Variation in the Growth of Private Colleges' Endowments Since the Mid-1990s: The Implications for Endowment Support of Current Operations

Abstract

Focusing on private colleges, which on the whole tend to be more reliant on endowment as a source of revenue than public colleges, this study seeks to address a series of questions related to the possibility that the have become disproportionately richer. First, is such a pattern actually present? Second, to the extent that there are differences in endowment growth that are systematically linked to differences in colleges' starting endowment sizes, what underlies these systematic differences? Is it higher investment returns, lower endowment spending rates, or some other factors? Third, to the extent that differences exist in endowment growth across colleges, how are these differences linked to ensuing differences in the growth of operating expenses? The picture that emerges, subject to some subtleties, is that the endowments of the rich have grown disproportionately from 1995 to 2007, and this disproportionate growth is largely confined to the very rich. Both higher investment returns and lower endowment spending rates play a role in this disproportionate growth. Substantial differences in investment returns are not as prominent in the early years of the twelve-year period as they have been more recently. To an extent, those colleges with higher endowment growth have tended towards higher operating expense growth, the presumption being that the higher expense growth is supported by the endowment growth. However, the higher expense growth has not kept pace with the higher endowment growth.