19.
Stanford's website cites that the endowment revenues were actually $1.3b for FY19. That’s a far cry from Stanford's annual operating budget of $6.8b. So even if the endowment were entirely unrestricted (and it is not, Stanford's website says that 79% of the endowment is restricted - typical of large endowments), there's a huge shortfall. That same shortfall exists for all universities mentioned.
Back I want to go back to the question, what is the ultimate goal of the endowment anyways? Stanford says its endowment’s purpose is "to provide an enduring source financial support." More elaborately, The Guardians Initiative funded in collaboration with TIAA and the Association of Governing Boards of Universities and Colleges explains the purpose of the endowment is to “supplement and protect against declines in net tuition and fee revenues, state appropriations, and other income. Endowments can also be used to launch new initiatives consistent with institutional mission, strategic priorities, and donor intent, and they can sometimes be used as a source of emergency reserves.” Yet, in the midst of a crisis, are they really achieving their goal?
And more importantly, what are we telling donors and the public if hundreds of millions, even billions, is not enough to maintain financial resiliency?
I believe this latest crisis demonstrates that pure donor-led restricted endowments take advantage of huge gains in the market, but are structured in such a way that they can't provide for the organization in a crisis.
And I submit the industry reconsider both: 1) the traditional pure endowment as the model of choice, and 2) move fundraising from donor-led endowments to institution-led endowments.
The traditional model of a pure endowment invests the gift in perpetuity and has a conservative payout rate between 3-5% annually. The purpose behind the pure endowment is to grow the overall investments so that in turn, the annual payout is increased. That makes sense, until you hit a crisis like in 2020.
And endowments have been growing. According to Paul Jansen who wrote for the Forum for the Future of Higher Education at MIT, "The investments held by the top 10 higher education endowments grew from $11 billion in 1984 to more than $100 billion in 2005." Moreover, Paul Jansen also cited the Commonfund’s 2006 Benchmarks Study which “found that the 40 institutions with endowments greater than $1 billion earned an average three-year return of 11.6 percent. Yet the average payout for this group was just 4.3 percent for fiscal year 2005, a drop from previous years.” The National Association of College and University Board Officers reported that collectively, higher education has $500b in endowments as of FY18.
So endowments are seeing huge gains, but I ask - what good is a huge endowment if it can't help the institution weather a storm? Wouldn't some donors rather see the principal tapped or higher payout rates employed to maintain vital programs, faculty, and staff and see the endowment reduce one year, only to make up for the losses overtime (as statistically long-term investments do)? Why are quasi-endowments not more commonplace and not often suggested to donors as a possibility?
Are fundraisers really fundraising for the financial resiliency of the organization when suggesting pure restrictive endowments as the first or only choice? Or are we fundraising to grow the endowment for other reasons now?
Which brings me to my second point, I think the industry should reexamine how effective donor-led endowment fundraising is to the institution and consider emphasizing institution-led priorities when it comes to fundraising for endowments. Many institutions lean towards a donor-led model within fundraising. Those organizations justify their approach by claiming it's donor-centric. They encourage the donor to choose the priority important to the donor and the byproduct is the donor dictates the endowment restrictions (within parameters). But in a crisis, the $50,000 scholarship fund that only supports in-state students from specific counties with 3.8 GPAs and an interest in aerospace engineering is not going to address the need for vital support. So are they really donor-centric? I submit perhaps not.
I think healthier fundraising would be providing the donor with the priorities identified as vital by the institution and encourage most donors to support those existing endowments, quasi-endowments, and current funds. The option for creating an endowment could still be on the table, but it would not lead the gift conversation. Fundraisers would be effectively pooling resources towards more broad and more apropos initiatives that the institution recognizes it needs to maintain in the good times – and the bad times.
I also question the low threshold many higher education institutions have set to creating endowments, many starting between $25,000-$50,000 (I question this threshold especially for testamentary endowments). These low thresholds provide for for an average payout rate between $1000-$2000, a small slice in the cost of a college education, and the administrative burden and expense of managing thousands of small endowments is significant.
Rethinking endowment structure and donor-led endowment fundraising does not solve all of the organization's budgetary challenges in a crisis and it doesn’t address criticisms I often heard from donors who questioned the fiscal spending policies around salaries, athletic programs and capital improvements/expansions in particular. It also does not address the issue as to why many public institutions receive less than 10% of its budget through the state. These are all valid concerns and prompt valid conversations, but don’t get at the core of fundraising for endowments.
I submit it's time to re-examine pure restrictive donor-led endowment fundraising and the message we are sending to donors that billions is not enough to make for a financially stable organization. Perhaps it’s time to bring fundraising for endowments back to the original purpose – financial resiliency of the institution.