What is The
The endowment comprises many investment accounts. Income from some
of these can be spent for whatever the University wishes, but a
large number of these accounts are designated for specific purposes
(the Charles Howard Candler Professorships, the Henry Bowden Scholarships
and the Tenenbaum Lectureship are examples of such designated purposes,
and designated endowments exist in all the schools of the University).
pie chart) To use the income from designated endowments
for purposes other than those intended would constitute a breach
of trust to those who gave the money for those endowments.
On Aug. 31, 2001, the market value of Emorys endowment stood
at $4.3 billion. Of that total, just over $2 billion (including
the $1.1 billion Emily and Ernest Woodruff Fund) was assigned to
the University in general, and about $2.3 billion was designated
for use by the schools, colleges and divisions. The general University
portion is further designated for uses shown in the pie chart. Using
a formula established by the Board of Trustees for determining how
much can be spent from the endowment, the board authorized $203
million in endowment spending for the last fiscal year.
How is endowment
Until a few decades ago, universities were prohibited from spending
more than the dividends and interest on their endowments. Since
a change in the law, universities are permitted to use net appreciation
of the market value of their endowments, exercising, in the language
of the law, ordinary business care and prudence under the
facts and circumstances prevailing at the time. If an endowments
book value is $1 billion, but investment increases that
value to $1.5 billion, $500 millionor 33 percent of the market
valuecould be spent.
In practice, however, that would be like someones inheriting
$5,000 and spending it all without regard to the future. What if
she loses her job next year? What if the house needs a new roof
in two years? What if she needs an operation? Wouldnt it be
prudent to hang onto some of that inheritance and let it grow through
The Board of Trustees has the fiduciary responsibility of making
sure the University will be solvent a decade, a century, a millennium
from now. The board has therefore established a policy that the
administration may spend no more than 5 percent of the market value
of the endowment. Few universities, colleges or foundations spend
more than 5 percent of the value of their endowments.
For more than a decade the budgeted spending rate approved by the
board has been 4 percent, and for some years an additional 0.75
percent of unrestricted endowments has been applied to a capital
matching program, which has allowed the University to attract gifts
for projects like the Schwartz Center, Science 2000, the Goizueta
Business School and the Whitehead Research Building.
The spending rate, however, does not apply to all $4.3 billion
of the endowment; nearly $700 million is sequestered in the Woodruff
Health Sciences Center Fund, the income from which underwrites programs
in the health sciences. Restrictions on that endowment limit its
Similarly, the Universitys cash management accounts are maintained
on the balance sheet as a part of the endowment but are not available
for spending at 4.75 percent. Only about three-fourths of the total
endowment can be spent at the 4.75 percent rate approved by the
Why not spend a higher
percentage of the endowment?
The trustees spending policy has two purposes: First, it protects
the assets of the University for the long haul, ensuring that the
source of a significant portion of Emorys income (20 percent
of the budget this year) will be there regardless of unforeseen
difficulties (e.g., the unlikely but plausible drying up of funding
for research, or a decline in enrollment and tuition, as happened
during World War II and the Korean War). Second, the limit on spending
prevents our committing too much too fast to programs in fat years,
and then not being able to continue supporting those programs in
lean years when the value of the endowment declines, as it has in
the last two years.
Retrospection20/20 hindsightis of course a great aid
in suggesting what spending rates could have been during
the bull market of the 1990s. Seeing what the market will do next
year or five years from now is a bit trickier. Even on the crest
of a wave, prudence dictates that we recognize the wave may crash,
the bubble may burst and the bull may turn into a bear.
But it is worth noting that even with a cautious policy, during
the unprecedented rise in the value of Coca-Cola stock during the
1980s and early 1990s, the University reaped great benefits (see
bar graphs). In several years during the 1990s, Emorys
endowment grew by a greater percentage than any other university
endowment in the country. And from 1995 to 2000, spending from the
endowment grew commensurately. Emory converted much of that growth
in endowment spending to additional faculty lines, new buildings,
scholarships, research support, much-needed renovation of infrastructure
and new equipment. Had Emory not converted some of that extraordinary
appreciation of value into capital, we would have failed to realize,
or capture, some of that boon before the decline in market value
in 2000 and 2001.
Once the market turns
around, wont Emorys budget crunch be over?
It is worth noting that, as Emorys endowment shrank in the
past 18 months, so did those of nearly every other university and
college in the country. Of the major university endowments, only
Yales grew last year. Of the endowments that shrank, Emorys
did not lose the most in either dollars or percentage. The decline
in the S&P 500 (a benchmark for investment performance) for
calendar 2001 was 24.4 percent; the decline in Emorys endowment
for that same period was 10 percent. These data suggest that the
endowment would have suffered some loss regardless of the asset
As is common in endowment management, Emory uses the average of
the past three years of market value to project spending for the
next year. The average of the past three years has not been good.
And it will be another three years before a market recovery has
any impact on the Educational and General Budget, assuming that
the recovery lasts.
Even despite the market downturn in 2000, however, income from
the endowment this year is greater than it was two years ago. In
fiscal year 1997, when the endowments market value stood at
around $3.7 billion, spending from the endowment amounted to $102
million (of which $45 million went to the Educational and General
Budget). In the following years, as the endowment increased in value,
the spending rate remained the same but dollars spent from endowment
grew with the endowments market value, reaching $155 million
in 1999. Since then, the market has gone down, and at the end of
fiscal year 2001 the endowment was where it stood in 1998. Yet last
year endowment spending was more than twice what it was in 1997.