A Billion Dollars

That's how big the endowment has grown, thanks in part to the recently concluded capital campaign. Just what is that billion doing?

Visit the Dartmouth campus and you will see an impressive accretion of physical assets: $290 million worth of handsome grounds and stately buildings, well appointed and buffed by time.

Looming behind those holdings, however, are assets seen only between the pages of the annual report: an endowment that, thanks to good markets, conservative management and almost $200 million added by the five-year Will To Excel campaign, is valued at more than $1 billion. This glacier of money creates an annual spending stream of about $50 million a year for salaries, scholarships, books, art, performances, and other staples and trimmings. This money in turn flows into a total budget of $319 million.

All of which makes Dartmouth far from the first in overall endowment. In a 1995 comparison by the National Association of College and University Business Officers (NACUBO), Dartmouth's endowment ranked 19th in overall market value. In endowment per student, Dartmouth came in 30th, behind such fiscal giants as Harvard, Princeton, and Yale—and also behind such lesser-known schools as Macalester, Grinnell, Williams, and Middlebury. Still, Dartmouth places solidly among the elite 11 percent of American colleges and universities that account for more than 60 percent of the total endowment monies.

It is becoming increasingly important to stay in such good company, because other forms of revenue for higher education are waning. One reason: Families are less able to shoulder a portion of the costs. Median family income has grown only five percent over the past 15 years, while the average cost of attending a private college or university has grown by 90 percent. At the same time, increases in federal grants to students have lagged substantially behind inflation since the start of the 1980s, and the federal government is no longer reimbursing schools for research overhead as much as it once did. "Endowment is extremely important," notes J. Peter Williamson, emeritus professor of the Amos Tuck School of Business Administration who has written extensively about educational endowments. "For those schools who can afford to put money aside for their endowment, it's a great insurance policy against dips in alumni giving, fewer fall-tuition students, and less government and foundation support."

Endowments for higher education are an old idea, going back at least to ancient Greece. Plato bequeathed his academy along with an endowment of productive land. In the thirteenth century, universities began establishing endowments in western Europe. Some gifts were in the form of houses for indigent students, such as one given to the University of Paris by Bishop Robert de Sorbon─hence the school's informal name, La Sorbonne, probably a contraction of la maison Sorbonne, according to Charles Wood, emeritus Dartmouth professor of history.

An Englishwoman, Lady Anne Mowlson, established the earliest known endowment in this country. In 1643 she gave a perpetual scholarship to Harvard College, five years after the college's establishment. Periodically strapped for funds in its earlier years, Harvard invaded the principal repeatedly and stopped awarding the scholarship. By 1893 the contrite and now-wealthy college put $5,000 back into the endowment; the Lady Mowlson Scholarship exists at Harvard to this day.

Dartmouth also mishandled what some say were its first endowed funds. The£l 1,000 that Samson Occom raised in England was intended to be an endowment, of which only the interest was to have been spent. Eleazar Wheelock went through the principle and still had to beg funds from the government of New Hampshire and neighboring towns. (Not to mention Whee-lock's betrayal of the funds' original main purpose: the education of Indians. His actions clearly would have been lawsuit material in the twentieth century.)

Dartmouth also was given substantial tracts of land, but these rocky gifts produced little income and fetched paltry sums when sold. In 1781, trustee John Phillips gave the College £37 10 shillings to buy productive land for the purpose of supporting the College's first endowed professorship, of divinity. In 1791 Phillips gave the College 285 bushels of wheat to buy a woodlot for "his" professor. (That professorship still exists, held currendy by religion Professor Ronald Green, although the College no longer provides the firewood.) Other endowments followed in the nineteenth century for scholarships, professorships, and academic prizes, some of which exist today. Larger donations came in the latter half of the nineteenth century, from people who had struck it rich in railroads and industry. Very often, their gifts came with an agenda: These practical industrialists and businessmen wanted to see higher education pay greater attention to education that would prepare students for business moguldom; they tended to sneer at the classics.

Two of Dartmouth's greatest benefactors were in that mold. Military engineer and former West Point superintendent Sylvanus Thayer, class of 1807, bequeathed $70,000 for a school for civil engineering that opened in 1871. In 1901 Edward Tuck, class of 1862, a financier who by his death in 1938 had given the College more than $4.5 million, endowed the nation's first business school in the name of his father, Amos.

By Tuck's time, Dartmouth's endowment was invested mainly in monetary assets, not land. The asset of choice for endowments at that time was the bond, which would retain a major role in educational endowment investments until around the second half of this century. But bonds—essentially, loans made to particular classes of industry, such as railroads—were inferior as an investment to productive land, emeritus Tuck professor Williamson points out in his 1993 book Funds For The Future:College Endowmenl Management for the 1990s. Land values and rents tended to rise over time, allowing institutions to meet rising expenses. But bonds returned a fixed interest on a fixed principal, with no growth.

