U-M outlines role of endowment in financial aid for U.S. Senate

Almost $1.4 billion — about 20 percent of the University's endowment — is earmarked for financial aid, U-M has reported in a letter to U.S. Sens. Max Baucus and Charles Grassley. The letter comes in response to a U.S. Senate Committee on Finance inquiry sent to 136 universities in January as part of an examination of how institutions can use their resources to help ensure the affordability of a college education.

"Fundraising for students is one of our highest priorities," President Mary Sue Coleman wrote in the letter, adding that, because of the University's efforts, "the average year-to-year increase in the amount spent for centrally awarded undergraduate aid has been 6.6 percent over the last 10 years, compared to an average increase of tuition and fees of 6 percent for in-state undergraduates during the same period."

She reiterated the University's deep commitment to maximizing both the quality and accessibility of a U-M education in the face of rising costs and declining state appropriations through a combination of aggressive fundraising, prudent investment policy, careful stewardship of endowment funds and on-going operational cost-cutting measures.

The Senate's inquiry comes on the heels of a report released in January by the National Association of College and University Business Officers (NACUBO) showing high returns on investment for university endowment funds last year. In addition, a number of private universities with the very highest endowments, including Harvard, Yale, Princeton and Stanford, recently have announced plans to boost aid to students.

At $7.1 billion, U-M's endowment came in as the eighth largest on the NACUBO list. When ranked according to endowment per student, however, U-M ranked 116th because of its larger student population.

Coleman's letter, which details the workings and uses of the University's endowment as well as outlining its financial aid policies, explained that about $1.9 billion of the total $7.1 billion endowment is restricted for use by the U-M Health System, which serves 1.6 million patients a year. Thus the actual amount of the endowment available for University operations — including academic programs, faculty salaries, student aid and building maintenance — is $5.1 billion.

Coleman further noted that the University has experienced an 11-percent decrease in its state appropriation over the last six years, a $40-million decrease that translates to $100 million when adjusted for inflation. At the same time, costs have increased, including a 300-percent increase in health benefit costs and a doubling of utility costs in the last 10 years.

Other points made in the response to the Senate questions include:

• Nearly 80 percent of undergraduate Michigan residents receive some form of student aid (including grants, work-study and loans). The students who receive aid are recipients of $10,330 a year, or the equivalent of 96 percent of resident tuition and required fees;

• Out-of state students who receive aid receive an average equivalent to 71 percent of tuition and fees;

• More than $442 million raised during The Michigan Difference campaign has been earmarked for student aid, and the market value of endowment funds for scholarships at U-M has increased by 90 percent in the last seven years;

• Just over $94 million of grants distributed to undergraduates in 2006-07 came from the University and another $45 million came from state and federal sources. In other words, the University was the source of 67 percent of grant aid to students;

• The University's total spending from the endowment has averaged 5 percent or more over the last 10 years;

• In FY 07, 80 percent of spending from the endowment was used to support core academic needs, including instruction, scholarships, fellowships, research and curriculum development; and

• Of the total endowment fund, 54 percent, or $3.8 billion, is subject to restrictions set by the original donor. When only non-Health System endowment is considered, 73 percent is subject to donor restrictions.

The cost of managing the University endowment was $4.7 million in FY 2007, or 0.09 percent of the total value, a cost that is borne by the endowment. The figure is considerably below an industry benchmark fee of 0.5 percent, plus a share in the investment gains.

The report explains that the University calculates its payout of endowment funds by taking 5 percent of a trailing average value over a period of years. In other words, the payout is not 5 percent of the total endowment in a given year, but rather, it is being extended to 5 percent of the average amount of the endowment over seven years. The averaging helps ensure that the payout remains steady in the face of inflation and the inevitable ups and downs of the marketplace. This practice also ensures that the value of the endowment will not be eroded over time, allowing it to remain a reliable source of funds in perpetuity.

A PDF of the U-M response to U.S. Senate Committee on Finance is posted at www.umich.edu/pres/UMich-SFC_Response_Web.pdf.