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Do University Endowment Sizes Align with Rankings?

Have you ever wondered how the size of a college’s endowment fund might correlate with its rankings? Not likely… the answer wouldn’t affect your preferences among schools very much. But we’re conducting this exercise because it may indicate how wisely an elite school spends their substantial non-tuition income each year. This can serve as a way of estimating the efficacy of the spending from a school’s fund relative to the level of academic excellence associated with that school.

First, what is an endowment fund? The endowment of a college or university is an investment fund established by the school as a not-for-profit entity. It allows for withdrawals from the invested capital and gains as established in its bylaws and approved by the fund’s board. The school applies withdrawn funds to support the operation of the institution and/or to accomplish specific programs. Endowments are funded by donations that are tax-deductible. They are typically structured so the principal amount invested remains largely intact, while investment earnings are available for spending each year.

There are three types of rules in the bylaws of endowment funds. The first type of rule is the investment policy, which stipulates the type of investments the fund manager is permitted to make. It dictates the level of risk that the manager can undertake in attempting to meet a targeted rate of return. The second set of rules is the withdrawal policy, which establishes the amount the institution is permitted to withdraw from the fund annually. The third set of rules is the usage policy. These rules govern the purposes for which fund proceeds may be spent.

A criticism that’s occasionally directed at institutions with large endowments is that funds could be used to lower or even eliminate tuition for all students. However, if doing so were to violate the bylaws, then the fund wouldn’t be permitted to comply with such an order if issued by the institution’s senior executive. Even if the fund’s board were to support such a change in policy, the change would need to be approved by a majority of the donors (or their estates) who made donations under the existing rules, and their votes would be cast in proportion to the size of their donations.

Such change requirements make amending major policies in bylaws extremely impractical. Donations to endowments funds are meant to be, “A gift that keeps on giving”. That is, some or all of the income earned by the fund each year is to be spent, but the principal is usually not. However, the bylaws of many funds permit a fixed rate of withdrawal to facilitate long-range planning regardless of how well or poorly the fund performed in the previous year. The average annual rate of withdrawal from college endowment funds is 4.6%.

So let’s review the aforementioned comparison of fund size and rankings. For rankings, we’ll use the U.S. News and World Reports results from 2016, not because it’s necessarily the best source but because it’s the most popular. Since National Liberal Arts Colleges and National University rankings are two separate lists, rankings will be shown as C1 or U1, C2 or U2, and so on. Endowment funds above $2 billion are included. The endowment data is also from 2016.

Table: Comparison of Endowment Sizes and Rankings

 

No.

 

College, University, or System

Fund Size

($ Billions)

USN&WR

Ranking

1Harvard University34.5U2
2Yale University25.4U3 (tie)
3University of Texas – System24.2U56
4Stanford University22.4U5 (tie)
5Princeton University22.2U1
6Massachusetts Institute of Technology13.2U7
7University of Pennsylvania10.7U8 (tie)
8University of Michigan – Ann Arbor9.7U27
9Northwestern University9.6U12
10Columbia University9.0U5 (tie)
11University of Notre Dame8.3U15 (tie)
12University of California – System8.3U20 (tie)
13University of Chicago7.0U3 (tie)
14Duke University6.8U8 (tie)
15Washington University in St. Louis6.5U19
16Emory University6.4U20 (tie)
17University of Virginia – Charlottesville5.9U24
18Cornell University5.8U15
19Rice University5.3U15 (tie)
20University of Southern California4.6U23
21Dartmouth College4.5U11
22Vanderbilt University3.8U15 (tie)
23Pennsylvania State University – Univ. Park3.6U50
24Ohio State University – Columbus3.6U54 (tie)
25University of Pittsburgh3.5U68
26New York University3.5U36
27Johns Hopkins University3.4U10
28University of Minnesota – Twin Cities3.3U71
29University of Washington – Seattle3.0U54 (tie)
30Brown University3.0U14
31University of North Carolina–Chapel Hill2.9U30
32University of Wisconsin – Madison2.4U44 (tie)
33University of Illinois – Urbana-Champaign2.3U44 (tie)
34Williams College2.3C1
35Purdue University2.3U60
36Michigan State University2.2U82
37University of Richmond2.2U27
38Boston College2.0U21
39Amherst College2.0C2

Notes on Table: The University of Texas – System and the University of California – System both consider their endowment funds collectively as statewide universities with many branches. However, USN&WR ranks each branch of these systems as a separate entity, so the rankings listed above represent the University of Texas – Austin and the University of California – Berkeley, the highest-ranking branches in each system. There were several universities listed relatively high in the USN&WR rankings that did not have endowments over $2 billion. Shown with their rankings, these schools were the California Institute of Technology (U12), Georgetown University (U20), Carnegie Mellon University (U24), and Wake Forest University (U27). Some college ranking sources use the size of the endowment fund as one of many criteria by which colleges are ranked, but it is a minor factor without much weight.

The table shows that there is some degree of correlation at the high end of the list. Harvard, Yale, MIT, Penn, Cornell, USC and others match up exactly or within two places on the rankings. The lower end of the scale doesn’t correlate well, with the exception of UNC – Chapel Hill.

Please note that a gift to an institution is not the same as a donation to the institution’s endowment fund. Gifts can be earmarked for a specific purpose such as to establish of a new chair for a “Professor of Marine Biology” or the construction of a new honors dormitory.

As a college admissions consulting firm specializing in elite schools, IvySelect works hard to provide services of measurable value and substantial benefit to our clients. The case for retaining IvySelect is strongest wherever the competition for admission is most intense such as the Ivy League and other top-tier schools. As part of our comprehensive planning process, we advise students to seek colleges that are the best fits for them rather than to simply target those schools that are most prestigious. However, for many of our students, their best-fit colleges are the most competitive and prestigious ones.

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