OK, endowments allow a university to function "in perpetuity". But what are they going to spend those billions on?
Saving and investing now may seem the obvious path. After all, as Princeton University’s former president Shirley Tilghman put it in 2008, “The endowment does not function as a ‘piggy bank’ or ‘rainy day fund’ waiting to be used or allocated.” Yet that is only part of the story, for wealthy universities do spend a target amount of endowments each year, usually around 5 percent, although that strategy may not be optimal at this moment...Endowments are designed to fulfill the university’s mission in perpetuity. With compound interest and economic growth, they can be used to build multigenerational wealth and make capital available for vital projects in the future. In the case of university endowments, investing unrestricted funds provides returns that can be used for future operating expenses. Of course, a large proportion of funds is restricted to the uses that donors in the past specified or tied up in illiquid assets like real estate, but not all. At my university, the endowment was valued last year at around $26 billion, and while liquidity varies, just under half does not have donor restrictions...If their goal is to continue into the deep future, then spending more now could better prop up the university’s scholarship-driven mission than hoarding in strict deference to the dollar. The example of graduate student funding illustrates how, in this wager against the future, austerity is partly a moral calculus. For funds can grow with compound interest, but so too can ideas.
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