Funding a Public University
The Role of Endowment
Top-tier universities such as the University of Michigan have an inherent focus on the future. As a major public educational and research institution, U-M develops the people and ideas that drive innovation and growth in virtually all aspects of our nation’s economy.
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U-M’s finances are designed to focus on the future as well, enabling the University to fulfill its mission not just for today, but for generations to come. The cornerstone of a university’s ability to achieve this long-term commitment is its endowment, a permanent fund that is carefully managed so that it will provide income to support core operating expenses in perpetuity.
U-M receives revenue from a variety of sources to support its educational and research mission, including tuition and fees, state appropriations, gifts and investment income from the endowment, and grants associated mainly with research conducted under contract for government and industry. Income from the endowment is of growing importance, particularly as state support has declined steadily over the years.
Unlike charities, which generally distribute payouts from their endowments to support a changing portfolio of projects and activities for specified periods of time, universities use their endowment income to provide sustained support for such central operational needs as academic programs, faculty salaries, student aid, building maintenance and infrastructure, and strategic initiatives.
Endowment is built principally from gifts from alumni and friends who choose to invest in the mission of U-M. Donors make endowment contributions with the understanding that the principal will remain untouched so that it will provide ongoing benefit to students, faculty, and academic programs. A majority of these gifts are restricted by the donors to specific uses, such as scholarships, for example. And about 26 percent of the total endowment is restricted for use by the U-M Health System.
historic Revenue Shares From Four Primary Sources*:
Tuition/Fees, State Appropriations, Gifts/Investment Income, and Indirect Cost Recovery/Other
Over time, the decline in state appropriations has been offset by increases in tuition and fees, gifts, and investment income.
*This represents revenues to support the Ann Arbor campus educational mission.
Uses of Endowment
Total Endowment at June 30, 2008: $7,572M
The endowment supports core operating expenses of the University’s primary missions in eudcation, research, and patient care.
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Today, the University of Michigan’s endowment is a collection of 6,500 separate funds witha total value of $7.6 billion at June 30, 2008. Although it is the eighth largest university endowment in total value, based on the most recent survey data, it is just 116th overall on a per-student basis. Thus, one of U-M’s top strategic goals is to continue to grow its endowment.
Prudent stewardship of this resource is critical to maximizing its impact. U-M manages these funds to strike a balance between generating a steady, predictable stream of annual support for current needs and preserving its purchasing power for the future in the face of inflation and inevitable fluctuations in financial markets.
U-M’s endowment spending rule dictates that 5 percent of the market value of the funds is distributed each year, where the market value used to calculate the 5 percent spending rate is an average of the value over the last seven years. This approach allows U-M to stabilize distribution year over year through strong and weak markets.
Cutting costs is another key aspect of responsible fiscal management. In the last five years, the Ann Arbor campus has been able to trim more than $117 million from its annual educational operating costs. Further efforts under way to control costs include examining health care costs, boosting energy efficiency, using space more efficiently, improving procurement services, and leveraging technology.
As global competition intensifies and the pace of innovation quickens, universities will be an increasingly important resource to society. But rising costs, declining state funding, and volatile markets pose serious threats to the ability of U-M to remain affordable for all students, to attract top faculty, and to innovate.
A growing endowment is part of the solution. Central to the unique financial model of academia, this stable financial foundation has enabled U-M to educate generations of students, and to conduct the basic research that has laid the groundwork for countless innovations. U-M’s endowment will play an even more critical role in maintaining and strengthening its ability to fulfill these responsibilities in years to come.