In general, an endowment is comprised of all financial assets that are intended for the long-term support of a college or university. Endowments are built up over many years, primarily with donated funds. Some of those funds are given for a specific purpose, such as establishing a scholarship or new building construction, while other donations are given for the general support of the institution’s mission.

Like most colleges and universities, Carnegie Mellon’s endowment funds are managed to provide a permanent source of income to support the institution’s mission. Managed as a set of pooled assets, the endowment funds are comprised of many individual funds that are invested in a purposeful and disciplined manner. A certain percentage of the endowment funds is spent each year, subject to the following key goals:

• Honoring the donors’ intended purposes for their gifts
• Supporting the current operations of the institution
• Protecting the endowment value against the long-term, eroding effects of inflation.

A common misconception is that an endowment is simply a large pot of money that a college or university can spend indiscriminately, however and whenever it chooses. In fact, an endowment is created through private gifts intended for the long-term support of non-profit institutions, which gifts are often restricted in very specific ways.

Because endowments are intended to provide perpetual support for institutions, they might be thought of as a special savings plans for the future. To protect an endowment’s inflation-adjusted value for future generations of students, most universities establish disciplined spending policies (or formulas) to ensure appropriate spending from their endowments each year.

While endowment values generally rise and fall with market conditions, most institutions adopt and adhere to spending policies that enable them to generate a steady support for annual operations. This financial stability is crucial to institutions, whose mission-critical activities are chiefly long-term and not easily started and stopped (e.g., the funding of faculty positions or ongoing maintenance and renovation of campus facilities).

Over the last decade, the annual spending rates of college and university endowments have averaged between 4.5% and 5.1%. Today, three-quarters of colleges and university apply a spending rate of about 5% to a moving average of the endowment value, which allows for a smoothing of the annual support from the endowment and protects its long-term value. Carnegie Mellon’s spending policy, for instance, is to spend five percent of a rolling, thirty-six month average of the endowment’s market value.

Carnegie Mellon’s Endowment below:

Simply put, the long-term strength, stability, and independence of Carnegie Mellon’s mission depends greatly on the health of its endowment.

For Carnegie Mellon, its endowment is essential for providing students with world-class programs and educational opportunities beyond those that could be funded by tuition alone. Fortunately, Carnegie Mellon is extremely efficient with its financial resources; ensuring funds are dedicated to important educational purposes. Because of its exceptional efficiency and emphasis on world-class quality, Carnegie Mellon is able to compete with larger, richer institutions for the best students and faculty.

Carnegie Mellon utilizes endowment funds for a wide variety of purposes, including: scholarships/ financial aid, fellowships, academic programs, faculty positions, library acquisitions, and buildings and grounds. Virtually all of Carnegie Mellon’s endowment is targeted to improving the student’s educational experience.

While significant progress is being made to strengthen Carnegie Mellon’s endowment, it remains significantly smaller - both in absolute terms and on a per capita basis - relative to its peer institutions, resulting in heavy reliance by the operating budget on tuition and research funding.

Carnegie Mellon’s annual spending from its endowment only supports about 5.3% of the university’s annual operating costs. As a result, the university must support the vast majority of its annual operations with tuition and research dollars.

Compared to other universities, Carnegie Mellon’s annual spending from its endowment provides far fewer dollars to support our annual operating costs. While some peer institutions can support 20 to 30 percent of their annual operations from their yearly endowment distribution, Carnegie Mellon is only able to fund about 5.3% of its annual operations from its endowment.

Carnegie Mellon believes that proper endowment stewardship requires that annual spending is managed in a disciplined manner designed to balance the “creative tension” between two fundamental goals:

1. supporting the current needs of the Carnegie Mellon’s students, faculty and programs

2. according to the principle of “intergenerational equity,” ensuring that future students, faculty and programs will benefit from similar levels of endowment support.

Carnegie Mellon’s current policy for annual spending from the endowment is to spend 5% of a rolling 36-month average of the endowment market value.

Significantly increasing the annual endowment payout formula (currently 5% of a 36-month average of the endowment value) would significantly risk material erosion to the endowment’s “real” (i.e., after-inflation) purchasing power over the long-term. Analysis shows, for instance, that there is approximately a 35% chance that an endowment that spends 5% of its value each year will experience a 10% decline in its “real” purchasing power over a 20-year period. If its spending formula were increased to 6%, then the chance that the endowment would lose 10% of its “real” purchasing power over the same time period would increase to 50%, which, obviously, would negatively affect the programs and tuition benefits available for future generations of students.

Carnegie Mellon takes very seriously its legal and moral responsibility to honor our donors’ wishes to ensure that endowment funds are at least as strong 10, 20 and 50 years from now as they are today – so they can continue to serve the future needs of students and society, just as they do now.

Although donors may have established endowment funds for a particular purpose, essentially all funds are commingled for investment management purposes, using a market-value unit system similar to that of a mutual fund. The unit system is a way of assigning a value to each recipient's participation in a commingled long-term investment pool. New gifts are used to “purchase” additional units, or shares, in the investment pool. To determine unit value, we calculate the value of the investment pool and divide it by the number of units outstanding at any given time. The value of each unit is driven by the investment performance of the portfolio’s underlying assets.

Pursuant its investment policy and overall asset allocation targets, Carnegie Mellon invests endowment funds globally through approximately 70 top-tier, external managers that specialize in areas such as private equities or real estate. Working closely with the Investment Committee and certain external consultants, the investment management staff of the Office of the Treasurer oversees the university’s investment program.

Distributions from the endowment are paid to the campus on a quarterly basis.

The following schedule outlines when the distributions are made:

1Q FY distribution to be made in July, based on March shares
2Q FY distribution to be made in Oct., based on June shares
3Q FY distribution to be made in Jan., based on Sept. shares
4Q FY distribution to be made in April, based on Dec shares