A surging stock market accompanied by an outpouring of gifts has pushed the market value of MIT's endowment above $2 billion, but the Institute is still "significantly underendowed," according to Glenn P. Strehle, vice president for finance and treasurer.
"Although MIT ranks sixth among the leading universities in total endowment, our large size causes us to rank 22nd in endowment per student," Mr. Strehle said in a report to MIT President Charles M. Vest (see Table A).
"MIT's endowment per student is about one-half of the average of Harvard, Yale and Princeton," he added, ascribing the underendowment to "our rapid growth as a research university and the relatively few decades we have had to build the endowment.
"The growth of research revenues over more than 50 years has resulted in a much greater dependence on federal support than at our peer institutions," Mr. Strehle said. "If federal support continues to become a smaller portion of our revenues, MIT must seek funding sources more similar to our peers. This implies a much greater reliance on endowment income and gifts."
THE ENDOWMENT PICTURE
MIT's principal sources of revenue and income are tuition, sponsored research, gifts and distributions for spending from the endowment (see Chart A).
Growth in the endowment, Mr. Strehle noted, comes from two sources: retention of investment returns and new gifts.
Spendable income from endowment is vital in a host of areas, he said, but particularly for:
--Tuition support--Support for professorships--Support of departments and research--Undergraduate scholarships--Graduate fellowships
In the case of tuition, for example, in recent decades about 50 percent of the cost of an MIT education has been paid by tuition, with the remainder paid in about equal amounts by investment income and by expendable gifts and fees.
More than 97 percent of MIT's endowment funds are invested in a single investment pool and the remainder are separately invested. The market value of MIT's endowment at the end of the fiscal year on June 30, 1995, was $2.093 billion, which included $2.041 billion in Pool A, the principal endowment pool (see Table A).
This was a one-year increase of 17.7 percent, or more than $300 million, which is largely attributed to the significant increase in the domestic stock market in the fiscal year ending in June 1995. In the previous year, the market value of the endowment increased only 1.4 percent.
Simultaneously, the pace of gifts and transfers to endowment has accelerated in the years following the conclusion of the Campaign for the future in 1992, and has continued in recent months. As of January 17, just over six months into the current fiscal year, total gifts were $79.4 million, up 73 percent from the same period a year ago.
According to Mr. Strehle, the obvious good news is dampened somewhat by the knowledge that "MIT will need to increase the endowment income that we can spend for our operations-in order to meet the increase in expenses resulting from inflation and to offset the expected lack of growth in research revenues."
ENDOWMENT SPENDING AND MARKET VALUES
In the MIT endowment, the amount available for spending comes both from income payments (dividends, interest and rents) and from a portion of the market gains on investments.
The Institute's policy has been to retain and reinvest that portion of the investment returns that equals the rate of inflation and expend only those investment returns that exceed inflation, as measured over extended periods. This enables the principal of the endowment to be preserved in inflation-adjusted dollars. Any increases in endowment above the rate of inflation come from the addition of gifts each year.
"Over long periods, we expect our total investment return to exceed the rate of inflation by about 5 percent per year," Mr. Strehle said, "and this is the portion of market value we expect to distribute for spending."
In actuality, over the past 25 years, the amount distributed for spending has averaged 4.75 percent of market values, close to the 5 percent long-term objective.
Distributions from Pool A for spending were $87.2 million, up from $80.5 million in 1994 when the market value of Pool A was $1.744 billion.
In 1986, when the market value of the Pool A endowment reached $950 million, distributions for spending amounted to $36 million.
In 10 years, there has been a total market value increase in the Pool A endowment of $1.289 billion, resulting from $384 million of gifts and fund transfers (gifts to current funds or life income plans that are later designated for endowment) and $905 million of retained investment returns, less distributions for spending.
In recent years, Mr. Strehle said, distributions from the endowment have been the fastest-growing source of revenues, increasing 47 percent from 1990 to 1995. "This comes at an advantageous time, as the growth of other important revenue sources has slowed during the past five years," he said
In the same five-year period, revenue from tuition and similar income has increased 40.5 percent, and sponsored research revenue on campus has risen 21.4 percent. At Lincoln Laboratory, revenues have decreased 18.9 percent.
Furthermore, in the year just ended, Mr. Strehle said, the increase in research on campus, which had grown at 10 percent a year in the decade from 1975 to 1985, was less than 1 percent.
