# Trend lines (#1014)

Topics/tags: Grinnell

Grinnell has something like a two-billion-dollar endowment. With an endowment that large, do we really need donations? That’s something I know many of our alumni ask. It’s also something I ask myself.

Some donations are useful because they support things not currently in budget lines. For example, I donate to the CS department so that we have funds to take research students to meals or offer snacks at class presentations [1]. I also donate to the student food bank, even though I wish that it didn’t have to exist.

But what about to the base endowment? Are those donations also necessary? In my early years at Grinnell, I didn’t think so [2]. However, when I think about long-term projections, I can see why the Trustees and others ask us to donate. Or at least I think I do.

Let me do the math. Or at least some back of the envelope calculations.

We’ll say that our endowment is $2,000,000,000. Wow. That’s a lot of zeroes. We’ll assume that we take 4% from the endowment each year. I suppose we could take a bit more, but it’s enough for now. We’ll assume that our investment strategy provides a return of 5%. I know that it’s been higher in most recent years, but I hear that most analysts think higher rates will be difficult in the future, particularly if we adjust for the upcoming downturn. What other assumptions should I make? Let’s assume that our current budget is$140,000,000 per year, that we need the endowment to cover 55% of the budget, and that the budget grows at 5% annually [3]. That last number may be a bit conservative; most of our expenses are related to personnel, and things like health care grow at a much higher rate. Are the numbers themselves reasonable? Our 2018 budget was about $130,000,000 and the endowment paid a little less than 57%. It’s a starting point. I’ll also assume that we have$100,000,000 in reserve for the downturn. That’s probably a bit high.

It’s spreadsheet time! I’ll create mine, you can create your own [4]. Here’s the basic setup I ended up with, once I realized that I wanted a general form.

A B C D E F G H
Row Year Endowment Interest Payout Budget From Endowment To Reserve Reserve
1 0 =INIT_ENDOW =B1*INTEREST =B1*PAYOUT =INIT_BUDGET =E1*ENDOW_PERC =C1-F1 =INIT_RESERVE+G1 
2 1 =B1+C1-D1 =B2*INTEREST =B2*PAYOUT =E1*(1+BUDG_GROW) =E2*ENDOW_PERC =C2-F2 =H1*(1+INTEREST)+G2 

The remaining rows are appropriate variations of row 2.

When I plug in the assumptions from above, I see that the expected contribution from the endowment exceeds the payout in year one. And we’ve overdrawn the reserves by year 10. That’s scary. Here’s my table. As I said, YMMV [5].

Year Endowment Interest Payout Budget From Endowment To Reserve Reserve
0 $2,000,000,000$100,000,000 $80,000,000$140,000,000 $77,000,000$3,000,000 $103,000,000 1$2,020,000,000 $101,000,000$80,800,000 $147,000,000$80,850,000 -$50,000$108,100,000
2 $2,040,200,000$102,010,000 $81,608,000$154,350,000 $84,892,500 -$3,284,500 $110,220,500 3$2,060,602,000 $103,030,100$82,424,080 $162,067,500$89,137,125 -$6,713,045$109,018,480
4 $2,081,208,020$104,060,401 $83,248,321$170,170,875 $93,593,981 -$10,345,660 $104,123,744 5$2,102,020,100 $105,101,005$84,080,804 $178,679,419$98,273,680 -$14,192,876$95,137,054
6 $2,123,040,301$106,152,015 $84,921,612$187,613,390 $103,187,364 -$18,265,752 $81,628,155 7$2,144,270,704 $107,213,535$85,770,828 $196,994,059$108,346,733 -$22,575,904$63,133,658
8 $2,165,713,411$108,285,671 $86,628,536$206,843,762 $113,764,069 -$27,135,533 $39,154,808 9$2,187,370,545 $109,368,527$87,494,822 $217,185,950$119,452,273 -$31,957,451$9,155,098
10 $2,209,244,251$110,462,213 $88,369,770$228,045,248 $125,424,886 -$37,055,116 -$27,442,263 Since I have a general spreadsheet, I can try other things or, as Mike Latham used to say, adjust some levers. What fun! What if we earn 6% each year, rather than 5%? We make it all the way to year 12 before the reserve runs out. What if we earn 6% and cut the percent of the budget from the endowment from 55% to 50%? We make it to year 17. But how can we use less from the endowment? I know! Alumni (and others) could donate! What if we stuck with the 5% and the 55%, but managed to cut the budget growth to 4%? We overspend in year 12. What if we also increase the payout rate to 4.5%? Year 16. Note that once we run out of the reserve, at least in my model, we’ll need to start taking money from the core endowment. Under the original model, that means that the endowment would be down to$0 in about year 28. If I were a Trustee, I’d find that scary.

Is there a solution to all of this? It seems like the obvious ones are (a) earn a higher interest rate, (b) cut expenses, (c) decrease the percentage of the budget that comes from the endowment, and (d) increase the endowment. I don’t think we have control over (a). Choosing (b) means that we’ll gradually decrease the quality of our program, at least if we cut expenses significantly. That leaves (c) and (d). There are two ways to decrease the percentage of the budget that comes from the endowment. We could change the distribution of students, bringing in more full-pay students and fewer high-need students. But that goes against our principles. Or we could increase the amount we get from donations. What about (d)? The primary way to increase the endowment is through donations.

Wow. I guess even with a \$2,000,000,000 endowment, we really need donations.

Postscript: Thanks to Eldest, who helped check my work.

[1] And for many other things.

[2] Given how I’ve heard fundraising worked at the College during that time, it seems that no one thought so.

[3] The notes I have from Kate Walker’s last presentation suggest that we’ve grown at about 5.44% per year.

[4] Or you can grab my Excel spreadsheet

[5] Your Money May Vary, or something like that.

Version 1.0 of 2020-02-09 .