In Letter to Congress, Faust Makes Case For Endowment

Responding to congressional inquiry about university endowments, Harvard released an extensive document Friday explaining how its $37.6 billion endowment advances its educational—and tax-exempt—mission.

By Helen Y. Wu

Senator Orrin G. Hatch, Congressman Kevin P. Brady, and Congressman Thomas W. Reed II have begun to consider whether large university endowments, including Harvard’s, should be taxed. In a letter they sent in February to colleges and universities with endowments larger than $1 billion, the members of Congress asked a series of questions about how their endowment funds operate. University President Drew G. Faust submitted a public, wide-ranging response Friday.

The explanatory document, prepared in consultation with several Harvard offices, answers the Congress members’ 13 questions and delineates the function and purpose of the University's investment pool. It makes clear that much of the money in the 13,000 individual funds that make up Harvard’s endowment—$31 billion, or 84 percent of the total—remains restricted by the original terms of donors’ gifts. Harvard uses about 5 percent of the endowment every year for its annual operating budgets. Last year, this money funded roughly a third of Harvard’s operating expenses, including financial aid, the document notes.

In an interview Friday, Faust said that she aimed to clear common misconceptions about Harvard’s endowment—the largest of any university—with the public document.

“So many people do not understand how endowments work and they criticize them for being pots of money that we are just hoarding, and I wanted to explain that we live on the income that that pot of money can make every year,” Faust said.

Portions of the document elucidate details about how the Harvard Management Company manages the funds. In response to a question posed regarding how much the University spends each year to manage the endowment, the document outlines that the Harvard Management Company is undergoing a review of its compensation system.

Over the last 5 years, HMC has consistently underperformed relative to its peers, prompting a series of leadership and administrative changes. Stephen Blyth took the helm of Harvard’s investment arm in early 2015 after Jane L. Mendillo stepped down the year before.

The document also notes that HMC conducted a study of its “hybrid” model of internal and external fund management. The results showed that the Harvard model consistently saved Harvard money over the last decade as compared to an all-externally managed model, like that of Yale.

“The management cost for HMC’s internally managed endowment funds is generally below 0.75 percent, while the cost of externally managed endowment funds generally averages 1–2 percent of assets under management,” the report notes.

Faust wrote an introduction to the 23-page memorandum, arguing that the Harvard’s endowment “maintains the teaching and research mission of the university.”

“The recognition and support the tax code offer to nonprofit organizations remain critical to Harvard’s success and excellence,” Faust wrote. “Fundamentally, as with all tax-exempt organizations, Harvard’s non-profit status guarantees to its supporters and the larger community that its resources are dedicated to its charitable mission and larger societal benefits rather than to profit-making.”

A number of offices and administrators across the central administration helped prepare the document, which comes as university endowments, and Harvard’s in particular, have increasingly become the subject of scrutiny. This is not the first time Congress has challenged growing university endowments—in 2008, Senator Charles E. Grassley proposed legislation that enforce mandatory payout minimums.

In Connecticut, Governor Dannel P. Malloy announced he would veto legislation intended to tax Yale’s $25.6 billion endowment.

In fiscal year 2015, Harvard’s endowment grew 5.8 percent to $37.6 billion, trailing the rate of growth at many peer institutions, including Princeton, Yale, and MIT.

—Staff writer Andrew M. Duehren can be reached at andy.duehren@thecrimson.com. Follow him on Twitter@aduehren.

—Staff writer William C. Skinner can be reached at william.skinner@thecrimson.com. Follow him on Twitter @WSkinner.