I see a lot of confusion about college endowments on HN. It's best to think of them not as saving accounts but financial instruments. Annual university budgets make use of the returns off of the endowment, often covering more than half of their expenses. Their long-term plan is to never tap into the principal. In fact, the hope is to increase the principal with new donations to expand the annual returns to fight against inflation and support new initiatives.

> It's best to think of them not as saving accounts but financial instruments.

I mean I get that (not that a bank isn't a financial instrument...) but to what ends? The example I gave is should be clear, because of the large wealth of money that is. $54bn is no laughing matter. Stanford has $30bn. These are sums that completely pay for the operating costs of the universities and students. On interest. If the point is to be like dividend investors, it does not appear (at least from what I'm seeing) that they are actually acting like someone with a goal to live off of dividends. There's more growth than that. Or there's something missing that I don't understand (more likely).

Using Harvard as an example, they had an operating expenses of $5.0 billion in 2021 [1]. In order to cover that, they would need to be having a consistent rate of return around 9% on their ($54 billion) endowment. That a fairly good estimate of the rate of return for the stock market over the past 25 years, so not unreasonable. Though, this ignores that most of the endowment consists of restricted funds that can only be used on certain ways. Also, generally you need to cut a few percentage points if you want to guard against inflation.

So yes, Harvard could cover just about all of their budget with the endowment returns, though they probably need some extra income to cover the holes formed by the restricted funds and avoid inflation pressure.

Is their current usage of the returns too conservative? Probably. Do they have an absurdly large pile of cash that they have no business holding on to? Not really; the investment returns roughly correspond with their current operating costs.

[^1] https://finance.harvard.edu/financial-overview

I was taught that you should estimate a 4% rate of return, which means Harvard's endowment can cover around 40% of their budget. Much of the remainder will come through research grants, and a rather small percentage will be tuition and fees.

Yes, that's what I learned as well. And that's actually close to what Harvard reported using last year ($2.1 billion from the endowment; 40% of the budget).

I was only using the more aggressive number as a thought experiment to the original poster about what it would take the cover the entire operating budget.

I admit I don't know about university endowments, so the question is: what are those $40+ billion dollars sitting there for every year? Does a university really need a balance that may be larger than some nation's GDP?

>Does a university really need a balance that may be larger than some nation's GDP?

This comparison makes no sense.

1. GDP is a per-year measure, but an endowment is accumulated over multiple years. Therefore durectly comparing them doesn't really make much sense.

2. "some nation" includes some pretty small/poor countries. Should it be a surprise that an organization in the US is bigger than a country like Liechtenstein?

> what are those $40+ billion dollars sitting there for every year?

It’s not sitting there - it’s invested and working. Investment returns pay for operating expenses.

Thanks for the answer, makes sense from a purely economical perspective, but I wonder if universities should fund themselves through speculation and financial instruments. Sounds way too detached from the actual purpose of the institution.

Would it make sense for hospitals to do the same? Why not theaters next? In the end, if keeping the balance in check is the main thing an istitution is bound to do, why not stop doing education (= expenses) and just focus on investments?

> Sounds way too detached from the actual purpose of the institution.

I literally don't understand what you mean. The purpose of the institution is to educate people (and other stuff.) They do that by investing money that they were given for this exact purpose.

What on earth could the problem with that be?

No only are they providing education to people, often for free, they're also lending people money to build and develop businesses along the way.

I think you've got some idea they have their billions in a Duck McScrooge style vault? They don't - being invested means they lend it to people to build things. It's all being actively used.

> Would it make sense for hospitals to do the same?

Many hospitals and health organisations have endowments. For example the Wellcome Trust has an endowment of $37 billion. I think they funded my wife's PhD in cancer.

> Why not theaters next?

Many art institutions have endowments. For example the Getty uses a $7 billion endowment to fund the arts so they're preserved for and accessible to people like you.

What is the issue you see here? If they kept it as cash in the bank it'd depreciate rapidly and they'd end up with none left.

It's just a very foreign concept to me as a european. Perhaps I'm more inclined to the idea that institutions like education and healthcare should be publicly funded and shouldn't aim to be economically sound, as some services can only be done properly at loss.

In 1992 in Italy hospitals became "hospital companies", meaning what was once a public service with the sole aim of providing the best possible treatments to citizens for no cost, became at all effects a business (although still state owned) with incomes, expenses and a budget. You may think this makes sense, but since then our healthcare quality has tanked.

One notable side effect is that all hospital companies cut on the intensive treatment beds to save on costs, which backfired heavily during covid since we didn't have enough beds and many patients died without proper treatment as a consequence.

> It's just a very foreign concept to me as a european.

But it comes from Europe.

https://en.wikipedia.org/wiki/Financial_endowment#History

https://en.wikipedia.org/wiki/Financial_endowment#Modern_col...

> incomes, expenses and a budget

Government-provided healthcare also has an income, expenses, and a budget. They don't just spent whatever they want with no planning and no income.

I mean, the roman empire, ancient greece and in modern times Britain. Britain is European as much as USA is. Not really common in contemporary Europe.

The article itself notes that it's common practice only in North america, and when it is used outside of USA it's in a different way:

>In the United States, the endowment is often integral to the financial health of educational institutions. Alumni or friends of institutions sometimes contribute capital to the endowment. The use of endowment funding is strong in the United States and Canada but less commonly found outside of North America, with the exceptions of Cambridge and Oxford universities

> Government-provided healthcare also has an income, expenses, and a budget. They don't just spent whatever they want with no planning and no income.

Of course, but there is a big difference in having a regular accountability and starting to think in terms of business. Suddenly intensive treatment beds become "centers of cost", not vital but expensive tools required to save lives.

The whole point is that you don’t draw down the endowment. It’s a long term investment.

