September 18, 2008

C.U. Endowment Spending Likely Unaffected by Legislative Proposal

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With recent debates in Washington over whether universities should be legally forced to spend more of their endowments, one cannot help but wonder how Cornell utilizes its $5.4 billion endowment, the 18th largest in the nation.
Under law, Cornell is not allowed to spend the principal value of the endowment, but can spend a portion of investment returns.
Nearly all of the $5.4 billion is invested, and after adjusting for inflation, a portion of investment returns are spent. This amount, called the payout, has been 5.1 percent of the value of the endowment on average over the past 10 years.
This figure is slightly higher than the five-percent minimum payout rate that legislation proposed last February by Rep. Peter Welch (D-Vt.).
Even if the requirement becomes reality, it is unlikely to have a significant impact on Cornell, according to David Harris, interim provost, and Paul Streeter, interim vice president for planning and budget.
This opinion is echoed by Prof. Ronald Ehrenberg, industrial labor relations and economics, who heads the Cornell Higher Education Research Institute.
“Generally speaking, it will not affect Cornell much because we, on average, spend more than five percent,” Ehrenberg said. He is also a member of Cornell’s Board of Trustees, which makes the ultimate decision on endowment spending.
“The five percent rule is reasonable, but it should not be based on the current value of the endowment, but its value over a number of years,” he added.
Funding for academic programs tops the list of Cornell’s endowment spending at 31.6 percent of the payout, according to the University’s response to a questionnaire issued by the Senate Finance Committee in January. Student aid for undergraduate, graduate and professional students comes next at 23.4 percent, while 16.7 percent of the endowment payout is used to support professorships.
For the 2008-09 fiscal year, however, the payout rate will be significantly increased by 12.8 percent, from 4.9 percent to 5.5 percent. This is conspicuously higher than the usual five percent increase per year.
“This is a special case. The trustees approved it with very, very clear expectations that the money is used to fund specifically on the financial aid initiatives,” said Streeter, referring to the new financial aid initiative announced in January.
Over the past 10 years, Cornell’s endowment has earned an average return of 10.2 percent. In the last fiscal year, it reached a rate of return at 25.9 percent, the highest figure in the past 10 years. Still, the payout rate last year remained at 4.9 percent.
Cornell officials stressed the importance of analyzing the numbers from a long-term perspective.
“We look at a 12-quarter rolling average of market value so that we do not overreact when we have a high or low rate of return in a single year. This helps to ensure a stable and hopefully growing source of income for the University,” said Streeter.
Student Trustee Mike Walsh, grad, also emphasized the importance of “financial sustainability.”
“Although the endowment has recorded growth in the past five or six years, this year it may not be as healthy as in the past. A consistent and reasonable payout rate helps to ensure a continuous return in endowment funding through good and bad financial times,” Walsh said.
Ehrenberg also pointed out a trade off between the growth of endowment and its payout rate.
“The endowment has to provide income not only for current operation, but also future operations. On average, if you spend more today, there will be a slower rate of growth in the future. There is a trade off in how much we spend today and how much we can spend tomorrow,” said Ehrenberg.
The issue of endowment spending is a hot topic. Last Monday, 24 college presidents and policy experts met on Capitol Hill to discuss the issue of endowment spending, though no legislation surfaced from the meeting, according to The New York Times.