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November 22, 2000

Faculty group urges increase in amount of endowment spending

Penn State spends 5 percent of its endowment annually to endow professorships, scholarships and fellowships, and to meet other operating expenses.

Carnegie Mellon spends more than 5 percent of its endowment for such purposes.

But the University of Pittsburgh spends just 4.25 percent. That's the lowest fixed rate among the 27 Association of American Universities (AAU) schools that base their payouts on the average market value of their endowments during the preceding three years. Among all 60 AAU schools, Pitt appears to have one of the more conservative endowment spending policies, according to national studies.

Increasing Pitt's endowment spending by less than 1 percent would free up millions of dollars annually to help balance the University's budget, the University Senate's budget policies committee (BPC) points out.

BPC is calling on Pitt administrators and trustees to "seriously consider" adopting a higher endowment spending rate.

The market value of the University's endowment has more than doubled in the last five years — to $1 billion — thanks to the bullish stock market, increased donations to Pitt and judicious investment strategies, BPC noted in a Nov. 17 letter to Chancellor Mark Nordenberg.

"Our committee has been pleased to see such growth in the endowment….But the financial needs of the University have also been growing rapidly," BPC wrote.

"Despite major successes in enhancing the fiscal efficiency of the University, balancing the budget remains difficult every year. Costs have been rising rapidly for information technology, books and journals, maintenance and renewal of the physical plant, enhancements of the quality of student life, and many other necessary expenses.

"On the revenue side, the share of the University's costs covered by state appropriations has been dwindling for years, and tuition rates have had to increase more than we would wish. In short, any significant increase in revenues available to meet the real needs of the University could be put to very good use," BPC wrote.

During the current fiscal year, Pitt is budgeted to spend $32.4 million in endowment funds. That's based on 4.25 percent of the endowment's average market value during the preceding three years ($761 million).

Had the rate been 5 percent instead of 4.25 percent, this year's endowment spending would have been $5.7 million higher, BPC pointed out.

BPC's recommendation is "reasonable and prudent," according to Arthur G. Ramicone, Pitt vice chancellor for Budget and Controller. "To say otherwise would be to say that somehow we know more than Penn State and Carnegie Mellon and the lion's share of the other AAU institutions, that they're all irresponsible and we're not."

Ramicone, who attends BPC meetings as an administrative liaison, promised to present the Senate committee's proposal to Malcolm Prine, who chairs the Board of Trustees' investment committee. Changing the University's endowment spending policy would require the board's approval.

BPC chairperson Philip K. Wion is scheduled to report on his committee's recommendation at the Nov. 28 Faculty Assembly meeting.

Of the $32.4 million in Pitt endowment funds to be spent this year, only $1.2 million ($600,000 allocated to the chancellor's discretionary fund, $600,000 for acquiring property) is "unrestricted" money.

The remaining $31.2 million is restricted for use by particular schools, based on how much of Pitt's total endowment is earmarked for those schools by donors. Some 38 percent of the University's endowment is earmarked for the School of Medicine alone, by far the largest share among Pitt units.

Thus, increased endowment spending would benefit some units more than others. "If you don't have any endowment," Ramicone said, "you wouldn't see any of that money, at least not directly."

On the other hand, he and Wion said, the whole University might benefit indirectly if some additional endowment monies were allocated, say, to library acquisitions budgets or to funding a larger share of endowed professorships (freeing up additional salary funds for other faculty) and scholarships (enabling Pitt to increase the number and/or dollar amounts of those scholarships).

The bottom line, BPC members agreed, is that an additional $5.7 million this year, however it was spent, would have been a welcome addition to Pitt revenues.

— Bruce Steele

Filed under: Feature,Volume 33 Issue 7

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