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The inequity of Swarthmore’s endowment, revisited

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I have been asked specific questions as a result of my op-ed concerning intergenerational inequity and Swarthmore’s endowment spending (The Phoenix, March 20, 2014, page 2). This short note contains a bit more data and as a result illustrates the issue more clearly.

The solid line on the graph shows the endowment return on investment (from Suzanne Welsh, Vice-President for Finance and Treasurer at Swarthmore) minus the inflation rate for the period 1987 to 2013. Also graphed is the endowment spending rate (dotted line). Notice how much the endowment return minus inflation fluctuates from year to year, due almost entirely to economic factors external to Swarthmore. Notice also how steady the spending rate is comparatively. This is exactly how an endowment protects the institution from yearly changes in the return on the endowment. Every time the endowment return minus inflation falls below the spending rate, the College has spent more money from the endowment than allowed for long-range financial stability in order to insulate the College from the negative financial situation. But just as important, every time the endowment return minus inflation falls above the spending rate, the College has spent less money from the endowment than it could have while still achieving long-range financial stability, leaving those funds in the endowment to be used in the future.

To make a comparison easier, the dashed line on the graph shows the average endowment return minus inflation for the entire time period. Perfect intergenerational equity would place this line on top of the spending rate data, while conservative planning would argue that this line should be slightly higher than the spending rate data. For Swarthmore, the gap between endowment return minus inflation and the spending rate is 4% on average, too large an amount to strike the proper balance of conservative financial management and intergenerational equity. Because the average spending rate at institutions with similar endowments is 1% higher than Swarthmore’s, I have to conclude that the people who determine the endowment spending policy at these institutions agree with me. The amount of money involved is substantial, because, 1-2% of Swarthmore’s present endowment is $15-30 million annually, an amount that could significantly strengthen the quality of the Swarthmore experience for every member of the College community.

Peter Collings is the Morris L. Clothier Professor of Physics at the college, and serves as the coordinator of Environmental Studies. 


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