Bucking Trend, Stanford Changes Endowment Payout Policy

(October 29, 2009) – Bucking the trend of other top American schools, Stanford University has altered the formula under which payouts are made from its endowment to the university.

Traditionally, the university—like almost all of its peers—has used a “smoothing formula” to spread endowment losses over five years, the result being that any increase or decrease in the endowment’s capital base would have little immediate effect on the amount that the university draws from the fund. However, after a 27% decline in the school’s endowment—which now stands at $12.6 billion—President John Hennessy has stipulated that smoothing will be done over two years, according to Bloomberg. The result: The financial collapse of 2008 will be felt more sharply than at other endowments but, if a recovery follows, will have less of an impact five years from now.

The Stanford endowment contributed 29% of the school’s operating budget in fiscal 2009. As a result of the new policy, the school will reduce this amount over the next two years.

“It is only in those crunch times that we really say, ‘Which things no longer make sense?’” Hennessy told Bloomberg. “That’s a healthy process. Not a painless process, but a healthy process.” According to Hennessy, the steep cuts will lead to normal hiring and growth more quickly than at other schools. By comparison, Yale University, the country’s second largest school endowment behind Harvard, likely will continue to make cuts through 2014.