Rapid Growth in College Endowments Exacerbates Concerns About Wealth

Allan T. Demaree, a retired executive editor of Fortune magazine, gladly makes donations to Princeton University, his alma mater, even though he knows it has become one of the wealthiest educational institutions in the world. His son, who also went to Princeton, points to its endowment of $15.8 billion, and will not give it a penny.

“Why give money to an institution that can seemingly live off its interest when other very deserving entities need money to function tomorrow?” asked the son, Heath Demaree, a professor at Case Western Reserve University who instead donates to Virginia Tech, where he was a graduate student.

His question captures how the wealth amassed by elite universities like Princeton through soaring endowments over the past decade has exacerbated the divide between a small group of spectacularly wealthy universities and all others. If Harvard has $34.9 billion or Yale $22.5 billion, fewer than 400 of the roughly 4,500 colleges and universities in the United States had even $100 million in endowments in the fiscal year that ended in June. Most had less than $10 million.

The result is that America’s already stratified system of higher education is becoming ever more so, and the chasm is creating all sorts of tensions as the less wealthy colleges try to compete. Even state universities are going into fund-raising overdrive and trying to increase endowments to catch up.

The wealthiest colleges can tap their endowments to give substantial financial aid to families earning $180,000 or more. They can lure star professors with high salaries and hard-to-get apartments. They are starting sophisticated new research laboratories, expanding their campuses and putting up architecturally notable buildings.

Other campuses are fighting to retain faculty, and some, with less cachet, are charging tuition that rival Harvard’s and scrambling to explain why their financial aid cannot match the most prosperous of the Ivy League.

“It’s a huge difference,” said Sandy Baum, an economist at Skidmore College. “You don’t have to go very far down the food chain before you get to institutions that feel real constraints about how they spend money. Princeton can do what they want to do, but not many schools can.”

Skidmore, in Saratoga Springs, N.Y., is not exactly poor; its endowment reached $287 million last year. But the growth alone in Harvard’s endowment last year was $5.7 billion — a sum bigger than all but 14 other universities’ total endowments.

Higher education has always been stratified, but the disparities were never as large as today. In the early 1990s, endowment income represented a small part of revenues at most colleges and universities. In 1990 Harvard’s endowment was $4.4 billion.

The last decade brought a sea change, as sophisticated money managers hired by the universities moved their portfolios into hedge funds, private equities and other high-performing investments, and endowments skyrocketed.

Yale’s recent decision to raise the amount of money it draws from its endowment by more than $300 million, for example, will give it $1.2 billion in revenue from the endowment alone — roughly 45 percent of its yearly budget. Princeton is also at this level.

Until recently, top public research universities could count on enough public subsidy to hold their own, when the taxpayer money was combined with tuition and fund-raising.

“Having state support was akin to having an endowment,” said Donald E. Frey, an economics professor at Wake Forest University in North Carolina.

But that world is changing.

The University of California, Berkeley, a prestigious public institution, has a $3 billion endowment, but it is stretched across 34,000 students. And with state budget cuts looming, Robert J. Birgeneau, its chancellor, says he fears he will no longer be able to attract the best professors and students.

“It will cost less for a student from a family with an income of $180,000 to go to Harvard than for a student with a family income of $90,000 to go to Berkeley,” he said, taking into account Harvard’s recent decision to give more financial aid to families earning up to $180,000 annually.

“I’m not criticizing Harvard,” Dr. Birgeneau added. “They have done a great thing. I wish we were in a position to do it.”

His answer is to build a larger endowment. Last year, Berkeley used a $113 million gift from the William and Flora Hewlett Foundation to create an endowed fund to subsidize professors’ salaries and to help recruit top graduate students. (The average salary for full professors at Berkeley in 2006-2007 was $131,300, compared with $177,400 at Harvard, according to the American Association of University Professors.) Now Dr. Birgeneau wants to up the ante, with an $800 million fund for student financial aid, to help Berkeley remain affordable to low- and middle-income students. He says half could be raised from donors, and the rest could come from the state.

Others, too, are seizing on the idea of endowments for public universities. Gov. Eliot Spitzer of New York recently proposed creating a $4 billion endowment for public universities, to be paid for by selling part of the state’s lottery business.

Virginia Tech, a state institution with a $525 million endowment, is allocating nearly one-third of the money received in its current $1 billion fund-raising campaign to its endowment.

Even as colleges race to raise their endowments, high tuitions have caused a backlash among parents, graduates and members of Congress, criticizing them for sitting on wealth. Typically, colleges spend less than 5 percent a year from their endowments.

“These institutions continue to build up their kitties,” said Representative John F. Tierney, Democrat of Massachusetts. “They say it is the schools’ money. But it is not all the schools’ money. Some of it is. But when a donor gives them money, he is able to give more because he is not paying taxes. So some of what they have is federal money, every student’s money, every family’s money.”

“It may be time to change tax policy,” Mr. Tierney added.

The Senate Finance Committee, which oversees tax policy, recently asked the nation’s 136 richest colleges and universities to provide a long list of financial data for the past 10 years, to show how they have set tuition and used their endowments.

Some educators, too, say universities may be too timid in their spending.

Lawrence H. Summers, the former president of Harvard, recalls that when he returned to the university as president in 2001 after being away for a decade, part of that as secretary of the Treasury, he was struck by the $14 billion growth in the endowment, and thought some of the money should be used “for priorities of transcendent importance.”

He allocated money for a new Allston campus, expanded financial aid for low- and middle-income students, and created a new school of engineering and applied sciences. Harvard’s endowment spending rate in several of those years was 4.8 to 5.2 percent, higher than many of its peers.

Dr. Summers said that when investment returns were particularly high he believed spending at wealthier universities should go higher, too. “There is a temptation to go for what is comfortable,” he said, “but this would be a mistake. The universities have matchless resources that demand that they seize the moment.”

Princeton too has begun to spend more of its endowment returns for expansion, financial aid and research. Shirley M. Tilghman, Princeton’s president, said the trustees decided to expand the student body in 2001, after the endowment had undergone a few years of “extraordinary growth,” because they felt “that a university that had as many resources as we did should educate as many students as it could without losing its character.”

But Dr. Tilghman said universities had to keep the balance right. “We are all forgetting that we have been through a 30-year period of a sort never been seen in this country, in terms of the creation of wealth and in terms of prosperity,” she said. “If we were to begin to spend more in the belief that there will be another 30 years like the last 30 years, that would be irresponsible.”

Donors like Allan Demaree agree: “We want make sure the people who come after us have the same advantages we did.”