Go, Grassley, Go!

As college endowments rose dramatically over the last several years, higher education leaders explained low endowment payout rates as savings for hard times. The rates would inherently rise, they said, when the market turned sour. The market's as curdled as it's been in decades, but a survey released today ($) found less than four percent of colleges are planning to raise their payout rates.

The savings-for-tough-times rationale has not matched actions so far. During the 2008 academic fiscal year (July 1, 2007 to June 30, 2008), the Dow Jones Industrial Average fell 13 percent and college endowments 2.7 percent. Yet, the average payout stayed the exact same (4.6 percent) as in 2007, when the Dow rose almost twenty percent.

Let's take the case of Harvard, because they're the biggest and most interesting. Harvard's endowment began fiscal year 2000 with $14.3 billion in assets. In nine and a half years since, a period in which the broader market declined, Harvard's endowment doubled to $28.5 billion. Using the rule of 72, it managed to grow in value about seven and a half percent annually. The word "value" here is important; it signifies not the rate of return, but total holdings after donations and its payout rate of 4.25 percent are included. They owe some of that growth to federal tax policies, policies that give breaks to donors and exempt earnings from the grasp of tax collectors.

Reading the stories describing the losses incurred during the first six months of fiscal year 2009, I was heartened to see Senator Charles Grassley (Rep., Iowa) continue his campaign to require colleges and universities to pay out at least five percent of their endowment annually--a requirement that all other foundations manage to meet. The idea makes a lot of sense for college and university foundations, and the five percent requirement, moreover, would affect only the top tier of university foundations, since ones with lower assets tend to spend more than five percent already. The best counterpoint against the five percent mandate is to consider what would happen if colleges and universities were forced to spend all of a largesse in one year. That money could not be spent responsibly or sustainably, and Senator Grassley would be wise to allow for flexibility through some sort of rolling average over a multiple year period.

While heavy-handed government action is the least desired outcome, if colleges and universities do not spend more of their endowments during tough times, a five percent minimum would be a helpful prod.