Tim MacKenzie has been a member of the Stanford community since arriving to start his PhD in the chemistry department in Fall of 2013. Any errors in the description of the budget are the author’s own, and he welcomes a response from administrators – especially a detailed breakdown of the buffer funds and how they were (or were not) utilized during the height of the pandemic in 2020. He currently works as a postdoctoral researcher in the genetics department. This article is a part of a two-part series on Stanford’s budget.

Part I: Introduction

Stanford recently announced record endowment returns, growing the total amount to $37.8 billion. It can be hard to find things that outpace the dizzying 52% return over five years since the endowment stood at $24.8 billion in 2017. Hard, but not impossible: health insurance costs for postdocs with dependents increased by as much as 61% over the past two years. Campus workers also faced an increase in insurance premiums. But that pales in comparison to the 80% increase in premium costs graduate students with dependents saw in the five years from 2013-2018.

How is it that Stanford can simultaneously see record growth of the endowment, including nearly two billion dollars in gifts for the institution’s Long Range Vision, while leaving some of its most precarious workers in the lurch? Why is it that when advocates point to the endowment as a potential funding source for their requests, decision makers won’t even entertain the idea? In a recent article, I celebrated the student activists whose efforts led the administration to make an unprecedented investment in affordability initiatives. At the end of that article, I said that understanding how money flows in the university is an entirely different can of worms from recognizing the efforts of activists. It turns out to be more of a box of cans of worms – there is too much ground to cover in a single article. This pair of articles is intended to help demystify the endowment and operating budget at Stanford and point towards possible avenues for advocates to create enduring change. Armed with a nuanced understanding of the operating budget and endowment, advocates will be better prepared to speak for their community and identify how to make their goals reality.

Part II: The Endowment

The purpose of the endowment is to provide “an enduring source of financial support for fulfillment of the university’s mission of teaching, learning, and research.” There is no single account with Stanford’s nearly $40 billion. Instead, there are more than 8,000 individual endowed funds, the vast majority of which have legal restrictions on what they are allowed to fund. For example, Stanford’s founding grant forbids sale of university land, which as of 2018 was worth nearly $20 billion and made Stanford the largest landowner in Silicon Valley. Stanford will only spend approximately 5% of the total value of the endowment in a given year.

So how do the funds from the endowment ensure funding for their designated purpose in perpetuity when only a small fraction of the endowment is available for use? In short, Stanford is an investment bank with a hospital, research institute, and university attached. The Stanford Management Company (SMC, whose CEO was paid nearly nearly $4 million in 2019) invests the endowed funds, aiming for returns of approximately 10%. About half of that is used for payout to provide funds for the express purpose stipulated in the original donation. The rest is reinvested into the principal to keep pace with inflation.

Without reinvesting some of the returns into the principal, inflation would eat away at the purchasing power of the endowment and future generations would not be able to access the same level of resources we can in the present. For similar reasons, anytime you do not get a pay increase that is at least as much as inflation, you are actually getting a pay cut. Postdoc salaries are increasing by 4% this year, while inflation is over 8% – our spending power does not seem as important to the administration as the endowment’s spending power.

Approximately a fifth of the yearly operating budget for the university comes from endowment payout. To ensure stability in year-to-year funding for university endeavors in the face of market volatility, managers of the endowment apply a smoothing formula to the yearly payout. Essentially, a weighted average between real and target payout with a long-term fudge factor is used instead of actual returns in an individual year. This practice helps determine the amount that gets paid out vs. reinvested to the principal in any given year, aiming to keep purchasing power equivalent every year. Especially good or bad returns in an individual year don’t cause sudden windfalls or shortcomings in the budget since SMC takes the long view. The need to protect against future downturns coupled with legal restrictions on much of the endowment payout is the reason administrators are dismissive of requests to utilize the endowment when the idea is proposed.

Part III: The Operating Budget

So approximately 5% of the total value of the endowment funds a fifth of the university’s operations in any given year. Where does the remaining 80% come from? A detailed breakdown of sources of revenue and expenditures for this year’s approximately $7.5 billion budget is easily accessible online. Every year in June, the Board of Trustees gives final approval over the yearly operating budget that was assembled throughout the academic year by the Provost and the Budget Committee and approved by the Faculty Senate in the Spring.

Revenue in the yearly budget is broken down into six major categories: student income (i.e. tuition), university sponsored research (i.e. grants obtained by faculty and others), health care services (i.e. hospital income), expendable gifts, investment income (from both endowment and non-endowment sources) and other income. Total income in this year’s operating budget is projected to be $7.433 billion. Spending is broken down into four categories: compensation (i.e. salary), financial aid, debt service, and other operating expenses. Total expenses in this year’s operating budget are projected to be $7.149 billion.

The majority of Stanford’s non-endowed funds are referred to as the expendable funds pool (EFP), which is expected to stand at $4.9 billion by the end of this academic year. A small fraction of that is put into cash to ensure liquidity on hand for short term needs; the remainder gets invested. The merged pool investments of the EFP track closely with endowment returns. There is one crucial difference, however: the vast majority of the EFP (86%) receives no payout on investment return. Nearly all of the returns from investments of the multi-billion dollar operating budget are money in the bank for Stanford.

A concrete example can help illustrate the practice. Say a professor obtains a grant that funds research in their lab at a total of $1 million. That money will not be used all at once – graduate students and postdocs will get their paycheck every two weeks, experimental supplies will be bought as needed, laboratory equipment will be one-time costs, etc. While the grant funds are not being used, Stanford takes the sum total and invests that, aiming for a 10% return. If the grant were an endowed fund, a portion of the payout would be reinvested into the principal to allow the grant to fund the research project in perpetuity, but the principal itself could not be touched. Given the limited size of research grants, it is not feasible to fund a laboratory solely on investment returns; for money in the EFP, the principal is allowed to dwindle to nothing as the professor taps into their grant. Meanwhile, the university pockets all the returns from investments while the principal remains.

It can be easy to get lost in the weeds while trying to understand the various funds in the operating budget and the endowment. The major takeaway to keep in mind is that the endowment and operating budget essentially operate as two separate pots of money. Only a fraction of the total value of the endowment is available in any given year, whereas the money in the operating budget represents the real flow of money in the multi-billion dollar organization that is Stanford University. This fact is a major reason that administrators are resistant to calls to employ the endowment – in any given year they only have the money in the operating budget to really utilize. However, that does not mean there are no resources to respond to calls from advocates. The next article will highlight parts of the operating budget that advocates can point towards as potential resources to respond to their requests.

This article has been updated to change the headline from “A primer on the Stanford budget” to “A primer on the Stanford budget or: how I learned to stop worrying and love the endowment” at the request of the author.