University President Chris Eisgruber wrote about the endowment in a letter to the Princeton community that was published this week.
Princeton is blessed to have an exceptional endowment, built up through the generosity of our donors, leveraged by the impact of Annual Giving, and sustained over time by the careful stewardship and disciplined spending policies of past generations. That endowment buffers our University from some of the more extreme pressures affecting other institutions of higher education. It helps us to pursue our mission during the crisis and to emerge from it as energetically as possible. But the endowment does not save us from having to make tough choices or exercise financial discipline; indeed, as I have noted already, endowment returns have declined along with the University’s revenue streams.
People sometimes mistakenly regard endowments as though they were savings accounts or “rainy day funds” that can be “tapped” or “dipped into” during hard times. That is an error: endowments are more like lifetime annuities. They must support active operations of the University each year and last as long as the University does.
Our budget model in fact presupposes that we will “tap” or “dip into” our endowment every year. We spend about 5 percent of our endowment each year by design. Put differently, Princeton spends more than $1.3 billion from its endowment every year, including in years where endowment returns are negative. We spend at a rate such that, absent growth, the entire endowment would be gone in 20 years.
This endowment spending accounts for more than 60 percent of the University’s operating revenue every year, supporting a substantial part of faculty salaries, graduate stipends, financial aid, and other budget lines. We have to sustain that level of annual spending forever or radically reduce future expenditures on our core mission.
We believe that an average annual endowment spend rate slightly above 5 percent is in fact sustainable. With this year’s decline in endowment value, however, we expect to be spending more than 6 percent of our endowment. That rate is not sustainable. We therefore need to reduce the University’s operating expenditures, especially because there is a substantial risk that greater economic distress may lie ahead.
Read more about how the school is surviving the pandemic here.
If you want to hear how the investment office at Princeton is navigating through this market turbulence, listen to Andy Golden on Capital Allocators.
Post by Marcelino Pantoja