True, bonds provide steady, guaranteed, low-risk income, making them well adapted to the slow, conservative management that most college and university trustees of that time exerted on financial management. Financiers, however, disdained bonds—even Tuck, who made his fortune building the railroads that bonds enabled. After Ernest Martin Hopkins'01 became president in 1916, he sailed to Paris to speak with Tuck about the question of stocks versus bonds—older trustees had speculated that the legendary donor would favor the latter. Tuck's reply quashed those notions. "Never owned a damned bond in my life," he told Hopkins. When institutions invested in stocks, on the other hand, they were generally of the blue-chip variety: shares of large, established companies that yield steady interest but grow little in value.

Then Harvard broke from the pack, investing in stocks, and profited mightily because of it. It had a tradition of appointing as its treasurers experienced Boston bankers who invested the endowment funds more like they would their own money. Princeton had investment managers who withdrew from the stock market before the 1929 crash and reentered it in time to take advantage of the post-war boom. To this day, those two schools are endowment leaders.

The wake-up call for the rest of academe was McGeorge Bundy's 1966 annual report during his first year as head of the Ford Foundation. The report called attention to the rising costs of higher education (22 percent in the five years previous to his report, compared with an eight-percent rise in the consumer-price index) and the poor performance of most endowments. As a result of that and subsequent reports in the late 1960s, laws were changed through much of the nation to permit institutions to take greater investment risks and reap greater gains.

Many institutions leaped to the bait and were left dry. "Bundy's advice was good but its timing was terrible," notes Jon King, the College's director of investments. "Just as institutions started to implement it, in 1973 and 1974, the equity market plummeted. The high-flying stock Bundy had recommended took an even bigger dive than the blue-chip stock." At the same time, bonds were also doing poorly, says King. "The inflation of the seventies woke people up. It was no longer appropriate to sit back and collect bond coupons. You really had to build appreciation into your portfolio."

Dartmouth started to do just that in 1978, when it took its assets from the single-firm money manager it had employed until then, which specialized in bonds and blue-chip stocks. The College split the assets among various money managers with the goal of balancing the portfolio. In the years since then, Dartmouth and other institutions have gotten up to speed and stayed there. As a class college endowments are better managed than mutual funds, says Williamson. Dartmouth's assets include shares of both private and public companies, international investments, real estate, startup ventures and, yes, bonds and blue-chip stocks. King and Dartmouth Vice President and Treasurer Lyn Hutton stay abreast of economic forecasts and data on investment outcomes and the performances of money managers—including those they don't currently use.

One thing they don't do, and don't want to do, is pick specific investments. "We at Dartmouth are generalists," says Hutton. "We are not specialists. None of us could manage a hightech stock portfolio. We know enough to hire the right expert to do that. Our job is to focus on the long-term objectives and broad policy implications." The policy is a high basket-per-egg ratio. "My rule is don't be greedy," she says. "Don't lose the endowment." The returns speak for themselves, ranking in the upper-quartile and even upper decile among college and university endowments. Hutton says she is proudest of fiscal year 1994, when lots of endowments lost value under the abysmal market conditions while Dartmouth clocked a 7.7 return.

Dartmouth's spending formula calls for it to use, on average, 4.5 to five percent of market value per year in support of programs, pay half a percent to investment managers, and retain any remaining return to cover the expected annual 4.5 to five percent inflation in College-wide costs. Returns beyond that serve to increase the real value of the endowment. Spending the investment return involves allocating investment yield, gains and losses, among the more than 4,000 separate funds that make up the endowment—some based on original donations of less than $100.

Although they don't net much income, these older funds are a glimpse into history, establishing prizes for "excellence in original orations" (Class of 1866 Prize) and funds "to contribute in all possible helpful ways toward high and noble moral ideas and living, moulded after the ethics of Jesus, the Master" (Fuller Memorial fund, established in 1911).

Some old funds with obsolete restrictions can be reinterpreted to continue their usefulness. For instance, all scholarships referring to "boys" or "men" now include women, says Susan Howard, associate director of financial aid. The funds to establish Thayer School, which specified civil engineering, now support the school in its entirety. Funds that are too small to warrant the trouble of reinterpretation—which sometimes involves seeking court judgments or tracking down donors' descendants (as the College once did to allow the more general use of a fund that had been designated to go for the study of nutrition)—go to a sort of endowment purgatory. Their annual share of the booty is put into a reserve account. If a now-inactive fund is likely to be useful again in the future, the College might add its annual earnings to its principal until it is called back into action. But in the case of funds that are too onerously restricted, the earnings simply collect, year after year. These useless earnings are only a tiny percentage of the annual endowment income, says Hutton. One member of the class of 1866 set up prizes in boxing, a sport that is no longer played at Dartmouth. He also gave a total of $65,000 to the Dartmouth Outing Club for such uses as a camera club, an annual Thanks-giving Day "rum and molasses feed" on Moose Mountain, and a sporting carnival for Hanover children. The College later interpreted the funds as applicable to general DOC expenses.

