Essay on The Current State of Endowments

Submitted By Phidiva
Words: 3813
Pages: 16

Current State of Endowments

An endowment is money that is given to an organization, usually for a specific purpose. Lapovsky (2007) says that endowments are not only a symbol of prestige, but also brings financial stability to an institution. Endowments generally are meant to be used for investments that will create indefinite interest income for the recipient. Endowments come in many types, and can be classified by their type of recipient, their purpose, or by the way the finances from the endowment are handled. Recipients of endowments typically may be a college or university, a library, or a hospital. Endowments may be true, or permanent, endowments or they may be term endowments ("Types of endowments," 2013).
Endowments are generally managed in four ways. A term endowment pays a designated recipient, but only for a predetermined amount of time, or until a specific event occurs. An example of an event that might end a term endowment is the death of the endowment recipient or closure of the organization receiving the endowment. This type of endowment may also be called a living trust ("Types of endowments," 2013).
Also according to the article on Types of Endowments (2013), another way to manage an endowment is to have an investor outside the organization invest the principal and then turn the income from the principal over to the recipient. This type of endowment is called a fund held in trust. A permanent, or true, endowment is a principal investment that provides interest income to an organization indefinitely.
Sometimes, an endowment can be classified by how an organization is allowed to use its funds, whether the spending is restricted or unrestricted. Restricted endowment funds, sometimes called restricted-purpose endowment funds, are financial gifts given to an organization for a specified purpose. Unrestricted endowment funds, also called quasi-endowments, provide general funding for an organization or department. Where an unrestricted endowment would allow an organization to spend money on anything the organization needed, a restricted endowment might give a specific gift, like new musical instruments for a high school music program. In science, a restricted endowment can be for a specific purpose within a specific area of study. In addition, institutions that establish quasi-endowments, may decide to move non-endowment funds, such as a gift or a bequest to the institution, into the institution’s endowment for investment and spending purposes. The institution can reverse the decision to create quasi-endowments and spend those funds in their entirety at any point in time (United States Government Accountability Office [GAO], 2010).
Within the academic world, another type of endowment is the endowed professorship. These highly-regarded, salaried positions are bestowed upon a faculty member by an institution of higher learning. Professors receiving this honor are considered to be ranked above a standard professor at that institution. An endowed scholarship is a restricted-purpose endowment given to students at an institution. Higher education institutions in Florida helps to fund 226 Eminent Scholar Chairs ("Matching Gift Program," 2005).
It is important to note that of the more than 2,400 public and private colleges and institutions, only about 30 percent of the public four-year institutions and 28 percent of the private institutions report endowments (Lapovsky, 2007). Keeping that in mind, growth trends for endowments over the past decade or so are widely varied. Also according to the information presented in the 2007 article by Lapovsky, the rate of return has been greater for large endowments compared small endowments. Lapovsky’s (2007) research further shows that from 1996-2006 the average return on extremely large endowments, those with assets greater than one billion dollars, nearly doubled the rate of return for small endowments, those with assets of 25