Endowment - Explained
What is an Endowment?
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Table of ContentsWhat is an Endowment?How Does an Endowment Work?Types of EndowmentsEndowments and Higher EducationEndowment ManagementEndowment CriticismEndowments and Federally Required PayoutsEndowment History and Future
What is an Endowment?
An endowment refers to donating funds or property to a non-profit based organization that invests the received amount in meeting a particular objective. It can also be considered as the total investable or liquid assets of non-profit organization, called principal or corpus, which are used in activities that meet the preferences of the donor. Endowments, in most cases, leave the principal amount untouched and use the investment income for humane purposes.
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How Does an Endowment Work?
Endowments can be seen as a private foundation, a public charity, or a trust. While there are many schools, colleges, and universities that regulate endowments, there are some who are regulated by cultural organizations including public or private libraries, art galleries, retirement homes, hospitals, etc. There are cases where the concerned party can use a specific portion of the endowments assets every year so as to get a total of principal and interest income when the endowment matures. The varying market rates will cause fluctuations in the ratio of principal amount and income from year to year.
Types of Endowments
The four types of endowments are as follows:
- As per the term endowments, the principal can be expended only after a set time period or the occurrence of a specific event.
- Unrestricted endowments include assets that one can save, invest, allocate, and spend based on the choice of the institution taking the gift.
- A quasi-endowment refers to a charity made by a person or organization with an objective of serving a particular objective. In such cases, the principal amount is kept intact, and the income or earnings are allocated as per the guidelines of the donating party. Organizations who seek benefits in the form of internal transfers generally initiate such endowments.
- The principal amount in restricted endowments is retained in perpetuity. However, the income received from the investments is distributed according to the wishes of the donor.
The breach of terms and conditions of the endowment agreement cannot take place except in special cases. If an organization becomes bankrupt or is about to be bankrupt, but has some assets retained in endowments, then the court can release a special doctrine of cy-pres so as to enable the organization to exercise the use of assets in improving its performance, while simultaneously striving to meet the donors preferences as much as possible. Invading or endowment invasion that involves withdrawing the endowments corpus for making debt payments or incurring day-to-day expenses, may ask for permission from the state.
Endowments and Higher Education
Western academic institutions consider endowments as a crucial element in measuring their financial performance. The quantum of endowment that a school or college holds can ascertain how well the institution is performing. Through endowments, these education institutions can manage arranging funds for their operating expenses, and these funds dont include the basic tuition fees. They make sure to create stable conditions by keeping endowments aside as a prospective rainy-day source of fund. Endowments that are organized by schools, colleges, or offered as presents have many benefits to offer. They can assess the financial performance of particular areas, create professorships, and can further be given to meticulous students as scholarships and fellowships. Also, they can motivate students, especially coming from financially-weak backgrounds, to work hard and deliver outstanding results. Endowed professorships or chair positions get paid with the free up capital and revenue or income that endowment offers. With these revenues, educational institutes can afford hiring more professors, thereby making professors available for students. Usually, senior professors receive weightage for such chair positions. Colleges and schools can create endowments specifically for a field, department, or study program. For example, Smith College sets up an endowment particularly for botanical garden.
The committee managing endowments of a university has the primary objective of increasing the size of funds by reinvesting the earnings received from endowments. However, this reinvestment should take place along with bearing operating expenses of the institution, and accomplishing the set goals. The Ivy League School in the U.S. has managed maintaining huge funds in response to receiving donation funds regularly from affluent graduates and well-organized funds. The management of an endowment involves several steps including identifying goals, formulating a payout policy, creating a policy for effective allocation of assets, choosing experts for managing endowments, risk management, minimizing costs, and establishing responsibilities and duties.
Several institutions such as Harvard have faced criticism for having such a huge chunk of endowments. As per the critics, they hoard such big-sized endowments as there was already a hike seen in tuition fees by the end of the 20th century. Though big endowments work as rainy-day funds for schools and colleges, but during the great global recession in 2008, there were many endowments who reduced their payouts. According to the American Economic Review research established in 2014, more focus was laid on the performance of an endowment, and not the whole educational institution. Student activists have a keen observation regarding where their schools, colleges and universities are using their endowments. In the year 1977, Hampshire College managed divesting from South African investments as a result of protest based on apartheid. The same move was adopted by many U.S. based institutions as well. If students are of the view that certain investments are made in financially or ethically compromised sectors, student activists go for divestments.
Endowments and Federally Required Payouts
Individuals managing endowments need to handle pull and push of interests so as to make effective utilization of assets, that can help in the organizations or universitys growth. There are laws made for privately owned non-operating organizations which require them to contribute 5% of their investment assets on endowments each year towards noble causes or charity. Private operating organizations are required to pay at least 85% of their income received from investments. However, there is no such criterion set for community foundations.
Endowment History and Future
King Henry VIII and his relatives came up with the biggest endowments that still exist today. Countess of Richmond, his grandmother, created endowed chairs at two big universities including Cambridge and Oxford. Besides, Henry VIII created professorships in different departments at both these institutions. Aurelius created the very first endowment for the majority of schools of philosophy in Athens Circa in 176 AD. According to the Tax Cuts and Jobs Act of 2017, and the Bipartisan Budget Act of 2018, large-sized university endowments are required to bear 1.4% as taxes on the investment income received. Endowments that cater to around 35 private educational institutions having a minimum of 500 students enrolled with $500,000 of net assets for each student are bound to bear these taxes.