Endowment Explainer

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When we're talking about fighting austerity at the University of Virginia – about fighting furloughs and benefit cuts, enacting tuition and firing freezes, and more - the $9 billion+ elephant in the room is: why not spend more of the endowment? We're often told this isn't possible--but is it?

 Q: First, what exactly is an endowment?

A university endowment is made up of donations to the university which are then invested; the institution can use investment income for specific purposes. Many endowment funds are restricted for specific uses, such as “endowed chairs” or special programs at the institution.  But other endowment funds are unrestricted and the institution does have freedom to choose how to spend the investment income. 

At UVA as of 2019, the  unrestricted endowment totaled over 2.78 billion dollars. That big investment pool is further divided up into two smaller (but still in the hundreds of millions) pools: the short-term pool and the long-term pool. The long-term pool are investments that are set aside to be invested long-term. These are portfolios of long-term investments in the future of lots of different companies, likely in industries ranging widely from fossil fuels to Silicon-Valley tech. 

The short-term pool is what we’re interested in: investment income  that could be used right now. This pool is made up of types of investments that are more volatile (prices go up and down unpredictably) and so money has to move in and out of them more quickly. In addition to short-term investments, the short-term pool includes a giant pool of cash, gaining interest in various bank accounts, ready to use at a moment's notice. As of December 2019, UVA had approximately $149.2 million in cash and cash equivalents.

 Q: Okay, but hasn't UVa told us that they can't afford to use any of that?

Actually, they totally can. Here's how we know. On March 6th, 2020, the Finance Committee of the Board of Visitors met to chat about how things are going. At this meeting, Robert Durden, CEO and Chief Investment Officer for UVIMCO (UVa Investment Management Company), which is in charge of handling how the endowment is invested, said as much. According to the minutes of this meeting, Mr. Durden "explained the metrics they use including earning an annualized rate of return of at least spending plus inflation plus fees, beating the policy portfolio benchmarks, and comparing favorably to peers. Risk was increased just a bit this year." This means that UVa's short-term return on their investments is better than even they thought likely and better than other peer public institutions. 

How much better? Durden outlined this as well. "The primary goal of generating a required return was met over the trailing 3-, 10-, and 20- year periods. [...] Over 20 years, investments have added 400 basis points of value [4%] on top of the policy return of 6%." In 2018 that return was up to 12.4% and in 2019 it was 11.4%. For comparison, the average university endowment gets around a 5.43% return on investment. While that difference doesn't sound like much, it means that UVa's return on the investment of the endowment was, on average, hundreds of millions more than that of peer institutions over the past 20 years.

It looks as though UVa's overall financial outlook is rosy. But don't just take our word for it. On July 6, 2020, well into the current pandemic, Moody’s Investors Service assigned UVA their highest credit rating of AAA. In their analysis, “[t]he stable outlook reflects our expectations of continued excellent student demand and philanthropic support. It also reflects sound operating performance, maintenance of superior financial resource levels and manageable future borrowing.” If UVA were in dire straits, it would not have received such a glowing and optimistic credit rating. UVa has echoed this sentiment. In its most recent financial report, UVa stated, "the University is well positioned to meet the challenges it faces due to its diverse revenue base, strong endowment, broad and generous philanthropic support, a commitment to organizational excellence, and strong student demand resulting in increasing number of applications and yield."

So, what does this all mean? Durden himself laid it out: "there is ample liquidity in the pool—51% of the pool could be converted to cash within one year." That means that over half of UVa's invested endowment wealth could be cash in a matter of months. But a lot of these investments are already cash. As of December 2019, the market value of UVa's long-term pool is 9.5 billion dollars, 12.8% of which is allocated as cash. That's over 1.2 billion dollars in cash in the long-term pool. By its own lights, then, UVa is not short on cash in the short-term or long-term pool. 

 Q: Would spending more of the endowment even make a difference right now?

Sure it would. The university has a relative standard for how much of those two pools of money they will actually spend every year. Each year, a portion of the total endowment is withdrawn and used to supplement the University's budget.  Typically, UVA distributes about 4 - 6% of the endowment market value per year. In 2019, it was 4.86%. In 2009 the Board of Visitors increased this distribution by 0.5%.  How much money are we talking? In 2009, half of a percent increase in endowment spending resulted in an extra 16 million dollars to combat the effects of the U.S. recession. An increase of only that much for 2020 would result in $49 million dollars available to spend right now.

A lot of jobs could be saved with an extra $49 million dollars floating around.

Given all this, why wouldn't the Board of Visitors do something they can and have done multiple times in response to past crises: authorize an increase in endowment spending? What is preventing the Board from increasing endowment distribution to meet the needs of our current crisis?

United Campus Workers of Virginia

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