Limited Funds: Why Our Endowment Cannot Pay for Everything

After the Board of Regents and President Schlissel voted to increase fall tuition during an economic recession and global pandemic, many students expressed their outrage.  Is it really fair to offer online classes, which are subjectively worse than in-person, at a higher price?  What does the $50 COVID fee cover?  Could the University really not find that money somewhere else? 

Michigan boasts an endowment of $12.44 billion as of last year, the third-highest endowment for a public university, and ninth-highest overall.  In the minds of many students, those $12 billion are all available for the school to spend.  Instead of raising tuition fees or cutting access to critical resources, the school should just spend more of the endowment to weather the coronavirus-induced recession.

Unfortunately, at least 94.7% of the endowment is untouchable each year, including in 2020.  The university pledges not to spend more than 5.3% of the money in the endowment annually, which comes out to about $660 million with today’s endowment total.  It usually spends 4.5% per year or $560 million for this school year.  This is a cap on spending that the Board of Regents set a few years ago that could only be changed through re-negotiations by the current regents.  If this pandemic has not prompted distribution rate re-negotiations by the regents already, it’s hard to say what will.

In the minds of many students, those $12 billion are all available for the school to spend.  Instead of raising tuition fees or cutting access to critical resources, the school should just spend more of the endowment to weather the coronavirus-induced recession.

An endowment fund is the entire pool of money donated by thousands of charitable individuals,  Michigan accepts expendable gifts, which are sums of money that can be spent entirely on what the donor wants up-front.  They also accept endowed gifts, which are more common: a donor gives a large sum of money and only a portion of that, called a distribution, can be spent each year.  

When a donor gives money to the university, they buy “shares” of the endowment.  Much like a publicly-traded company, the university sells these shares and then invests the endowment money in various markets to yield an even greater revenue stream.  The donors act like shareholders, with a more direct say of where their money is spent than traditional shareholders have.  Although the school can invest their money where they see fit, when it comes time to spend the 4.5% distribution, that money must be spent according to how donors specified.  Current shares are going for about $15.03, down from a record high of $15.73 at the end of 2019.  Still, the school anticipates the share value to rise again by September.  

The university doesn’t have the jurisdiction to allocate the money to anything that they want, unfortunately.  Although they can spend about $560 million this year, they couldn’t put all of that toward buying PPE for professors or covering the $50 student COVID fee.  When a donor gives money to the university, they often mandate that it is spent on a specific item, perhaps raising research funds for a department that they studied under or supporting a program that they were a part of as a student, such as the Honors program or Michigan Community Scholars.

Distribution of Endowment funds

The above chart demonstrates the breakdown of where the endowment money is allocated.  It is unclear where the university would be able to take endowment funds from to cover COVID-related costs, but they may be able to use some of the “instruction” endowment funds to provide PPE for the professors or “academic support” funds to help the transition to online classes go smoothly.  This is all speculation; since no one anticipated a pandemic, donors most likely did not give money to support the university’s mask and hand sanitizer purchases in the future.

Only 14.5% of funds that the school uses to cover its operating expenses comes from the endowment.  A majority (60%) of the school’s funding comes from Michigan Medicine, Michigan Athletics, Student Housing, and Student Publications.  24% comes from things like tuition and fees, research, and money from the state.  The university claims that it has been raising tuition because state support has declined from 78% of its revenue in 1960 to a mere 14% of revenue in 2020.

Reprimanding the university for not touching more of the endowment and breaking its contract is not productive, but it doesn’t mean there is no place for the university to temporarily increase its revenue in this recession.

To those of you who are angry about the tuition and fee hike, I am with you.  Michigan State, Central Michigan, Western Michigan, and Oakland University have all announced tuition freezes for the upcoming fall semester; why a profitable and internationally acclaimed university like ours must raise tuition is certainly a slap in the face to students and parents experiencing job loss, furloughs, and public health risks.  However, it helps no one to attack the university for not spending all $12 billion of the endowment on coronavirus relief.  It is not possible for them to force donors to change their distribution requirements.  That’s a good thing!  This pandemic is a freak of nature, a once-in-a-lifetime issue. The endowment is not structured for crises, it is structured to support exceptional students and programs year after year that need small amounts of financial help.

Reprimanding the university for not touching more of the endowment and breaking its contract is not productive, but it doesn’t mean there is no place for the university to temporarily increase its revenue in this recession.  If you’re hoping to get more out of the endowment, emailing the regents with demands to review and increase the distribution percentage would be a fantastic first step.  The University should also reach out to the state of Michigan to ask for more financial support; we are, after all, a public university.  The school ought to cash in on its public status rather than penalizing students for a pandemic they couldn’t anticipate or breaking contracts with endowment donors.   

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About Lindsay Keiser

Lindsay Keiser is a freshman in LSA, studying political science. When she isn’t writing or copy editing, she enjoys traveling the world and browsing twitter.