Stock market is kind to colleges and universities
Last year was a very good year for college endowment funds. A strong stock market yielded healthy returns for many Illinois institutions of higher education.
Illinois Wesleyan University's endowment fund grew by 31% in 2021. Illinois State University's endowment growth was at nearly 33%. The national average return after fees was 30.6% — up from a puny 1.8% in 2020.
The results were for the budget year that concluded on June 30, 2021, leaving at least six more months of a favorable stock market climate for the calendar year that will be reflected in next year's report from the National Association of College and University Business Officers, covering 720 higher education institutions.
Illinois Wesleyan University President Georgia Nugent said the growth doesn't mean they'll splurge. She said the university spends about 5% of the endowment each year to support operations.
"You can have volatility in the market. To smooth out that volatility, the approximately 5% that we spend from our endowment fund is based on a rolling average of what the returns have been over the past four years. That's a fairly common practice," said Nugent.
Illinois State University uses a slightly different smoothing mechanism.
“We use a weighted-average method, factoring in inflation and market value to calculate our spending distribution. The inflation factor accounts for 70% and market value accounts for the remaining 30%. The inflation factor takes the prior year distribution multiplied by the Higher Ed Pricing Index (HEPI) and adds the prior year’s gift total multiplied by 4.5%,” said ISU Vice President for Institutional Advancement Pat Vickerman.
Illinois Wesleyan's endowment fund now tops $260 million. ISU's endowment is $201 million. The national median endowment size is about $200 million.
Almost 60% percent of endowments increased support for their institution’s operating budget in the 2021 fiscal year. The study noted tuition and other revenue fell at many institutions because of the pandemic. IWU was not one of those, said Nugent, noting the school's endowment spending actually went down in 2021.
She also suggested there is a caveat in assessing a pandemic-related response for most institutions' use of endowment money.
“Much of our endowment, or any colleges endowment, is what we call restricted. That is the donor has indicated that it should be set spent for this purpose and this purpose only. And very often, that is the scholarship. So, a good deal of our endowment is earmarked specifically for financial aid. But it's not a fund out of which you can just decide, oh, we'd like to buy a Learjet,” said Nugent.
That’s something seconded by ISU’s Pat Vickerman.
“Nearly all of the endowed funds at Illinois State are restricted to a college or unit based upon donor intentions. When growth occurs in a fund it is attributed back to the donor’s fund purpose,” said Vickerman.
Nugent said there was federal pandemic help for things like the $1 million hotel room cost IWU spent to give every student a single room.
"Much of the COVID expense was covered and we had virtually no travel. We didn't have events. Our expenditures went down dramatically. We actually had a very successful year financially," said Nugent.
Vickerman said ISU’s endowment spending did not increase because of the pandemic, but did rise based on growth in the value of the fund.
“This reflects the success of policies focused on intergenerational equity,” said Vickerman.