July 31, 2017

Letters: Chronicle’s Endowment Analysis Lacked Context

To the Editor:

I was shocked and disappointed to read the article, "Many Big Nonprofits Rapidly Stockpiling Endowment Cash, Chronicle Data Shows" (The Chronicle, July 26.) The article reflects a lack of understanding about the purpose and management of endowments that I would not expect from the Chronicle of Philanthropy. Here are four areas where the article got it wrong.

The article begins by saying, "Nonprofits with large endowments are collecting more than twice as much money as they are spending..." The inference is that responsible institutions should pay out from their endowments each year the same amount they earn in investment returns and receive from new gifts.

First, trust laws in most states require institutions to manage their endowments prudently, with the goal of supporting a donor’s designated purpose in perpetuity. Excluding new gifts, a well-managed endowment should grow at about the rate of inflation over a very long period of time that includes both bull and bear investment markets. To assess whether institutions are hoarding you should compare their payout rates against a reasonable expectation of long-term investment returns.

Second, your timeframe of analysis is highly questionable. You picked six years following the 2009 Great Recession, when investment returns were very strong and investment returns greatly exceeded payout. The implication is that institutions hoarded these strong returns rather than increasing their payout. However, had you analyzed any five-year period including the Great Recession, you would see a very different picture. Over the period from fiscal 2007 through fiscal 2012, Stanford’s endowment actually declined in value as our payout substantially exceeded weak investment returns. Payout needs to be compared to investment returns over a very long period of time, not a handful of years.

Third, including new gifts in your analysis is inappropriate. Given a donor’s intent for an endowment gift to support the designated purpose in perpetuity, institutions can only payout about 5 percent each year from the new endowment. Thus, the value of a new endowment gift will be about 20 times greater than its payout in the following year. Characterizing this as hoarding reflects a gross misunderstanding of endowment management.

Fourth, in the second paragraph you say, "the richest nonprofit institutions are sitting on huge and growing reserves .... even as many students struggle to pay for postsecondary education." You conflate two entirely different issues. It is true that many students struggle to pay for college — but at the highly endowed institutions, the story is quite different. Stanford’s and its peers’ endowments enable them to offer incredibly generous financial aid. Stanford charges no tuition to American undergraduates from families with income below $125,000. As a result, almost 80 percent of our undergraduate students graduate with no debt, and for those who choose to borrow, the median indebtedness upon graduation is about $14,500.

Stanford and its peers are not stockpiling cash. Our endowments are incredibly important in supporting undergraduate and graduate education, and groundbreaking research. They have enabled Stanford and its peers to drive many of the advances in medicine and technology, creating thousands of new companies along the way. This in turn has created a very large share of the economic growth in this country. Our endowments have been central to that virtuous cycle.

Randy Livingston
Vice President for Business Affairs and Chief Financial Officer
Stanford University
Stanford, Calif.

To the Editor:

The Chronicle’s article fails to tell the complete story about how nonprofits use charitable giving to support both current operating needs and endowments.

While your article considered fiscal 2010 to 2015, the 2016 NACUBO-Commonfund Study of Endowments shows that 74 percent of institutions increased dollar spending from their endowments in fiscal 2016, and the median increase was 8.1 percent— despite overall negative returns for that year. This spending increase is attributable in large part to the way endowments are managed for the long term: While the average endowment return was negative, colleges and universities still increased spending to support their missions and their students.

Further, the 2016 Voluntary Support of Education survey shows that 59.9 percent of gifts last year went to current operations. The authors missed the opportunity to dispel the commonly held myth that most giving goes to endowments and to explain to readers that nonprofit organizations with endowments have a fiduciary obligation to ensure endowed funds last into perpetuity and are managed to enable a reliable, steady, and growing revenue stream.

Nonprofits organizations rely on annual giving for current operations and maintain endowments or other reserves that enable them to respond to unforeseen changes or pursue long-term strategic initiatives in pursuit of their missions. We applaud your efforts to explain nonprofit finance but urge you to show a more complete picture.

Liz Clark
Director, Federal Affairs

Ken Redd
Director, Research and Policy Analysis

National Association of College and University Business Officers