University of Michigan Endowment

The university’s endowment provides steady financial support for the university’s academic programs and other needs. Endowment funds are invested for the long-term, and earnings from those investments help support outstanding faculty, innovative programs and student scholarships. Here are links to additional information about the endowment.

Endowment Q&A (2016)

The University of Michigan’s endowment provides steady financial support for the university’s academic programs and other needs. Endowment funds are invested for the long-term, and earnings from those investments help support outstanding faculty, innovative programs and student scholarships. Below are answers to some frequently asked questions about the U-M endowment.

Q. What are endowment funds?
A. The university’s endowment funds consist of both true endowments and quasi-endowments, also known as “funds functioning as endowments.” U-M’s true endowments are permanent endowment funds received from donors with the stipulation that the principal remain untouched and that it be invested to produce a never-ending source of support for the purposes specified by the donors. Quasi-endowments are funds reserved by the university on a permanent or long-term basis for specific programs or projects critical to the mission, financial health and growth of the University.

The university’s endowment is essential to sustaining academic quality because it provides a guaranteed, never-ending source of income to support professorships, student scholarships, innovative programs and learning opportunities. Donors who contribute to the endowment do so because they want to support the university and positively impact U-M students and academic programs 25, 50 or 100 years from now.

Q. How large is Michigan’s endowment?
A. Endowment funds were valued at $9.7 billion at June 30, 2016. The majority of the university’s endowment funds are pooled in the unitized University Endowment Fund (the endowment), which consists of approximately 9,800 separate endowment funds. These figures represent endowment funds for the U-M’s three campuses and the U-M Health System.

Q. How important is the university’s endowment to its overall budget?
A. For fiscal year 2016, the endowment spending rule allowed for distributions of approximately $304.5 million to support operations. In the past 15 years, the university’s long-term investment strategy and spending policies have generated nearly $3.4 billion in endowment distributions to support U-M operations.

Q. How does Michigan’s endowment compare with the endowments of peers?
A. U-M’s endowment is the ninth largest among all universities in the country, according to data compiled by the National Association of College and University Business Officers and the Commonfund. The university’s endowment per student ranks 84th, lower than many private peers with much smaller enrollments.

Q. How does stock market volatility affect the endowment?
A. Stock market values go up and down. The university manages stock market volatility by maintaining a diversified portfolio, which includes stocks, bonds, absolute return, real estate, venture capital and other investments. However, diversification alone will not prevent the endowment from sustaining losses during market downturns.

U-M’s endowment distribution policy insulates the budget from short-term fluctuations in the financial markets by using a conservative spending rate formula. The university’s endowment spending rule smooths out the impact of volatile capital markets by providing for annual distributions of 4.5 percent of the average seven-year market value of endowment shares. The approach helps the university budget more consistently for its revenue streams.

Q. The university distributes just 4.5 percent of the endowment annually. How did the university arrive at this level of endowment spending?
A. The 4.5 percent distribution rate helps to insulate the endowment from anticipated market volatility that includes lower investment returns and higher inflation. It also ensures continued, steady support of university operations during uncertain economic times – including funding for student scholarships, faculty salaries and academic programs. The distribution from the endowment has steadily increased each year since 2003.

Q. Since U-M has a relatively large endowment, why doesn’t it use the endowment to replace the millions of dollars in state support that have been lost?
A. How endowment funds may be spent is usually restricted by the donor. Such funds can be used only for the specific purpose for which the endowment was established. The endowment is actually a collection of about 9,800 separate endowments, most of which have been donated to provide support for specific purposes such as scholarships, educational programs or professorships. To ensure continuing support for future generations, the funds themselves are not spent but invested so that part of the annual distribution can provide a steady flow of dollars each year. The endowment provides a margin of excellence for the university, but it does not replace the unrestricted funds coming from state support and student tuition dollars.

Q. Why not increase the rate of spending from endowment earnings when state funding is cut or growing slowly?
A. The current endowment-spending rule is set to protect and grow the value of the endowment for the future, because it must continue to grow over time to preserve the quality and health of the university. If an institution were to spend down its endowment for unplanned expenses, it would take many years to build the endowment back up through investment income, reduced spending and new gifts.

The university’s spending rule has changed only twice since 1986.

