Financial Plan - Cornell University Division of Budget & Planning

Tuition, Financial Aid & EndowmentSelected Sources of Need-Based FinancialAid for Cornell Undergraduates(in inflation-adjusted, 2006-07 dollars)Inflation-Adjusted Dollars in Millions$120$110$100$90$80$70$60$50$40$30$20$10$0Grant – CornellLoan – Government *Grant – GovernmentWork-Study – Federal88 90 92 94 96 98 00 02 04 06Fiscal Year* Excludes the use of non-need based governmentloans by students, parents, and guardians.Endowment and DebtWhile the purpose of an endowment payout or spendingpolicy is to regulate the use of investment returnin a given budget year, such a policy undergirds amore fundamental principle—that in setting payout,university trustees must balance the demands of thepresent and the needs of the future, a quest that issometimes referred to as “maintaining intergenerationalequity.” A payout policy accomplishes this by:• Ensuring regular and predictable payout increases tosupport a variety of university costs that experienceinflationary and programmatic growth• Regulating the absolute level of payout so that it willnot reduce the endowment corpus dramaticallyduring periods of lower or negative returns• Making certain that payout for true endowmentscontinues and the original corpus of the endowmentgift is maintained in perpetuityWhere possible, universities pool gifts that are to beinvested and treat them as mutual funds. This poolingallows a payout policy to be applied uniformlyacross funds. Payout must be set in advance so that itcan be planned as part of the institution’s budget. Thepayout for a given year could theoretically equal theincrease in the market value of the portfolio less thediminution of that value caused by inflation, investmentmanagement costs, and any service charges.Ideally, payout should increase annually or at least notdecrease precipitously. Unfortunately, neither the totalreturn nor the rate of inflation can be known in advance.For these reasons, institutions employ smoothingrules that link payout to previous investmentperformance and spending levels. Smoothing ruleshelp to insulate payout growth from the sometimessignificant swings in market returns.The graph below shows that among institutions reportingin the NACUBO Endowment Studies, returnsaveraged 11.8 percent from 1980-81 through 2006-07.Annual average returns for these institutions variedNominal Rate of ReturnEndowment Investment Returnsas Reported by NACUBO †50%45%40%35%30%25%20%15%10%5%0%(5%)(10%)CornellAverage of 23 PeersAverage of All Reporting81 83 85 87 89 91 93 95 97 99 01 03 05 07Fiscal Year† Investment returns, net of investment managementcosts, as reported in the annual NACUBOEndowment Studies.23