State Supported Uses of Debt and Donations for Endowment Growth
THE ACCELERATION OF endowment asset growth in the top 5 percent after 1996 suggests that schools began to use additional strategies beyond the new investment techniques of the 1970s. The average annual investment rate of return for wealthy endowments was 10 percent since 1990. Spending from wealthy endowments on operations was about 5 percent, leaving just 4 to 5 percent of average endowment investment returns for asset growth. Yet wealthy liberal arts endowment asset values grew 12 percent on average annually after 1996. Wealthy research university endowments grew 30 percent on average annually. Wealthy endowments could only achieve this additional asset growth by increasing the allocation of donations or other transfers to their endowments. Increased donations likely benefited the increasing fortunes of the rich in the broader economy from financialization and other political shifts (Hacker and Pierson 2011; Piketty 2014; Tomaskovic-Devey and Lin 2011). With support from the state through tax subsidies, however, increased bond borrowing and indirect tax arbitrage could have also enabled these growing allocations to the endowments through the use of debt in place of donations for capital projects.
I find that wealthy colleges indeed increased their use of institutional debt after 1996, consistent with an increased use of indirect tax arbitrage and allocation of donations to endowments rather than capital projects. Unfortunately, data on total outstanding debt or new debt origination is not available for private postsecondary schools prior to 2010. Figure 4, however, shows increased spending on interest by colleges and universities as a share of their total annual expenditures from 1996 to 2012, the only years for which data is available. Liberal colleges in the top 5 percent for endowment wealth nearly doubled the share of their annual budgets going to interest from just over 3 percent to just under 6 percent. Research universities in the top 5 percent similarly doubled interest as a share of their total spending from just over 2 percent to just over 4 percent. In comparison, interest as a share of total spending was flat at just under 3 percent for the bottom 95 percent of colleges for endowment wealth.