"Because of federal spending cutbacks, the outlook for the next several years is for little or no growth," he added. "After adjustment for inflation, the real decline in campus-sponsored research might reach 25 percent.
"Fortunately," Mr. Strehle said, "the investment returns for more than a decade have been well above the long-term trends. This followed a period during the 1970s when the returns for MIT, and those of most investors, lagged long-term expectations."
In addition, the Campaign for the future was an important opportunity for the Institute to increase the value of the endowment from gifts. The Campaign was announced in the fall of 1987 and raised over $700 million in endowment and other gifts.
"These gifts helped reduce our dependence on sponsored research revenues, particularly for the support of faculty salaries," he said. "The addition of 91 new endowed chairs helped cause a 103 percent increase in the market value of the endowment allotted for faculty chairs-to $633 million-over the past eight years, while the total Institute endowment increased by 79 percent," he said.
"The proportion of total faculty salaries supported by sponsored research meaningfully declined and released more research funding for the support of graduate students and related expenses," Mr. Strehle added.
In endowment funds created by gifts and bequests, donors usually designate that distributions be used for specific purposes. Endowment and similar funds also include gifts which the Institute, rather than the donor, designates as funds functioning as endowment. About a third of the endowment distributions for spending results from gifts designated as endowment by the Institute.
VALUE OF ENDOWMENT FUNDS BY PURPOSE
Endowment funds from which distributions are made vary by purpose (see Chart B).
Thus, support for professorships draws on income from 30 percent of the current $2.093 billion endowment, or $633 million; spending for general purposes uses 24 percent, or $497 million; departments and research take 15 percent, or $315 million; undergraduate scholarships account for 13 percent or $268 million; graduate fellowships use 5 percent or $98 million; and other specified purposes draw on 13 percent, or $282 million.
Mr. Strehle reported that the endowment for unrestricted purposes, which provides support of general expenses, including indirect costs, depends almost entirely on market appreciation since most donors restrict the purposes for which their gifts can be used. This category of endowment has increased in market value by only 56 percent over the past eight years as compared to an increase of 79 percent in the total endowment.
Endowment funds for departments and research provide both academic units and the central administration with vital resources for supporting specific academic programs and various initiatives. With sponsored-research revenues declining, there is a large need for rapid growth in this category, which has increased by 111 percent over the past eight years, Mr. Strehle said.
An increase in endowment is particularly important for providing financial aid to students, Mr. Strehle said.
"Over the past eight years, the market value of the scholarship endowment increased by 92 percent," he reported. "After more than a decade of endowment providing a steadily lower proportion of Institute-funded scholarship aid, this ratio fortunately reversed during the past two years. Amounts distributed from the endowment still only provide 40 percent of such grants from Institute resources and the remainder must come from unrestricted funds. Although many donors have responded generously, very large increases in scholarship endowment are still needed."
Mr. Strehle said the endowment for graduate fellowships increased by 140 percent during the past eight years from a low base of $41 million. But the loss of the ability to spread the cost of research and teaching assistant (RA/TA) tuition to the employee benefits rate after 1998, as a result of a federal ruling, has already started the search for alternate funding sources, including more endowment.
Mr. Strehle concluded: "The continued increases in market value of the endowment, and growing distributions for spending, will depend upon a favorable investment environment and successful financial management. This will mean a continued healthy stream of gifts to endowment, good investment returns and a distribution policy for spending that equitably meets both the present and future needs of the Institute.
"We cannot fully control all the external factors that will affect us. We can, however, develop and implement investment policies and fundraising efforts that can meaningfully improve the magnitude of our success."
WHY NOT SPEND MORE?
Some may wonder why the Institute doesn't just raise the percentage of endowment income used for spending-even slightly-in order to achieve the funding necessary for various purposes.
Replies Treasurer Glenn P. Strehle: "We took a look at what would have happened if we had distributed just 1 percent more in market value each year than was actually distributed.
"If such a policy had been started in 1976, it would have boosted the dollars distributed for spending by 20 percent in that year-from about 5 percent to 6 percent of market value. Over the next 19 years, this increased spending policy would have eroded the endowment's market value so that by 1995, the distributions under this supposedly higher spending policy would have been slightly less in dollars than our actual distributions. In future years, the distributions would have continued to be less."