[laGrenouille]

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.

[godelski]

> 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).

[laGrenouille]

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

[tallanvor]

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.

[laGrenouille]

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.

[pastacacioepepe]

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?

[gruez]

>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?

[chrisseaton]

> 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.

[pastacacioepepe]

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?

[chrisseaton]

> 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.

[DiggyJohnson]

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

[LudwigNagasena]

> 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?

[troupe]

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.

[LudwigNagasena]

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.

[ghaff]

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.

[ModernMech]

> 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.

[ghaff]

>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.

[daniel-cussen]

Oh so they're usurers.