When the College's development officers fan out across the country to visit alumni and friends, they frequently are asked about the endowment. Dan West, the College's vice president for college relations, discusses the importance of the endowment, which has a market
value of $168 million.
Q. What is endowment?
A. Endowment is money that is given to the College that is never spent. It is invested, and only a certain amount of the income is used to pay for parts of the operation of the College that have been designated by the donors. Many additions to the College's endowment come in the form of bequests-funds left to the College by friends and alumni under the provisions of their wills. Other additions to the endowment are made by living donors.
Q. Why do we have it?
A. Endowment provides a permanent financial foundation for the College. If managed well, it provides a reasonably dependable source of income to help operate the College each year. It gives stability and strength to the College. For this reason the market value of the endowment is often used as an index into the College's quality and staying power. It is looked at by those who rank colleges in magazines or assess colleges for the purpose of making grants or measure the fiscal integrity of colleges for bond ratings.
Second, it is a way for some who want to make a gift that will support, in an ongoing way, some part of the operation of the College in which they are particularly interested-a position on the faculty, for example, or the athletic program, or scholarships for students, or the library, or maintenance of the grounds. These are all specific objectives for which endowments have been established.
Finally, endowment supplements what the College derives in tuition, fees, and annual gifts, and it helps us hold down the rate of increases in our prices.
Q. Have we always had an endowment?
A. One reason Union prospered in the first half of the nineteenth century was the financial creativity of its president, Eliphalet Nott. We believe that Union's endowment exceeded $1 million by the mid-1850s, making us one of the wealthiest colleges in America at that time.
The years after Nott's death in 1866 were marked by internal strife, however, and by 1900 our permanent funds amounted to only $425,000. Gradually, under the guidance of Frank Bailey, our long-time treasurer, we began to
improve our financial situation. By the time of his death in 1953, we had an endowment of more than $10 million.
Q. What is the difference between giving to the endowment and giving to the Annual
Fund?
A. A gift to the endowment is permanently invested and only a portion of the total return (interest, dividends, and appreciation) is spent each year. A gift to the Annual Fund is generally spent, entirely, within the fiscal year in which it is donated. In essence, one helps us build for the future and one helps the College with immediate needs.
Which is more important? Neither. Both are essential ways
to build a stronger Union and help it progress and improve. Endowment is crucial for the reasons mentioned above. The Annual Fund is crucial because it provides funds, often unrestricted, that can be used to pay the bills this year. We need both. It would be wrong to pit the two needs against each other or to make donors feel the two are in competition for their help.
Ideally, donors will see the importance of each and help with both. That isn't possible for many, however. And so the endowment claims the help of some who like building for the future. The Annual Fund appeals to others who want to help now or who, generously, attach no restrictions to their gifts.
Q. Who manages the endowment?
A. The investments of the endowment are overseen by an Investments Committee of the Board of Trustees. The committee, in turn, has hired investment managers to invest monies with various objectives. The committee's goals are to protect the principal against inflation, beat indexes over the long term, and maintain the relative value of the endowment for present and future generations.
The endowment can be invested up to a maximum of sixty-five percent in equities (stocks). At this point about fifty-five percent is in stocks and the rest is in fixed income securities (bonds) or cash and cash equivalents.
Q. How does the College use the endowment?
A. The College has a “spending rate policy” on how it uses income from the endowment, which is based on a total return expectation that maintains the investment objectives.
Discrete parts of the endowment are assigned units, similar to the way a mutual fund works, and then each endowment fund is pooled for investment purposes. The total return on the endowment consists of the current yield (interest and dividends) plus realized gains (appreciation). Because appreciation is not guaranteed and there can be depreciation in some years (if the stock market
or bond prices go down) the College seeks to protect the principal of the endowment by using a three-year average “market value” of the consolidated investment pool as the base for applying a spending rate.
In 1996-97 the trustees have set the spending rate at five percent. This means that the College will take five percent of the three-year average market value of an endowment fund to spend on the purpose stipulated by the donor.
Now, we hope and expect that, over time, the total return will exceed five percent. For example, last December 31, 1995, the total return on our endowment for the previous twelve months was 19.6 percent, for the previous three years it was 11.2 percent, and for the previous five years it was 14.2 percent.
So, if the total return is, say, fifteen percent in 1996-97 and the College spends five percent of the market value averaged for the previous three years, then ten percent of the total return is available for adding to the principal to protect the buying power of the endowment for the future. In this way the trustees try to protect the principal against inflation.
There are always questions about whether we could have earned more or managed the money differently. It is important to remember, however, that in addition to obtaining the best possible return the trustees have a fiduciary responsibility to protect the endowment against loss. For this reason they may take what others would consider a more conservative approach in investing. There is always a tension between making more and avoiding loss.
Q. What are our goals in building the endowment?
A. So far in our Bicentennial Campaign we have raised about $60 million for endowment; our goal is to raise $87 million as part of the overall goal of $150 million. Our hope is to reach the $200 million mark in the market value of the endowment.
We have made splendid progress. Since the beginning of the Campaign, 110 new endowed scholarships have been established. We require a minimum of $25,000 to set up a new, named, endowed scholarship. That has made a tremendous difference in the College's ability to admit well-qualified students who nonetheless need financial aid to attend here.
Other endowments have been added to support professorships, terms abroad, ongoing maintenance for the Yulman
Theatre, the Nott Memorial, Schaffer Library, Memorial Chapel, Jackson's Garden, etc.
Much opportunity remains to build the endowment even stronger. Based on a market value of about $168 million and an enrollment of approximately 2,000, we have about $84,000 of endowment for each student. Many of the colleges with which we compete exceed $100,000 per student, and several are
at $200,000 or even $300,000 per student.
The endowment per student will, at five percent, provide about $4,200 this year for each student. This, along with monies contributed to the Annual Fund, represents a subsidy for every student that is not charged as part of their tuition but which allows us to provide a better educational program, better faculty, better facilities, and better equipment.
There is little wonder that there is a strong public perception that the more endowment a college has the better college it is.