Modern-day endowment guidelines screen out such potential problems, steering a donor toward stating a "preference" for a fund's use rather than a "restriction," and trying to make preferences as broad as possible while still honoring the donor's desires. "The donor wants a chair in Shakespeare but you already have a chair in Shakespeare. So you say, 'Would you consider endowing a faculty chair in English?"' says Lucretia Martin, the College's director of principal giving and outgoing development director. "It's part of the art, if you will, of this industry: to help donors find real value and rewards in investing in Dartmouth as a whole and in what are the real priorities for the College."

Funds must fit Dartmouth's priorities, not try to establish new ones. "To say, 'O.K., I'm going to create a new endowment for this brand-new interdisciplinary program in underwater neuro-basket-weaving'—the endowment might not even cover the program costs, and I'm not given any budget relief, says Hutton. As a farther safeguard against obsolescence, each endowment-gift "instrument"—the document that establishes the gift—must include an "alternate-use clause" allowing the College to change the purpose of the endowment, should that become necessary in the future. These measures are not, as new donors sometimes suspect, intended to enable a bait-and-switch. Accepting a fund under such false pretenses would be bad endowment "stewardship" and would discourage a donor from further giving.

Scholarships are a particularly easy sell. Gifts tor student aid totaled $48.4 million during the capital campaign—121 percent of the goal. Professorships are a little tougher to land. "There's the emotional issue," says Paul Sheff, Dartmouth's director of major gifts. "It's easier to see yourself through the creation of a scholarship than through a professorship. Very few people get to be college professors, but everyone was a student." Plus, academia is accused in the media of being "P.C." and of harboring tenured deadwood and entrenched bureaucracy. "In some quarters you fight that, says Sheff. Nonetheless, alumni and other sources managed to endow 25 full and visiting professorships in the Will to Excel Campaign. The perpetuity of endowments is attractive, says Sheff. "It's an especially powerful idea at a school like Dartmouth that has lived as long as it has. When one says, 'this is a permanent fund,' it's with the fact in mind that the College has been around since 1769."

There are no guarantees, of course, that the College will be around two centuries from now. Costs per student continue to rise faster than the general rate of inflation. No matter what handsome gifts are made to the endowment today, Dartmouth will be hungry tomorrow. Donors can't enjoy the illusion that their gifts will get the College set for eternity.

So be it, says an older alumnus who has given generously and anonymously—to Dartmouth and its endowment. College costs are always going to rise faster than other costs. Colleges and universities are in the forefront of new ideas, which is always inflationary. You're trying to buy a piece of tomorrow."

Reacting to the energy crisis of the seventies, the class of 1940 set up an endowment to ensure that Baker Tower never goes dark again.

John Phillips of Exeter donated 285 bushels of wheat (valued at £37) and some land to endow a chair of divinity in 1789. Today the John Phillips Professor of Religion is ethicist Ronald Green, who heads up Dartmouth's Ethics Institute.

Female alumni match the males of their generation in the creation of endowments to support their favorite sports. About seven million dollars went into the Athletics Endowment during the campaign.

Twyla Tharp's Hopkins Center residency and Tharp! performances were sponsored by the Visiting Artists program at the Hop. Since 1992 this program has been supported entirely from endowment and gifts.

Montgomery Fellows—ranging from Toni Morrison to David McCullough—are intellectuals who have made their name outside of academia. They meet informally with faculty and students and reside comfortably in this house overlooking Occom Pond. Ren '25 and Harle Montgomery established the endowment in 1977 with the proceeds from their Texas oil fields.

The Hood Museum of Art's Harrington Gallery is a teaching space endowed by the Harrington family. Income is used to present exhibitions organized by faculty and used in their classes. This academic year the Harrington Gallery will exhibit photographs for an English seminar, images of books in sixteenth-and seventeenth-century European art and literature for an art history class, and works of Oceanic art for an anthropology class.

Sixty professors, including English Professor Peter Saccio, hold endowed chairs at the undergraduate College. During the capital campaign the price for a named chair was $1.5 million, and 23 chairs were added College-wide. Saccio, Dartmouth's newest chairholder, is the Leon D. Black Professor of Shakespearean Studies.

Rebecca Bailey's last story for this magazine, "What's There toTeach About Art?", appeared in the May issue.