Tuesday, January 31, 2006

CITY BEAT: Deferred Gratification

As endowments soar, Memphis and Mississippi State

Posted By on Tue, Jan 31, 2006 at 4:00 AM

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 If you’re going to college, plan to go to college, or paying for someone else to go to college, a recent report on endowments might surprise you.

College endowments are loaded, and they’re growing as much as 25 percent each year. The increase is due to a combination of exceptionally large gifts and investment gains.  The University of Memphis has been one of the big winners, with a $175 million endowment and a gain of nearly 16 percent last year.

Other colleges and universities in Tennessee and the Mid-South saw gains ranging from 5.2 percent at Rhodes College to 23 percent at Mississippi State University. A bigger endowment means more financial aid for students, said David Easley, chief financial officer of the Mississippi State University Foundation, where about half of the endowment income goes toward scholarships.

The National Association of College and University Business Officers publishes a report each year on endowments of 746 colleges and universities in the United States and Canada. Their Web site, nacubo.org, has the full report.

Harvard, with $25.5 billion, has the largest endowment. The only university in Tennessee with an endowment of more than $1 billion is Vanderbilt, with $2.6 billion.

The big gain at Mississippi State was due to fulfillment of a $25 million pledge from a private donor. The university earned a return of 8.4 percent on its investments, which is slightly below the 9.3 percent average return for all colleges in the 2005 survey. At the University of Memphis, three gifts of more than $1 million boosted the endowment, said Julie Johnson, vice-president of Advancement.

For students, parents, and donors, endowment surveys point out things that may not be heralded in the institution’s alumni publications or fund-raising appeals.

Endowment gifts, as opposed to, say, gifts to the athletic department, don’t get spent right away. Donors are helping future generations of college students live off the interest. College financial officials say that, on average, they spend only four to five percent of the endowment each year. If inflation takes three percent and management fees another ibe percent, a  nine-percent return keeps the endowment at roughly the same level.

It’s never a good thing to lag one’s peer group, and endowments are no exception. The difference between a five-percent gain and a 10-percent gain on $200 million is $10 million. That translates to thousands of dollars per student at a time when tuition exceeds $5,000 a year at public colleges and $25,000 at some private colleges.

The rich get richer. Yale, with an endowment of $15.2 billion, also consistently has one of the best investment returns of around 16 percent. Stanford, with a $12 billion endowment, grew 19 percent last year thanks to investments in the stock of Google and emerging companies in Silicon Valley. On the other hand, size can be a disadvantage. Givers may wonder how much is enough? What difference does a $100 gift make to a university with an endowment of more than $1 billion as opposed to a similar gift to the local food bank or high school?

Endowment growth, coupled with the Tennessee Lottery, is good news for college students. Lottery proceeds, constantly replenished by gamblers, are projected to be $240 million this year, and most of it gets spent. By statute, the lottery reserve fund is only $50 million. Some 70,000 students will get a $3,300 scholarship if they attend a four-year in-state college.

Here’s a summary of the rank, size, and growth of endowments of colleges and universities in the Mid-South:

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       Vanderbilt University, 23rd, $2.6 billion, 14.5 percent.

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       University of Tennessee system, 81st, $714 million, 7.3 percent.

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       University of Arkansas system, 83rd, $691 million, 10.4 percent.

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       University of Mississippi, 135th, $397 million, 8.3 percent.

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       University of the South, 187th, $253 million, 5.4 percent.

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       Rhodes College, 202nd, $223 million, 5.2 percent.

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       Mississippi State University, 207th, $211 million, 23 percent.

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       University of Memphis, 236th, $175 million, 15.8 percent.

 

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