Many Colleges ‘Hoard’ Endowments During Rough Economic Times

When the economy is doing well, many colleges increase their endowment spending on new programs, new buildings, new positions, and breaks in tuition. But when times are tough—at precisely the moment that campuses could most use the money—colleges’ endowment managers are less likely to spend it.

“That’s a really strange thing to do if the purpose of the endowment is at least in part to help the university overcome economic shock,” says Jeffrey R. Brown, a professor of finance at the University of Illinois at Urbana-Champaign.  He refers to the behavioral pattern as endowment “hoarding,” a term that Sen. Charles E. Grassley, an Iowa Republican, used to criticize colleges that spent what he considered an inadequate portion of their endowment wealth.

Five years ago, with endowments suffering a record 23-percent average loss in value, Mr. Brown and colleagues at Illinois and at Michigan State University decided to take a systematic look at how colleges spend their money in good times and bad.  The scholars examined endowment and employment data for 200 doctorate-granting institutions from the mid-1980s through the bursting of the technology bubble in 2001-2 and the global financial crisis of 2008-9. The paper that resulted from their study was posted online Monday by the American Economic Review.

Their initial findings will probably surprise few: When college endowments lose money, support staff members are the first to go. Then tenure-track faculty positions are reduced, through attrition, a reduction in new hires, or even layoffs.

“A negative endowment shock equivalent to a 10-percent reduction in a university’s budget results in a decline of 5.1 percent in the number of support employees,” the article states. A year later, the number of tenured and tenure-track faculty members is down by 5 percent. However, the study found, there is no significant effect on the number of administrators or adjunct instructors.

But Mr. Brown says he and his fellow researchers noticed a curious correlation between the likelihood of spending cuts and the endowment’s performance since the president of the college assumed office: A college was especially likely to cut endowment spending if the endowment’s value was within plus or minus 10 percentage points of its worth when the current president started his or her tenure.

Mr. Brown ventures an explanation: “Presidents are judged in part by how they grow the endowment, and no one wants to see the endowment shrink on their watch.”

According to the most recent “Nacubo-Commonfund Study of Endowments,” college endowments are collectively worth nearly $450-billion. Even though the bulk of that wealth is increasingly concentrated in the hands of fewer institutions, the figure stands as a sizable bulwark against assertions that American higher education is teetering at the edge of financial ruin. But Mr. Brown says his study’s findings call into question the reason for the very existence of college endowments.

“Rather than the endowment providing insurance for the university, it’s almost as if the university is providing insurance for the endowment by saying that when the market’s bad, we’ll just spend less out of it,” he says. “If you’re not going to use the money when you need it the most, then when exactly are you going to use it?”

Mr. Brown’s co-authors on the paper were Scott J. Weisbenner, a professor of finance at Illinois; Jun-koo Kang, a professor of finance at Nanyang Technological University; and Stephen G. Dimmock, an associate professor of finance, also at Nanyang. Mr. Kang and Mr. Dimmock were previously at Michigan State.

Return to Top