Recently a committee of the Board of Managers refused a subcommittee’s request that extremely limited forms of divestment be discussed. Surprised by this, I decided to find out just what Swarthmore’s financial policies are. One aspect of what I discovered disturbs me deeply, compelling me to make sure the Swarthmore community is aware of it.
As posted on the College website, the objective of the endowment “is to provide a sustainable level of income distribution in support of the College’s annual operating budget while preserving the real purchasing power of the endowment before gifts.” In order to maintain this balance between current and future spending, the College website also states that “over the long-term the endowment spending, as a percent of the endowment market value (i.e., spending rate), is targeted to average within the range of 3.5 percent to 5.0 percent.” Such a policy is very typical because one of the goals colleges and universities seek is intergenerational equity — maintaining comparable resources for each generation. Institutions do this by spending only enough of the endowment each year so its value, adjusted for inflation, remains constant on average. Since the value of the endowment fluctuates, most institutions hedge a bit, spending less so that moderate downturns do not decrease the inflation-adjusted value of the endowment. As a result, endowments generally increase faster than inflation. Thus, in one study, the average endowment spending rate from 2004-2013 for institutions with an endowment over $1 billion was 4.8 percent, and for all institutions the rate was 4.5 percent (2013 NACUBO-Commonfund Study of Endowments).
Swarthmore College’s annual endowment spending over the last quarter-century is shown in the graph (Swarthmore College Financial Report 2012-13). Notice that the spending has consistently been in the lower half of the target range and has fallen below this range during 5 of the 27 years. The average spending rate for the time period shown is 3.8 percent, which is 1 percent below the average spending rate of institutions with similar endowments. With Swarthmore’s endowment of about $1.5 billion, 1 percent represents $15 million dollars annually. This is a quite a sum of money, enough to have a huge effect on tuition, student fees, financial aid, salaries, the size of the faculty, student services, extracurricular opportunities, and building maintenance, renovation and construction. Notice also what happened during the Great Recession, when the value of the endowment dropped by over 20 percent. As can be seen on the graph, during this period endowment spending remained in the lower half of the target range, even though some budgets were frozen, salary increases were minimal, fringe benefits were decreased, some faculty positions were not filled, the cost of attending Swarthmore rose and necessary building maintenance was deferred. As a result of the 3.8 percent average spending rate, the endowment has grown faster than it would have if a typical rate had been the policy, affording future generations more resources than those of the past. Is this inequity what Swarthmore means by “fostering social responsibility” (college website)?
There is no reason to expect the policy to change in the near future. Consider the College’s plan for the upcoming transition from a faculty teaching-load of five courses a year to four courses a year. Additional faculty will be hired to replace courses no longer taught by the present faculty, but the number of new faculty will be less than that necessary to replace the lost courses. To make matters worse, the student body will be increased to help pay for the new faculty, meaning some of the courses the new faculty teach will not replace lost courses but will be used to accommodate the higher enrollment. Was increasing endowment spending ever considered in order to avoid a reduction in student choice and an increase in class size? Simply replacing the lost courses would require that no more than 36 faculty be hired at a cost of $5.4 million annually at the most. This would raise the average endowment spending from 3.8 percent to no more than 4.2 percent , which is still below Swarthmore’s target average and considerably below the average spending at other institutions.
I have always felt that actions speak louder than words. Therefore, I must conclude that a spending rate that remains in the lower half of the target range and significantly less than that at similar institutions is intentional. I therefore submit that the “real” endowment spending policy is to maintain a rate of 3.5 percent to 4.25 percent regardless of the needs of the College. This allows the endowment to grow faster, but treats all those who study and work at the College inequitably.
Morris L. Clothier Professor of Physics
Coordinator of Environmental Studies