Penn’s endowment, explained

Retirees are very familiar with the challenge of determining how much they can spend from savings today while still having enough resources to support their future needs. A university faces a similar dilemma, with the added challenge of being a perpetual institution. 

Like a retiree, a university must strike a balance between short- and long-term needs when spending from investment assets. Penn has addressed this challenge through a carefully constructed endowment spending policy designed to maximize support for today’s students and faculty while also ensuring the endowment has a reasonably high likelihood of maintaining its purchasing power over the long term. 

“The University’s endowment makes possible our missions, honors the intent of Penn’s supporters, and is stewarded to last in perpetuity,” says President J. Larry Jameson. “Our careful management of every endowed fund enables lifechanging financial aid and groundbreaking teaching and research. It is essential we do so prudently so that generations far into the future can build upon Penn’s excellence that is being created by current students and faculty.”

Thanks to generous philanthropy over two centuries and to attentive stewardship, the endowment will sustain many more generations of students and faculty, says Vice President for Finance and Treasurer Mark Dingfield. That commitment means any prospective changes to the endowment’s spending policy must be thoughtfully evaluated. As Penn responds to two pending challenges—potential decreases to federal research funding and increases to a university endowment tax—those decisions become critical to managing the long-term fiscal health of the University.

More than 8,000 specific priorities

“While the endowment can appear to be a big, discretionary pot of money that the University can use for any purpose, that’s not the case,” Dingfield says. “It’s actually made up of over 8,000 individual funds donated to Penn over the years.”

About 90% of those funds can only be used for specific purposes designated by the donors, such as financial aid, research in particular fields, or faculty positions. Those donor restrictions are usually included in legally binding gift agreements. The remaining endowment funds are typically designated by the University’s schools and departments for specific budgeted uses. Overall, spending from the endowment provides approximately 20% of Penn’s annual academic operating budget.

“Penn targets spending 5% of its endowment each year, or about $1.1 billion today, while keeping the remainder invested to provide sustained support for our missions,” says Dingfield. “There’s a delicate tradeoff here: The more we spend today, the less we can spend in the future. Penn’s approach is to seek a balance, so that both current and future faculty and students benefit from the endowment’s support. A 5% annual target spending rate should allow us to achieve this balance over the long-term.”

The endowment has a wide-ranging impact on everyone at Penn, whether they recognize it or not. For example, nearly one-third of student aid is funded by endowment spending, with 46% of undergraduate students receiving grant-based aid packages. Penn is strengthening that promise with the Quaker Commitment financial aid initiative, guaranteeing full tuition scholarships for families who make $200,000 or less and removing primary home equity from the financial aid assessment process.

The endowment also supports lifesaving cancer research through the Abramson Cancer Center, student summer internships in the Robert A. Fox Leadership Program, agricultural research at the Kleinman Center for Energy Policy, and much more.

Protecting Penn’s future

Penn’s endowment and others are taxed under the 2017 federal Tax Cuts and Jobs Act, with 1.4% collected from realized investment gains. Proposals currently in Congress could significantly increase that rate by tenfold or more, representing a direct reduction in money available for financial aid, research, clinical care, and faculty. 

Even if the uses of Penn’s endowment were not so heavily restricted, offsetting the impact of policy changes today would impact the intergenerational equity Penn strives to achieve. For example, if a higher endowment excise tax and cuts to research funding totaled $500 million a year, filling that budgetary hole through increased endowment spending could deplete the purchasing power of Penn’s endowment by 30% in just 10 years.

“That means a scholarship fund would only be able to cover 70% of a full scholarship a decade later,” Dingfield says. “As we consider actions to help mitigate potential budget pressures, we need to be mindful that short-term changes to endowment spending can have lasting repercussions.”

Fundamentally, the endowment is a long-term asset that must balance current and future needs, Dingfield says. And the current challenges, unlike the disruption caused by the 2008-2009 financial crisis or COVID-19, are not guaranteed to be solved in just a few years. 

“Penn has done an excellent job over the past few decades weathering disruptions and downturns through disciplined budget management and stewardship of the endowment.” says Dingfield. “We are benefiting today from those decisions, and it is our goal to leave the same opportunities for those that follow us.”