A recent article ("The Endowment Trap") in the John William Pope Center’s Clarion Call attracted my attention. In the piece, Vance Fried notes the (limited) justifications for colleges to maintain an endowment (smooth out cash flow, for instance) and the many arguments against big endowments (lower productivity and less responsiveness within institutions that don’t have to worry much about the bottom line). I strongly endorse many of the arguments he makes.
But one I find less compelling. Fried separates out endowments as a partial good from perpetual endowments, and then writes:
But there is just one good reason for perpetual endowments—the donor demands it. Regardless of whether the donor’s desire to achieve some immortality through a gift is a good motive (it’s certainly not a desire the college can fulfill either physically or metaphysically), the school must put the funds in a perpetual endowment if it wants the donor’s money. (emphasis added)
In my experience, this is not true. When the case against perpetual endowments is properly presented, I find many if not most donors readily recognize the problems and are happy to explore other ways of structuring their gifts. My sample may be biased – I principally work with donors making restricted gifts who have serious concerns about donor intent – but it applies more broadly. I believe universities encourage donors to make gifts in perpetuity out of self-interest, not because that’s the only way to land the gift. The reason so many gifts are made in perpetuity, I would argue, lies with the marketing techniques of development offices and not with ill-intentioned or self-interested donors.
Why do universities prefer endowment gifts?
First, universities “tax” endowments at a very high rate (see my article, “The Endowment Tax”). Typical “fees” start at 20% of expenditures and go up from there. One of the reasons universities like perpetual endowments is they provide a way of laundering restricted gifts into unrestricted funds through their high and often hidden fees. Such fees have been rising at the same time endowment payouts have been declining. This structure creates a strong incentive for universities to accept money for almost any purpose, even if the gift has little or no educational value (such as gifts to athletic facilities).
Second, where donor intent is a concern, gifts in perpetuity create an almost mathematical certainty that a donor’s intent will eventually be thwarted. Why, whether this is ever justified, and how to prevent such violations are all separate issues, but for our purposes, the main point is that when (not if) donor intent is violated, the value of the funds in question is greater than that of the funds which went to the restricted purpose. In other words, charities have a strong institutional incentive to shift donors toward perpetual endowment gifts, particularly when the donor wants to restrict the gift.
Although I quibble with Fried on why we have so many gifts in perpetuity, I agree that they are a bad thing. As he writes, “Excess endowments are a non-productive use of society’s limited resources.” And I completely agree that a program to spend gifts over a reasonable time frame (he suggests 20 years) makes much more sense than trying to create immortality through ill-conceived giving. In my experience, donors understand that. Their immediate interest in making a gift is to respond to some visible need. They quickly understand that it is almost always more meaningful to have an impact now than to postpone putting ones philanthropic dollars to use at some ill-defined moment in the distant future. In fact, in giving – to churches, social welfare charities, etc., this is the practice donors follow. University gifts are unusual, I believe, in their tendency toward a perpetual time horizon.
The responsibility for changing the practice of gifts in perpetuity, of course, lies with donors who need to educate themselves in being better philanthropists. It would be naive to expect recipients, whose self-interest is served by the current system, to do anything to rock the boat.