November 6, 2007

Admin fears new rules could hurt endowment

Large university endowments—including the U of C’s $6.09 billion fund, which ranks 13th in the country—have become a hot topic on Capitol Hill as of late, with increasingly vocal calls for more spending in light of ballooning tuition costs.

Legislation recently proposed in Congress would increase the federal government’s control over college funds, with proponents arguing that colleges should be subject to the same rules as other nonprofits, which are legally required to spend five percent of their endowments each year. The average university spends slightly less, and advocates of the bill say that the resulting increase in spending could significantly lower tuition costs that have soared in recent years.

But University administrators are arguing that the situation is not quite that simple. The U of C’s endowment represents a mosaic of over 2,600 individual funds, 68 percent of which are restricted by their donors as to how they can be invested and spent.

“Of course, in this case, ‘restriction’ could mean donated to benefit left toe cancer research specifically, or it could mean donated to benefit only the College,” said John Kroll, comptroller for the University.

Furthermore, two percent of the endowment is impossible to sell, whether by stipulation or because it is in non-liquid investments such as real estate. Still, according to Kroll, the University typically spends at a level around or above what the proposed legislation calls for: 5.15 percent of the endowment was tapped in 2006, 5.2 percent in 2007, and the Board of Trustees has said that it will spend five percent of the endowment in 2008.

Nevertheless, the proposed legislation could cause problems for the University. In an effort to protect the endowment from market forces, the University determines the percentage spent based on the average market value of the endowment over the previous three years. Between 2005 and 2007, the University spent 5.2 percent of the average value of the endowment, not 5.2 percent of today’s actual market value. Under the proposed legislation, however, universities would have to spend at least five percent of the endowment’s present value, which would mean an increase (or, if the market were to take a dramatic downturn, decrease) of tens of millions of dollars in spending.

“The annual payout is designed to protect the endowment from the choppiness of the market,” Kroll said. “It will be higher when the market is going down, and lower when the market is strong. We take a long-term look at endowment funds.”

Peter Stein, chief investment officer for the U of C, oversees the investment of the endowment funds, which are actively managed by outside firms. Like Kroll, Stein stresses conservatism in his description of the endowment. “Our portfolio is designed to generate strong returns over a long-term horizon,” he said in an e-mail interview.

Stein would not give details about the portfolio’s makeup. The U of C, like most colleges, does not release information to the public about specific investments, a fact that has received some harsh criticism from proponents of greater transparency of University spending practices.

“Our mission is to provide the best possible stewardship of the University’s financial assets. To this end, the University has had a long-standing policy of not releasing comprehensive data on portfolio holdings,” Stein wrote.