Addressing Endowment Concerns

In his opinion piece “Seeing Double” last week, Thomas Brodey ’22 correctly argues that Amherst College should spend aggressively from its endowment to achieve its ambitious and wide-ranging mission. He is right to highlight that the college benefits from one of the largest endowments, on a per student basis, of any college or university. (It is in the top 10 — much lower than that of Princeton, Harvard, Yale, Stanford and MIT, and about the same as Pomona, Swarthmore and Williams.) As a result, the approach that Amherst applies to spending this endowment each year is indeed an important topic, one that should interest every member of our community. However, his suggestion that the college does not already spend aggressively from its endowment is simply incorrect. In making these points, Mr. Brodey presents a number of assertions and conclusions that are misleading and risk building mistrust in our community if not addressed.

Before highlighting some specific problems with Mr. Brodey’s analysis, it is important to counter his suggestion that Amherst’s primary motivation is growing its endowment rather than spending endowed resources to the benefit of its students, faculty and staff. He asserts that the college thinks of the endowment as “just a means to save for the future” and is more interested in investing in “outside corporations” rather than on the student experience.

Nothing could be further from the truth. Reasonable people can have differences of opinion about how much Amherst should spend from its endowment each year. Art is intertwined with science on this point and there is room for a wide range of views. I am sure Mr. Brodey recognizes that those who manage the college’s finances share his deep commitment to the college and its students, faculty, staff and alumni.

The question, then, is not one of commitments to Amherst’s community — that sentiment is universal — but rather one of how best to deploy resources in the present while simultaneously preserving them for the future. For nearly 200 years, Amherst College leaders have met this difficult challenge, and it is to the benefit of today’s Amherst that they did so. It is now our turn to do the same.

Now, to the endowment: what is it, and how is it used? Over many decades, Amherst’s alumni and contributors who wish to support Amherst in perpetuity have donated funds to the endowment. These gifts reflect an awe-inspiring faith in the college’s ability to use these resources both wisely and well, now and far beyond the donor’s lifetime. As perpetual funds, the college has invested these dollars to generate returns over time. The original gift remains untouched forever while a portion of accumulated investment earnings are used each year to fund the college’s mission.

Given this, how does Amherst approach endowment spending? Despite Mr. Brodey’s claims of the contrary, Amherst spends as much as it believes can be spent prudently from its endowment each year. Why? Because the endowment exists to serve the mission of the college and, frankly, is there to be spent.

On this point, there is great alignment with Mr. Brodey’s assertions. Everyone wants endowed funds to be spent — the donor who gifted the funds in the first place, of course, but also members of the Amherst community and outside observers (the general public, state and federal policymakers, etc.). The question then becomes: how much should be spent each year? What is prudent?

Like the grand finale of a fireworks display, it would be gratifying in the moment to launch a fusillade of spending from the endowment in any given year. There are always unmet wants and needs awaiting funding. A boost in endowment spending would undeniably improve the college’s efforts to achieve its mission in the short run. Yet, the college’s mission is perpetual, not provisional. An effective financial strategy must be sustainable over the long run. For an institution with a 200-year history and plans to thrive for hundreds more, balance and discipline are required to guarantee intergenerational equity in the use of college resources.

Spending too little from the endowment would privilege future generations of the Amherst community over today’s generation. Likewise, spending too much today puts the future at risk. Neither approach is wise or ideal. A “just right” approach that blends the competing impulses of spending with discipline is necessary.

While Amherst looks toward the future, it absolutely is spending endowment resources in the present. As noted in the 2018 annual report, Amherst spent $99 million from its endowment to fund a $188.6 million operating budget — a rate of budgetary support of 52 percent. (Net student fees after college-funded financial aid, by contrast, funded just 35 percent of the budget.)

This is a degree of “endowment reliance” virtually unprecedented in higher education. Only two out of 61 selective private colleges and universities tracked by Cambridge Associates have a higher rate of budgetary support from the endowment than that of Amherst. The mean of these 61 peer institutions is only 15 percent spent out of the endowment.

The annual contribution of Amherst’s endowment to its operating budget has also dramatically increased over time. Just 10 years earlier, Amherst spent $45.6 million from its endowment to fund a $115.6 million operating budget, a rate of budgetary support from the endowment of just 39 percent. Thus, in just a decade, Amherst’s annual endowment spending increased by 117 percent, with a compound annual growth rate of over 8 percent. The rate of increase in endowment spending in the prior decade (1998 to 2008) was even more dramatic at about 170 percent.

Mr. Brodey makes a number of assertions that belie this reality. “Students might reasonably expect the school to have used a substantial portion of [endowment gains over the last 20 years] to … improve life for students, faculty and staff,” he notes, insinuating that the college has not done so. Yes, students should expect this, and yes, the college has done so.

He also notes that “the school has consistently drawn the same percentage of cash from the endowment, while income from student fees increased 36 percent in the last decade.” This is a misleading apples-and-oranges comparison that seems to suggest that student fees have outpaced endowment spending. In fact, endowment spending increased more than three times as fast as net student fee income over this time.

Mr. Brodey is right that Amherst’s endowment spending rate has remained relatively consistent over the years, between four percent and five percent. (This spending rate is in line with accepted practice, roughly equivalent to the average of 4.7 percent across 109 institutions in the 2019 Cambridge Associates “Spending Policy Practices” survey report.)

Indeed, this is the very point of the principle of intergenerational equity and balance — a consistent rate of spending over time. But it also means that as the college’s endowment has grown, so has endowment spending in support of the operating budget, in both relative and absolute terms, and rather dramatically on both fronts. Many members — perhaps all members, including me — of the Amherst community share Mr. Brodey’s desire to spend more in the pursuit of the college’s mission. Every planning cycle begins with myriad ideas and requests for funds to make Amherst better.

The college energetically seeks additional resources from a variety of sources to make these wishes a reality — donor support of the annual fund and the Promise campaign, comprehensive fee increases (offset by need-based aid to keep Amherst affordable) and, yes, spending increases from the endowment.

For many years now, endowment spending has increased far faster than any other revenue stream. Ideally, alumni support of the college’s endowment, as well as skilled investment of endowment resources, will continue for many years to come. We are working very hard to ensure that such a case occurs. Regardless of what the future might bring, a balanced approach toward the use of endowment resources will always be necessary.