My Richmond Experience

standrews
Wed, 29 Aug 2007 11:54:06 +0000

Here’s an article from 2005 about how UR’s endowment works. The realm of college endowments seemed quite mysterious to me until I read this. It’s quite interesting.



The University calculates an annual drawdown, or payout rate, from the endowment that will never be less than 4 percent nor more than 6 percent of a three-year, moving average of the endowment’s market value, says Herb Peterson, vice president for business and finance. So, an 8-10 percent rate of return guarantees the payout plus an additional amount to account for inflation. The actual payout at present is about 4.25 percent, says Peterson.

“You don’t want to use the market value at any one date because the value could be unusually high or low,” explains Peterson. A three-year, moving average provides a “smoothing factor” to avoid fluctuations in market value.

Richmond’s endowment is actually made up of approximately 1,200 individual endowments-many of them scholarships or other restricted funds-that by agreement with donors are preserved in perpetuity. Only the income from these funds can be spent, and that income can only be spent on the specific objectives set out by the donors.

[snip]

So, the endowment does not fund construction projects on campus, says Peterson. If donors have not fully funded a particular building project, the University takes advantage of its Aa1 credit rating from Moody’s Investor Services to borrow the funds needed to complete construction. Richmond can borrow money at a much lower rate than it expects to earn on its endowment.

The endowment should be “generation neutral,” says Peterson. In other words, if a donor gives a sum of money today that will generate income to cover the full cost of tuition, “our investment and spending policies are designed to assure that that fund will continue to pay the full cost of tuition 10, 20 and 50 years from now.”



University of Richmond;