$2.3 Billion: The Facts And The Fiction About Pomona’s Endowment

To a mother bird, feeding her baby bird is a very meaningful, very rewarding practice. Baby birds depend on their parents for sustenance. However, if the food supply is low, the mother bird must make sure she has enough for herself to survive — if she does not, she will never be able to return to her nest to feed her hatchling. This may result in a hungry, noisy baby bird, but it’s the right choice for both the mother and the baby. 

Pomona College announced earlier this month that it plans to furlough an unspecified number of employees starting on October 1 due to a budget shortfall of $37 million. The decision has met significant criticism among alumni, students, and faculty. Last week, nearly half of Pomona’s 186 faculty and employees signed a letter demanding the furloughs be called off. Alumni weighed into the discussion on social media, many of whom calling for a reversal of the furloughs.  

The general consensus among those opposed to the furloughs is that Pomona should make use of its endowment, valued at $2.3 billion as of 2018, to support the staff during this period of financial hardship. They argue that “[t]he college does not face the kind of crisis financially where it needs to start furloughing,” according to an article from The Student Life. Per history professor Victor Silverman, “[t]here are very serious financial issues. But there are many ways for the college to approach that that would not fall on the people with the least resources employed by the college.” Other concerned parties have expressed similar views. 

The announcements sparked furious controversy. With opinions flying and tensions high, the Independent explores what is fact and what is fiction surrounding Pomona’s plan to furlough its staff. 

Wealthy Americans give away billions of dollars to U.S. colleges annually. As a result, college endowments have grown significantly since the late nineteenth century, with numbers rising into the billions. In the face of nationwide furloughs, the size of many college endowments have been thrust into the spotlight as students, donors, and faculty members wonder how colleges can possibly justify refusing to pay their hardworking employees while money sits in the bank and students pay tens of thousands of dollars per semester for tuition. While Pomona’s endowment has mostly grown from investment returns, donations still contribute to its size. 

While the practices of many American colleges deserve criticism, Pomona’s recent decision to furlough many of its staff members needs a deeper look. Pomona’s endowment may seem disproportionately large compared to the costs required to keep employees on payroll, which the college has done since March; however, maintaining a large endowment is crucial for the financial longevity of any private college, Pomona included. 

Pomona is also not in as good of a financial position as many of its peer institutions, despite what many in the Pomona community believe, according to the latest Forbes college financial health rankings. Though the methodology used to determine rankings remained the same, Pomona’s score decreased from Forbes’ 2013 ranking. The drop points to lower financial health for reasons besides what a single metric — endowment value per enrolled student — reveals. Compared to peer institutions like William and even Claremont McKenna College (CMC), Pomona tends to rank lower in terms of financial health, earning a 3.92 on Forbes’ list of college financial grades, while CMC and Williams both received rankings above 4.0. Pomona College spokesperson Mark Kendall told the Independent that the rankings had limitations, such as how “Forbes sees the higher numbers as indicating that the college had to discount tuition but the score does not take into account that Pomona offers need-blind admission and meets the full demonstrated financial need of students.” Peers such as CMC and Williams also have need-blind admissions and meet full demonstrated financial need. It’s also important to note that, even given restrictions on expenditures and a marked decrease in tuition revenue, Pomona paid staff for six months after students left campus in the spring 2020 semester and will continue paying healthcare. 

Despite income from tuition and donations, most colleges spend far more than they earn. In 2019, Pomona’s expenditures on instruction and student services alone exceeded by about $18 million its total revenue from tuition (net of financial aid) and unrestricted donor gifts. 

Colleges are capital intensive operations. And, unlike standard corporations, most college capital expenditures like research spending and building construction have little or no direct impact on revenue generation, aside from attracting additional students. Because colleges typically lose money when they operate, they need to offset their losses via another source. That other source is usually the returns on investments of college endowments. 

Even under normal circumstances, Pomona draws from its endowment to supplement tuition revenues; according to Kendall, “[t]he endowment provides more than half our operating budget every year. It is not a rainy-day account.. [from which we] can remove additional funds without consequences. It is an ongoing source that contributes around $100 million to our budget every year, and we need to keep it a sustainable resource to maintain our commitments to students.” 

