by Don Lifton '67, Cornell
Editor's Note: Just where does that donation to the alma mater go anyway? We'll be answering that question more in depth as time goes on, but for starters, you might be surprised to hear that universities everywhere, after sending you warm fuzzy entreaties to help the next generation of undergrads, hold back a big chunk of the dough they should be spending anyway.
An expert on law and economics of nonprofit institutions, Yale law professor Henry Hansmann, said that "A stranger from Mars who looks at private universities would probably say they are institutions whose business is to manage large pools of investment assets and that they run educational institutions on the side..." (Forbes, 10/19/98 p. 61).
Thus besides the goal of investing the university endowment responsibly, we might also insist that the administration spend more of it.
The endowment grows in two ways: 1) donations, and 2) annual returns on investments that exceed the amounts spent that year. Endowments can be seen as similar to foundations with narrow programmatic foci. Federal law, I am told, requires foundations to spend a threshold percentage of their total funds each year. Most years, foundations can meet that requirement and still grow through returns on well made investments of the core funds.
By contrast, there are no requirements for minimum endowment spending. A 1968 Ford Foundation report recommended the expenditure of 5% of an endowment each year. To my knowledge, the Board of Trustees has rarely if ever planned expenditures at that percentage rate. In 1997, for example, Cornell's endowment totaled $2.1 billion; it spent 3.3% of it - $35,700,000 under spent per the guideline, in just one year (per Forbes 10/19/98, p. 60). Might not UPA members have recommendations for a better use of that money than the administration's concerns to improve Cornell's competitive position in the rankings of "endowment per student" by keeping it unspent?
How are other schools doing? Per the 3/26/99 Chronicle of Higher Education: "According to the National Association of College and University Business Officers, the average payout rate for university endowments is 4.2% annually."[p. A47]
Thus, Cornell administrators fail to achieve even an average performance in this measurement (though, in a perverse way, they might claim that being under average shows leadership). Although the differences in percentage terms seem trivial, the dollar translation is significant. Had the Cornell board allocated just the average percentage, not the foundation's 5% recommendation but the mere 4.2% average, there would have been $18,900,000 more spent in the 1997 operating budget. That could easily have paid for more teachers, a lower student to teacher ratio, and perhaps a better educational experience.