University endowment returns are underspent - Higher Education - Statistical Data Included

Challenge, July-August, 2002 by Donald Frey

(5.) June 2001 endowment values from "2001 NACUBO Endowment Study Preliminary Results," NACUBO Web site, as of January 17, 2002. Student enrollments used in calculation are from Chronicle of Higher Education, "Almanac Issue," August 31,2001. Enrollments are for fall of the 1999-2000 academic year. Figures for largest per-pupil endowments are also from the "Almanac Issue" of August 2001 and refer to endowment values on June 30,2000, the end of fiscal year 2000. Several schools with largest per-pupil endowments had fewer than 1,000 students. In the reported calculations, these small schools were omitted because their large per-pupil figures reflected the small number of pupils as much as endowment size.

(6.) See, for exarnple, Richard A. Easterlin, Growth Triumphant: The Twenty-first Century in Historical Perspective (Ann Arbor: University of Michigan Press, 1996), figures 3.1, 3.2.

(7.) Robert M. Solow, "Sustainability: An Economist's Perspective" (lecture given at Woods Hole Oceanographic Institution, June 14, 1991), reprinted in Economics of the Environment, ed. R. and N. Dorfman (New York: W.W. Norton, 1993).

(8.) W.L. Cary and C.B. Bright, The Law and Lore of Endowment Funds: Report to the Ford Foundation (New York: Ford Foundation, 1969), p. 10.

(9.) Robert Eisner, discussion comments at session on "Endowment Income, Capital Gains and Inflation Accounting," American Economic Review 64, no. 2 (May 1974): 441.

(10.) George Psacharopoulos, "Returns to Investment in Education: A Global Update," World Development 22, no. 9 (1994): 1325-43; cited by R. Ehrenberg and R. Smith, Modern Labor Economics, 6th ed. (Reading, MA: Addison-Wesley, 1997), p. 322. Reported returns to higher education are 8 percent in developed countries and 11 percent in less developed nations. Private returns are higher.

(11.) James Tobin viewed the university as an efficient consumer: "[The trustees] want to know, therefore, the rate of consumption from endowment [that] can be sustained indefinitely.... Consuming endowment income so defined means in principle that the existing endowment can continue to support the same set of activities that it is now supporting" ("What Is Permanent Endowment Income?" American Economic Review 64, no. 2 [May 1974]: 427). Stated this way, Tobin's standard implies spending all real returns.

(12.) A formal demonstration may be obtained from the author.

(13.) L. Morrell cites previous speculation on the motivations of university trustees ("Retaining Economic Value: A Model Endowment Spending Policy," NACUBO Business Officer, February 1994, p. 30). Also see R. Ehrenberg et al., "Paying Our Presidents: What Do Trustees Value?" NBER working paper W7886, Cambridge, MA, 2000.

(14.) Ford Foundation, Advisory Committee on Endowment Management, Managing Educational Endowments (New York, 1969), pp. 21, 46, 62.

(15.) Adam Smith, Wealth of Nations, bk. 5, chap. 1, art. 2 (New York: Random House, 1937).

(16.) Eisner, "Endowment Income," 1974.

DONALD FREY is professor of economics at Wake Forest University, Winston-Salem, NC. His other writings on the economics of education include Tuition Tax Credits for Private Education (1983), an early empirical study of the likely effects of governmental subsidies to private education.