Kendall also explained that “as the endowment has grown over the decades, the college has made stronger and stronger commitments to financial aid and to admitting talented students regardless of their financial circumstances. This year, the College will allocate nearly $45 million to financial aid.” Pomona’s need-blind financial aid payout from its endowment accounts for nearly a quarter of the total annual endowment payout. 

Per Pomona’s recent webinar explaining its financial decisions to alumni, the average growth of the endowment since the Great Recession has been 9.5% per year, almost all of which comes from investment returns. Cutting into Pomona’s endowment, which is responsible for 53.1% of Pomona’s expenses, would reduce the returns on its investments. Currently, due to Pomona’s low-to-mid ranged spending rate, the college is better able to grow its endowment and support a greater proportion of students on financial aid. Pomona’s investment returns for the last ten fiscal years ending June 30, 2019, was 6.8%. For perspective, for each additional $1 million the college takes out from the endowment, that $1 million can no longer be invested to generate future income, thus depriving the college of additional income generated from that $1 million in perpetuity. Assuming that preventing furloughs would cost a $4 million withdrawal from the endowment, at the Pomona endowment’s average investment return (6.8%), Pomona would lose out on nearly $11 million in returns after just 20 years! The lost income can become substantial in the long run, affecting key aspects of Pomona’s education, including its ability to maintain some of the most generous need-blind financial aid services in higher education. 

Restrictions on endowment expenditures also play a role in hindering Pomona’s ability to draw from its funds so liberally, and could be for a good reason, as demonstrated earlier. According to Kendall, “[a]bout 50% of Pomona’s endowment is restricted by donors for specific purposes, say for financial aid or for an endowed faculty chair. Other funds are not restricted in this manner…Spending from the endowment is governed by the College’s spending rule. This rule is endorsed by the Investments and Finance Committees of the Board of Trustees and formally ratified by the full board.” This policy implies that any spending rule change must be ratified by Pomona’s Board of Trustees. 

According to Kendall, Pomona’s current spending rule is as follows: “Each year spend between 4.5% and 5.5% of the average endowment unit market value during the previous 20 quarters.” The precise amount is determined by applying a 2% growth rate to the previous year’s spending per unit, subject to the 4.5%-5.5% lower and upper limits. The 2% growth rate represents the expected long-term annual inflation rate.” As of the end of the last ten-year fiscal period, Pomona’s ten-year-return averaged to 6.8% per annum. 

These restrictions mean that Pomona’s current $37 million budget shortfall, which Kendall says is “a function of lost room and board revenue and lost tuition revenue from students who chose to take gap years, leaves of absence, or to go part-time,” cannot necessarily be made up by pulling funds from the endowment. 

The rules governing Pomona’s expenditures were put in place specifically to prevent long-term budget reductions. According to Kendall, “[m]ost of the annual growth in the endowment’s value is from investment returns, not gifts. Spending more from the endowment now would have two impacts: First, it would reduce its overall value and would therefore lose returns, in perpetuity, that we rely on for budget support every single year. Second, lower returns would impact the payout to the budget forcing budget cuts down the road or placing additional pressure on tuition and philanthropy.”  

The bottom line is that if large amounts of money were taken out now, it wouldn’t just hurt future payouts; it would mean that payouts would decline as the value decreased. Because Pomona is already fully utilizing its endowment according to its spending rules, continuing to pay staff would mean bigger budget cuts in the long-term. 

To increase endowment payout while keeping within the spending rules, Pomona’s endowment would need to grow. While Pomona does have an approximately $100 million credit line, it is mainly reserved for private equity calls for its endowment investments. 

However, in light of the current situation at least 51,793 college and university employees nationwide have been affected by a layoff, a furlough, or a contract nonrenewal resulting from Covid-19. Even Amherst has enacted salary and hiring freezes, though Williams has not

In short, though the baby bird may go hungry and some staff may lose their jobs, Pomona made a relatively sound financial decision, given the circumstances. Because of cuts today, Pomona will be able to give a top-quality education to many more students to come.

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