Senate hearing looks at university spending

The University submitted a written statement describing its methods for financial aid spending from its endowment to the Senate finance committee yesterday.

In a finance committee hearing on Sept. 26, two witnesses pushed for a proposal that would force universities to spend at least 5 percent of their endowments every year, the same rate that charitable foundations are required by law to spend.

Spending 5 percent of the University's $16 billion endowment annually would require yearly spending of at least $800 million.

At the hearing, Lynne Munson, one of the witnesses and an adjunct fellow at the Center for College Affordability and Productivity, argued that "many schools have been rolling over so much money for so long that they should easily be able to accommodate a higher rate of payout."

The statement, submitted by Vice President and Secretary Bob Durkee '69, outlines the University's financial aid program and the management of the endowment in an attempt to discredit the push for a legislated minimum expenditure.

Imposing a minimum spending rate on university endowments is not a new issue, Durkee said in an interview last week.

The proposal, he said, "seems to be aimed at reducing the value of the endowments." The University endowment, which consists of over 3,500 accounts, some over 100 years old, is used "to support students and faculty and to continue to support those purposes in the future," Durkee said.

The University's endowment spending is guided by a complicated formula, with the amount of money to be spent increasing a set percentage every year.

The current annual spending rate is 4.6 percent according to the submitted statement, which falls within the University's spending rate target range of 4 to 5.75 percent, adopted in 1979.

If expenditures fall below the target rate, the University makes adjustments to make sure that it spends within its preferred range. Over the last three decades, the University has made nine adjustments, the most notable one in 2001, when the no-loan financial aid policy was adopted.

In order to sustain the purchasing power of the endowment, the University aims for an average return on investment of at least 10 percent. The University spends about 5 percent and reinvests the remaining amount.

The University seeks to maintain a certain level of endowment growth in preparation for future projects.

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"Over time, knowledge expands," Durkee said, citing genomics as an example of a relatively new priority for the University.

New studies and programs must be continually developed so that the University can remain at the top in academia, and the money for such new programs must come from donations and the endowment, he added.

"[Charitable] foundations are in the business of giving money away," Durkee said. "We're not grant-making businesses."

Durkee noted that unlike foundations, universities must plan ahead to ensure they do not spend too much or too little in the present period, adding that the process is complicated, and simplifying the solution by specifying a minimum spending rate would be unwise. Moreover, he said that Congress should not even have a say in the issue.

Some of the spending of the endowment, is restricted by the donors' specifications when gifts are received. Of the restricted accounts, however, most are earmarked for financial aid, Durkee said.

The top expenditures for the endowment are funding for facilities, research and financial aid.

"The percentage of budget at Princeton [spent on financial aid] is higher than any place else," Durkee said.

In the 2006-07 academic year, the amount of financial aid that came from restricted funds totaled $52,581,353, and an additional $9,546,066 came from unrestricted funds. Fifty-four percent of the freshman class is currently receiving financial aid with an average grant award of $31,187. This is up from 38 percent of the Class of 2001 who received financial aid.

Despite such figures, critics think that universities should be required to pay the same 5 percent amount charitable institutions pay annually.

"If Harvard, Yale, Princeton, MIT or Stanford had paid out one-tenth of 1 percent of their endowment for undergraduate tuition, undergraduate tuition increases would have been unnecessary to maintain the budget," Jane Gravelle, an economist with the Congressional Research Service, said in a statement.

Most schools, like Princeton and Harvard, already aim to spend 5 percent of their endowment funds each year, but the actual figure varies from year to year based on needs.

In fiscal year 2007, Harvard funded one-third of its $1.1 billion budget from its endowment, Harvard spokesman John Longbrake said in an email. Tuition at Harvard "covers only about two-thirds of the total cost of a Harvard education," Longbrake added.

Similarly, Columbia's spending rate usually does not exceed 5 percent of the endowment. In fiscal year 2006, the university spent 4.3 percent of its endowment.

In the statement to the Senate, an unnamed University trustee said that "One of the most important responsibilities of the trustees is to try to find the right balance between achieving the highest possible standards of excellence for this generation and ensuring the University's financial capacity to continue to achieve those standards for future generations."