spending endowments in a recession

A friend (at Duke, nonetheless no less) and I were talking about the fact that, in the recession, both our institutions have used their considerable endowments pretty conservatively; my undergraduate college, Swarthmore, has been similar. Essentially they treat the interest coming off the endowment as current income, preserving principal.

The issue, though, is that this makes endowment spending cyclical, basically correlated with income from other sources, such as state funding (at a public university), tuition raises, donations, and even grant money. I imagine that a less risk-averse university could actually claim impressive returns to its endowment by spending counter-cyclically. Certainly these benefits could be intellectual or mission-based, as in the ability to hire faculty for relatively little money because of weak job markets. But I imagine the benefits could be financial as well, in the form of increased alumni donations, potential revenues from discoveries, grant income, and so on. What am I missing? Why does it seem like nobody is seeking to spend endowment money aggressively this way?

Author: andrewperrin

University of North Carolina, Chapel Hill

3 thoughts on “spending endowments in a recession”

  1. Could it be because universities are slow-learning organizations? Even though endowment spending doesn’t have the same sort of historical crater to dig itself out of as much of the rest of the general insanity of the academic world, I have to ask: What else about the university system suggests that a university is more likely to radically change its investment strategy at a time when large lenders are feeling the pinch than other institutions?

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  2. Perhaps the interest of the president and other powerful actors is to use the downturn as a way to overcome political resistance to cuts they already wanted to make anyway. Then when revenues increase, they can expand programs they prefer.

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