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When it comes to charitable donations, endowments play a significant role. An endowment refers to the donation of money or property to a non-profit organization. The invested income from these donations is then utilized for a specific purpose. Furthermore, endowment can also mean the total investable assets of a non-profit institution, which is usually used for operations or programs in line with the donor’s wishes. In most cases, the principal amount of an endowment is preserved while only the investment income is used for charitable endeavors.

Endowments have a rich history and have been around for centuries. Some of the oldest endowments were established by King Henry VIII and his relatives. They established endowed chairs in divinity and professorships in various disciplines at Oxford and Cambridge. Marcus Aurelius also established the first recorded endowment for major philosophy schools in Athens in 176 AD.

Donors can have certain restrictions on how the money from endowments is spent. They can specify the use of the income for merit-based or need-based scholarships. Another common use of endowment income is funding endowed professorships to attract exceptional educators.

However, universities still have the freedom to use the remaining income for other purposes like hiring professors, facility upgrades, or additional scholarships. The investment income from an endowment can greatly benefit students by reducing tuition costs. For example, if a university’s endowment yields $150 million and has a spending limit of 5%, it would provide $7.5 million of available income. If the university originally budgeted $5.5 million from the endowment, the excess $2 million could be used to pay other debts and expenses, resulting in savings for students.

It is important for endowments to be managed by professionals to ensure the investments align with the institution’s goals and policy allocation. Dependence on investment returns means that low returns can pose challenges for universities relying on endowment income.

Types of Endowments

There are different types of endowments, each with its own characteristics:

1. Term endowments require the principal to be expended after a specific period of time or event.
2. Unrestricted endowments give the institution complete discretion over spending, saving, investing, and distributing the assets.
3. Quasi-endowments are donations with a specific purpose, where the principal is retained, and earnings are expended according to the donor’s wishes. Institutions often start these endowments using their existing unrestricted funds.
4. Restricted endowments hold the principal indefinitely, but the earnings are spent as per the donor’s specifications.

In certain circumstances, endowment terms can be violated with court approval to utilize endowment assets for the institution’s financial health while still respecting the donor’s wishes as much as possible. This is called “invading” or “endowment invasion” and requires state approval in some cases.

Criticism of Endowments

Elite educational institutions like Harvard University have faced criticism for the size of their endowments. Doubts have been raised about the necessity of these multi-billion-dollar endowments, equating them to hoarding. This critique intensified as tuition costs increased towards the end of the 20th century. Large endowments were expected to serve as rainy-day funds for educational institutions, but during the 2008 recession, many endowments reduced their payouts. A study published in the American Economic Review in 2014 revealed a trend towards prioritizing endowment health over the overall institution.

Student activists often scrutinize where their colleges and universities invest their endowments. In the past, divestment from industries and countries implicated in moral controversies, like apartheid, gained traction among student activists. This practice continues to evolve as students seek more effective means of advocating for divestment.

-Albert Phung Investopedia