Introductory article on endowment spending from former Williams faculty Morty Schapiro and Mike McPherson. Read the whole thing if you are new to this topic. Conclusion:

A rule that limited annual endowment-spending growth to historically plausible levels would have generated more savings and a bigger endowment to draw on when the collapse came. As it always does. One way of formulating such a rule is just to say that no matter what is happening with the endowment, inflation-adjusted spending from the endowment will never be allowed to go up or down by more than a certain stated percentage from one year to the next.

Institutions did not plan for the volatility they have experienced, and they, their students, and their employees are now paying the price—and not merely in cold breakfasts, but in hiring freezes, construction plans disrupted in midstream, and confusing changes in student aid. With more forethought they can do better next time.

In other words, instead of aiming to spend around 5% of the endowment value each year, Williams should (and, I think, now does) aim to spend X dollars, where X is about $75 million. This amount should grow steadily with inflation, therefore allowing the College to plan its spending for a stable environment. If the endowment is up a great deal in the next few years then, obviously, the dollar spending could be raised. But the safest course is not to raise that spending until you are sure that you can afford to keep it there, even if endowment returns are poor for a decade or more.

I agree completely with this analysis. Targeting a dollar amount to spend each year is clearly better. Being very conservative with that amount, relative to the total endowment value, is important. My main (continued) complaint is that the College is still spending too much. But, if we just keep that dollar spending at $75 million for 5 or 10 years, then the natural growth of the endowment will get the endowment percentage spending rate down something more like 3%, which is a sustainable rate over the longterm.

Print  •  Email