U-M’s endowment-spending rate is based upon the historic track records of the capital markets and inflation. It is designed to support operations in a way that strikes a balance between generating a predictable stream of annual support for current needs and preserving the purchasing power of the endowment funds for the future. This approach allows the university to protect and stabilize yearly distributions through strong and weak markets.

Q. The U-M has earned more than 25 percent on its endowment some years. Why does it limit expenditures of earnings to 4.5 percent or less?
A. The FY 2007 25.6 percent return on the endowment was exceptional, as was the 44 percent return in FY 2000. The longer-term, 10-year return rate of 6.7 percent is more representative of what to expect from the endowment. It’s also important to remember that in 2001, 2002, 2009, 2012 and 2016, the rates of return were negative (-4.4 percent, -5.5 percent, -23 percent, -0.5 percent and -1.4 percent respectively) and a positive payout of about 5 percent of the market value of the endowment was nevertheless available.

U-M’s investment performance puts it in the upper end of the top quartile of all endowments for both the past five- and 10-year periods, as reported by Cambridge Associates, an investment consulting firm that serves colleges, universities and large institutional investors.

Earnings from invested funds are used for two purposes: a portion (4.5 percent of the average market value) is spent, and anything above that amount is added back to the invested principal to preserve the fund’s long-term purchasing power against inflation and market volatility. For example, an endowed professorship established in 1987 with an investment of $2 million would require an investment of $3.64 million today to be equivalent. Reinvesting a portion of the earnings helps make such growth possible, and ensures that U-M meets ongoing needs reliably and in perpetuity.

Q. Why not use more of U-M’s endowment to reduce tuition?
A. The majority of the payout from the 9,800 separate endowments in U-M’s endowment is restricted to specific uses by donors, and it helps the university serve a very broad population.

The portion available for U-M operations supports the education of more than 61,000 students. About 21 percent of the total is restricted to direct student financial aid. Other endowed funds have an indirect effect on tuition as well. The income from remainder of endowed funds is used to pay for faculty, academic support, research and building maintenance, so that tuition increases are not required to cover the full cost of faculty salary increases, for example.

About 21 percent of U-M’s endowment is restricted for the U-M Health System, which serves the needs of more than 2 million patients a year.

Q. Why does University of Michigan tuition go up each year?
A. Tuition helps support the learning opportunities, quality teaching, undergraduate research experience and the respected scholarship that make a U-M education one of the best in the world. Through prudent fiscal management, we are committed to maintaining the high standards of the university and to supporting its priorities and initiatives, including financial aid, which will help prepare our students for success.

As the Board of Regents and the administration develop a budget and set tuition each year, maintaining the excellence of our educational programs and ensuring access to the university for students from all economic backgrounds are U-M’s top priorities. Accordingly, we have consistently boosted financial aid for students with demonstrated need each year.

The annual appropriation from the state of Michigan also plays a key role in setting tuition and fees. Over the past decade, state funding on a per-student basis has been cut substantially. At the same time, U-M is experiencing increased costs in core expenses, although the rate of growth in these costs has been tempered by rigorous cost containment efforts.

Q. What are you doing to contain costs?
A. Controlling costs remains a top priority. The Ann Arbor campus already has cut $337 million in recurring costs from the general fund budget siince 2004 and we’re committed to trimming another $24 million in the coming year. The university continues to work to control health care costs, boost energy efficiency, make optimal use of existing space and eliminate non-core activities. U-M continues to identify and pursue opportunities to become more efficient and generate additional revenue, including the consolidation of information technology units, central scheduling of classrooms and revised travel and hosting guidelines.

Q. What goes into the cost of attending U-M?
A. There generally is a significant difference between the “sticker price” and what people actually pay out of their own pockets after receiving various forms of financial aid. Financial aid, in effect, discounts tuition to many people based on what they can afford. About 70 percent of in-state undergraduate students receive some form of institutional financial aid, including grants, work-study jobs and loans. About 50 percent of out-of-state undergraduates receive need- or merit-based financial aid. Ranked among the nation’s top universities, U-M is a bargain for Michigan residents, who are granted a significant tuition discount for being Michigan residents, when compared to the cost for out-of-state students.

Updated October 2016

Copyright 2013 Regents of the University of Michigan, Ann Arbor, MI 48109 USA

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