what is an endowment 
an endowment is a gift to a nonprofit organization to be used for a specific purpose the term endowment is also used to refer to the total investable assets of a nonprofit institution like a university the endowment also known as the institution s principal or corpus is used for operations or programs that are consistent with the wishes of the donor s most endowments are designed to keep the principal amount intact while the income is used to further the cause specified by the beneficiary a restricted endowment must be held in perpetuity with only the income available for spending 1understanding endowmentsendowments are typically organized as a trust private foundation or public charity 23 many benefit educational institutions others go to cultural institutions such as museums libraries religious organizations private secondary schools and service oriented organizations such as retirement homes or hospitals 4in some cases only a certain percentage of an endowment s assets can be used each year so the amount withdrawn from the endowment could be a combination of interest income and principal 5 the ratio of principal to income can change year to year based on prevailing market rates policies of endowmentsendowment funds are governed by the guidelines of three components including an investment policy a withdrawal policy and a usage policy the investment policy lays out which types of investments a manager is permitted to make and dictates how much risk the manager can take in seeking the target return many endowment funds have specific investment policies built into their legal structure so that the pool of money lasts for the long term 6the endowment funds of larger universities can have hundreds if not thousands of smaller funds that invest pools of money in various securities or asset classes the funds typically have long term investment goals such as a specific rate of return or yield the asset allocation or mix of investments within the fund is designed to meet the long term returns in the fund s objectives 6the withdrawal policy establishes the amount the organization or institution is permitted to take out from the fund at each period or installment the withdrawal policy can be based on the needs of the organization and the amount of money in the fund however most endowments have an annual withdrawal limit for example an endowment might limit the withdrawals to 5 of the total amount in the fund most university endowments are established to last forever and therefore have annual spending limits 7the usage policy establishes the purposes for which the fund can be used endowments whether set up by an institution or given as a gift by donors can have multiple uses these include ensuring the financial health of specific departments awarding merit scholarships or fellowships or providing other financial assistance to students 89university chair positions or endowed professorships can be paid with the revenue from an endowment freeing up capital that can be used to hire more faculty these chair positions are considered prestigious and are reserved for senior faculty 10endowments can also be established for specific disciplines departments or programs within universities smith college for example has an endowment for its botanical gardens and harvard university has more than 14 000 separate endowment funds 1112endowment typesthere are four types of endowments 13the terms of endowments can be violated only in exceptional circumstances if an institution is facing bankruptcy but still has assets in endowments a court can issue a cy pres doctrine allowing the institution to use those assets to improve its financial health while still honoring the wishes of the donor as closely as possible 15drawing down the corpus of the endowment to pay debts or operating expenses is known as invading or endowment fund invasion and sometimes requires court approval 16requirements for endowmentsmanagers of endowments have to deal with the push and pull of interests to make use of assets to forward their causes or sustainably grow their institutions the goal of any group given the task of managing a university s endowments is to sustainably grow the funds by reinvestment of the endowment s earnings while contributing to the institution philanthropies a category that includes most grant making foundations are required by federal law to pay out 5 of their investment assets on their endowments every year for charitable purposes at the risk of losing their tax exempt status 17 private operating foundations must pay substantially all 85 or more of their investment income 18 community foundations have no requirement 19under the tax cuts and jobs act of 2017 substantially large university endowments must pay a tax of 1 4 on net investment income this tax is levied on endowments held by private colleges and universities with at least 500 students and net assets of 500 000 per student 20endowments and higher educationendowments are such an integral part of u s academia that the size of a school s endowment can be a fair measure of its well being they provide colleges and universities with the ability to fund their operating costs with sources other than tuition and provide a rainy day fund 13older educational institutions such as the ivy league schools have been particularly successful in building extremely robust endowment funds having the advantages of continued donations from wealthy graduates and good fund management 21marcus aurelius established the first recorded endowment circa 176 ad for the major schools of philosophy in athens greece 22criticism of endowmentsharvard and other elite colleges have come under criticism for the size of their endowments critics have questioned their utility likening it to hoarding 23large endowments had been thought of as rainy day funds for educational institutions but during the great recession many endowments cut their payouts a 2014 study published in the american economic review looked closely at the incentives behind this behavior and found a trend toward an overemphasis on the health of an endowment rather than the institution as a whole 24it s not unusual for student activists to look with a critical eye at where their colleges and universities invest their endowments in 1977 hampshire college divested from south african investments in protest of apartheid a move that a large number of educational institutions in the united states followed 25more recently three universities with multibillion dollar endowments harvard princeton and stanford declined to accept millions they were set to receive as part of a 14 billion federal aid package for higher education included in the cares act 26 harvard university has now declined emergency covid 19 relief money from the federal government three times most recently 25 5 million from president biden s american rescue plan 27real world examples of endowmentsthe oldest endowments still active today were established by king henry viii and his relatives his grandmother countess of richmond established endowed chairs in divinity at oxford and cambridge while henry viii established professorships in a variety of disciplines at oxford and cambridge 2829according to the national center for education statistics article the top 10 u s universities by endowment size in 2023 were 21harvard officials had expected the endowment to shrink in 2020 due to the impact of the pandemic on the economy and financial markets 30 they were wrong though as it returned 7 3 on its investments and actually increased a bit 31similar fears about 2021 proved even more unfounded powered by a rising stock market the endowment returned a whopping 33 6 on its investments and grew by 11 3 billion to 53 2 billion 32the fund treaded water more recently returning 1 8 in fiscal 2022 and 0 1 in fiscal 2023 32there are thousands of specific funds within the overall endowment fund for harvard the funds asset allocation was spread out through various types of investments including 32the endowment s annual payout rate is typically capped harvard s payout in 2023 totaled 2 2 billion 33from an investment perspective harvard s endowment fund has consistently produced strong returns over the long term although ongoing infusions of capital in the form of new endowments also drive total growth 