Financial Plan - Cornell University Division of Budget & Planning

Tuition, Financial Aid & Endowmentmay spend the donor’s gift. For example, an institutionis legally prohibited from spending funds on studentfinancial aid from revenue generated from an endowmentfund established by a donor to support cancer researchor a professorship in a particular subject. In additionto donor imposed restrictions, there are also externalrestrictions that affect the payout of endowments. Forexample, the Uniform Management of InstitutionalFunds Act (UMIFA) has been recently amended andhas already been adopted as modified by several states.UMIFA was modified to provide that if a payout from afund exceeds seven percent, the fiduciary to the fundmay be in violation of the Act’s prudent managementstandards.The testimony also addressed the function of a spendingrule, which helps create a stable and dependableflow of operating support from an inherently variablerevenue stream:…colleges and universities typically employ endowmentspending or payout rules that seek to provide predictableand sustained funding for campus operations and theprograms and activities for which donors restricted theirgifts. …According to NACUBO, the most common spendingrule adopted by institutions is to spend 5 percent ofthe three-year average of an endowment’s market value.…College and university endowment spending rateshave averaged between 4.5 and 5.1 percent of markervalue over the last decade. For the 765 institutions whoparticipated in NACUBO’s 2006 endowment study, theaverage spending rate was 4.6 percent.An annual investment return of approximately 9-10percent is needed to: achieve the typical spendingor payout rate goal of 5 percent; reinvest part of theinvestment earnings to maintain the endowment’svalue relative to inflation (2.5-3.5 percent); and pay forinvestment management costs (1-2 percent). In recentyears, average investment returns have been strong.For 2005-2006, the overall average rate of investmentreturn was 10.7 percent. Institutions with the smallestinvestment pools had an average rate of 7.8 percentand institutions with largest investment pools had anaverage rate of 15.2 percent. However, one only has togo back to 2000-2001 and 2001-2002 to find examplesof when returns were not so rosy. In 2000-2001, theaverage return was -3.6 percent and in 2001-2002 theaverage return was -6.0 percent.The testimony further clarified why the proposal toextend a minimum-spending rate to college and universityendowments would be problematic:Private foundations and colleges and universities arevery different kinds of tax-exempt institutions. In thecase of a private foundation, the public has an interestin ensuring that, in return for the tax advantagesgranted to the donor, the foundation, which remainsunder private control, is adequately serving its charitablepurposes by spending its funds in a timely fashion. Forfoundations, virtually all of their income comes fromtheir endowments and the most effective way to ensurea significant charitable activity may be through aminimum payout requirement. In contrast, charitabledonations to college and university endowments aretypically given for the express purpose of supportingdesignated educational or scholarly activities over a longperiod of time. When a college or university executes itsdaily operations, it fulfills and engages in its charitablepurpose with endowment funds and other sources ofrevenue. There are many constituencies that play a rolein ensuring that these dollars are spent for their intendedpurposes, including the donors themselves, students,faculty, university administrators, alumni, local residents,and government agencies.In addressing the question of whether the governmentshould impose tuition price controls through punitivetaxation, the testimony noted:Throughout history governments have sought to imposeprice controls. Invariably price control efforts have ledto shortages of the commodity or service in questionand/or deterioration in quality.Taxing an endowment’s earnings would only increase theupward pressure on tuition and decrease the resourcesavailable to support institutional programs, includingthe student financial aid funds that are crucial to makinghigher education affordable for families from low- andmiddle-income backgrounds. In addition, taxing endowmentswould turn a donor-intended charitable gift intoa source of government tax revenue.The Senate RequestOn January 24, 2008, NACUBO 4 released its 2007endowment study, which highlighted a “…one-yearaverage rate of return of 17.2 percent [for] college anduniversity endowments.” 5 On that same day, the SenateCommittee announced that it had sent a requestfor information to the 136 U.S. colleges and universitiesthat had endowments of $500 million or more,according to the NACUBO study. 6 The Committeeposed eleven questions that touched on institutionalpolicies and practices governing tuition, financial aid,4 National Association of College and University BusinessOfficers.5 http://www.nacubo.org/x2376.xml6 http://www.senate.gov/~finance/press/Gpress/2008/prg012408f.pdf11