> they had an operating expenses of $5.0 billion in 2021

Isn’t that a crazy number? How much of it goes to a bloated bureaucracy?

You are probably under-estimating the size of Harvard. That isn't to say that large organizations tend to be ... well large organizations, but Harvard is huge.

You are probably over-estimating the size of Harvard. It’s not that huge for an R1 institution. Obviously, they have to pay huge money for cutting edge equipment and high salaries for top talent. But I don’t think that Harvard is protected from any administrative bloat so endemic in higher education. And since Harvard commands so much money the problem can theoretically be much worse than with state universities and LACs.

The specifics of administrative staff at a place like Harvard are doubtless different from your typical comparable company (What does a Dean of $X do???) but probably pretty similar in principle. Maybe less directly influenced by market pressures but you just can't operate a large organization in the same way you organize a small one.

> I mean I get that (not that a bank isn't a financial instrument...) but to what ends?

Tenure means a guaranteed job for life, and the university needs the money to guarantee it. The position exists even if there aren’t sufficient student or research grants to fund it.

Harvard is a bad example to use here because they are so massive. Other schools aren’t situated as well. And yea the endowments have taken a life of their own but tenure is a part of why they exist.

>There's more growth than that

There has been an almost unprecedented ten year period of growth in the equity markets. And the big endowment which I keep my eye on at least has done significantly better than the market. It's prudent not to count on that continuing--not that the school could turn on a dime with respect to their revenue mix anyway.

Oh so they're usurers.

Harvard, or other universities, are not too different from other corporations. Why would they offer to pay for something that their customers themselves would pay for? After all, a Harvard degree is quite valuable, and who's reaping the benefit of it?

They want to make as much money off their endowments (savings) as they can, and spend as little of it as possible on things that they don't need to pay for. Note that while the endowment is huge, actually a large part of it is restricted in what it can be used for, by "generous" donors who put conditions on their money, funnily enough. Turns out that they don't want the money spent on just sending kids to school, they rather want to see their name on art in museums, on professorships, and on department buildings.

Harvard to take an example, has an endowment of $53B, roughly (https://finance.harvard.edu/files/fad/files/fy21_harvard_fin...). Approx. 80% of that has donor restrictions on it and only $9B is useable freely for anything desired.

Last year, Harvard's operating costs were $5B (roughly). To pay for that (roughly):

-- $1B came from student tuition

-- $1B came from funded research grants

-- $2B was released from the endowment

-- $1B in gifts, royalties, licenses, other income

In a sense, $2B spent from such an endowment is not too different from what you would plan for your own retirement. Admittedly, Harvard Management Company (investment arm) earns much better than average though.

It's a choice by these universities, how big they want to be, the ambition of their educational goals, and to some extent, yes their power and influence. They are no different than many corporations.

If you want altruistic behavior and free tuition, well, you want a slightly different system.

> They are no different than many corporations.

Harvard is significantly different than most corporations because Harvard doesn’t pay taxes.

Yet Harvard is not a typical not for profit either, as you won’t find many non-profits with a $53B treasure chest.

> If you want altruistic behavior and free tuition, well, you want a slightly different system.

Yes, the majority want a different system, your average person doesn’t really like the fact institutions like Harvard/Yale have a combined ~$100B tax free war chest and supply 8 of the 9 lifetime appointments to the Supreme Court.

Maybe Harvard isn't the best example since it is private. But to me this seems a bit different when we're talking about public universities. It seems odd to run an academic facility like a company trying to turn a large profit. It is weird to me to compare them to corporate organizations, just like it is weird to compare government to corporations. I know it happens and there are some similarities, but just because apples and oranges are both spherical fruits doesn't mean we're comparing equal things.

Well, I think you've pointed out and answered part of your question.

Public universities generally have little/much smaller endowments by comparison because they rely on government for their steady stream of revenue. And because of that they can, and have pressure to, fulfill policy-based goals of educating students at little to no cost, or heavily subsidizing it.

Some public universities are acting according to the incentives they've been given, and accumulating their own endowments to insulate against political unreliability, and you can also see why college sports are such an important revenue stream for them as a result.

Altruistic behavior in a non-profit? The horrors. If they want to be a corporation fine, then pay taxes like one. Otherwise they should find ways to price education at cost, not at market clearing prices. I am sure they can, just hit up donors some more and trim the administrative largess.

They absolute most elite colleges lose money on the kids but...like it's a human resources thing, the administration transitions into senior jobs at other, less flash but equally expensive universities for a remarkable salary for how little work it is, and a crazy amount of power over the most politically active, and legally vulnerable because now they're responsible for debts, tried as adults of course, their parents are technically absolved of any responsibility to help them (except when there's a contract to pay for college, which is rare) so paying is totally optional, and poorest age bracket. And they're legal to have sex with, and at their peak of appearance in most respects, and they can't get a decent job without that degree if they're in a bind to get a lawyer. Especially in a bear market like right now, or 2008, youngest adults are fucked the most. I once asked about legal representation against a groundless and provably false rape accusation where the court would say this is a total lie, the scenario was proof sufficient to absolve someone from a murder, meaning court-valid proof all the way. The guy quoted me $25,000, will financial aid help with that I wonder? And he said there's like a delay (when they kind of sniff out if you've got legal firepower if you're rich you obviously do or politically connected), but then once it gets going it's like, it gets going strong and disgusting.

But it's the best time of your life!

Endowments allow colleges to operate like they are a business between the sheets and a non-profit on the streets.

A $2m endowment is approximately $80K/yr of safe return, which is approximately the sticker price of college.

Harvard is free for people not in the donor class, so I'm not sure what your are asking.

Also, universities do research and teaching, and the research costs money separate from teaching/tuition concerns.