It has become one of the more predictable cycles for a university president—every year or two, a spate of stories pops up in the media about university endowments. The stories vary in their details, but the central points are similar: the nation’s elite universities have gone too far in their pursuit of wealth, are engaged in an arms race for philanthropic dollars, and, in some cases, have more money than they truly need. One such recent article in the New York Times Magazine, provocatively titled “Harvard’s Hoard,” made the observation that Harvard’s endowment was “larger than the G.D.P. of Ecuador.”
I will not be the first Stanford president to bend your ear about this. Donald Kennedy, in a speech 15 years ago, wrote plaintively, “To look poor and feel rich in America is fine and honorable. To look rich and feel poor is no fun at all . . . Why do we find ourselves in this unenviable position?” Ten years later, Gerhard Casper wrote that it is tempting to look at our budget and endowment and “conclude, as some do, that Stanford is rich. Indeed, Stanford is a thriving university, and has been blessed by the remarkable generosity and loyalty of alumni and friends . . . On the surface, one might wonder how we could ask for more.”
So if this sounds a bit familiar, forgive me. But these questions are extremely important to the future of this University and bear renewed examination.
In recent years, Stanford has benefited from the strong market and a good investment strategy; its endowment has grown to about $8 billion. At the same time, the University’s needs have also changed and grown.
Although endowment earnings help us fulfill our mission of teaching and research, endowment income does not come close to meeting our financial needs. In fact, only 18.2 percent of our operating expenses were covered by endowment-income last fiscal year. Why, given the size of the endowment, don’t we just spend some of it to meet expenses? First of all, a university’s endowment is protected by law; so the principal cannot be spent. In addition, the trustees set a payout policy that tries to strike a balance between meeting today’s needs and ensuring that the endowment will be available to support future generations of students.
Protecting the endowment for future generations means accounting for the effects of inflation as well as variations in financial returns. Over the past 35 years, returns on the endowment have ranged from negative 15.7 percent to 39.8 percent. Most of the endowment’s recent appreciation has occurred in years of record performance by the stock market. Given the recent downturn in the market, we anticipate returns in the coming year will be disappointing. Because we count on the endowment to provide financial support in good years as well as bad, we end up spending less than we earn in high-performing years and more than we earn in low-performing years.
Over the past five years, the trustees have approved payouts averaging around 5 percent of the endowment’s value — slightly higher than payouts at comparable institutions. Even so, every year we must fund more than 80 percent of the budget primarily from a combination of gifts, tuition and external research support. Compare this to Princeton’s endowment, which generates 34 percent of its operating expenses, or to Harvard’s at 28 percent.
For fiscal year 2000, a study by the National Association of College and University Business Officers showed that Stanford ranks third in size of endowment, behind Harvard and Yale. More significant is the ranking of universities by endowment per student. Princeton University, although it is fourth in absolute size of endowment, has the highest endowment-per-student among peer institutions. Stanford does not even rank among the top 10 in this critical measure. Princeton’s greater endowment-per-student means, for example, that 95 percent of its undergraduate financial aid comes from dedicated endowed sources, while at Stanford, that figure is only 42 percent.
Why is it so important to increase the fraction of our expenses supported by endowment? Put simply, if we are to maintain a world-class faculty and an exceptional student body, then we have no other choice. Such a mission requires that we stay competitive with peer institutions in our faculty and staff salary programs, try to keep tuition increases to a manageable level and maintain our commitment to need-based financial aid for our students. And of course, it means we must continue to innovate—in the area of undergraduate education, where we’ve had so much success in recent years, as well as in our graduate programs, which are some of the most highly regarded in the country.
Since its founding, our University has never shrunk from these kinds of challenges. The Stanfords and successive generations of leaders embraced such difficulties and built a monument to their belief in the future. Building the endowment acknowledges our continued belief in Stanford and our ongoing commitment to those who will one day be Stanford alumni.
