Editors’ Note: Allison Tait revisits Henry Hansmann’s 1990 law review article, Why Do Universities Have Endowments?, at a moment when university endowments face unprecedented threats, elevating Hansmann’s question about their fundamental purpose.

Endowments, currently under attack and facing proposals that increase the tax on them in some higher education institutions from 1.4% to 21%, have become an unexpectedly hot topic and subject of curiosity. We know that endowments are collections of funds that are all restricted in at least one way – only income can be spent – and often in other ways as well – for scholarships, faculty support, sports programs. And, at this point in the conversation, the basic workings of endowments have been set forth in detail and the general contours of what they can and cannot do have been clarified. The biggest endowments are the ones at elite universities, although museums, and other nonprofit groups from churches to women’s health organizations, have them. The Harvard endowment, at a staggering $53B, is one of the largest and best-known endowments around and it is therefore not surprising that the Trump administration’s attack on it is big news.

To be clear, endowments have come under attack before because of the institutional inequality they both represent and enable. Criticism in this vein has arisen from a desire to reform individual institutions in ways that would make them more access-oriented and also facilitate equity between institutions. Not in recent memory however, have universities and their endowments come under attack in such an aggressive manner, with government actions meant to intentionally diminish higher education institutions and punish them for their purported status as havens of “woke” ideology. As one recent article summarized: “damaging universities is the point.” All of these attacks, whether large or small, do share one trait in common: they ask us collectively to consider and perhaps rethink what the true purpose of large endowments is.

Setting the Foundation: Hansmann’s Article

When Henry Hansmann wrote his foundational article in 1990, Why Do Universities Have Endowments?, he directly addressed the question of purpose. Hansmann went through a laundry list of the justifications for large university endowments including 1) promoting intergenerational equity, 2) smoothing out budgets, 3) gaining tax benefits, 4) maintaining reserves to protect against financial reversals, 5) insuring against the demise of the institution, 6) preserving a buffer from the demands of external audiences, 7) ensuring the perpetuation of certain values and status. Hansmann mostly rejected or at least indicated skepticism about the majority of these arguments, with the last one being the most convincing to him, but his analysis was nevertheless instructive.

From the start, he concluded that “concerns for intergenerational equity provide very doubtful support for current endowment policies” since the economy was likely to continue to grow in the future. He did not place much importance on the “smoothing out theory,” which suggests that the endowment mitigates financial fluctuations over time. Smoothing out was not the most likely guiding principle, he observed, because the “argument does not generally provide a justification for holding funds as permanent endowment, and it does not apply at all to the numerous small gifts that, in the aggregate, have a value that is relatively constant and predictable from year to year.” Gaining tax benefits was not a winning argument, Hansmann decided, not least because endowment accumulation predated the corporate and personal income tax. Hansmann also noted with some prescience that, in terms of reform, “[i]f universities have a tendency to accumulate inefficiently large endowments, then a tax regime less favorable to endowment accumulation may be appropriate.” Hansmann questioned the justification about safeguarding against financial reversal, especially short-term “periods of temporary financial stringency,” since endowment values in elite institutions are “far larger than necessary” to accomplish such risk management. He did, however, allow that a long-term strategy for preservation was potentially guiding universities, centered on preservation of reputation and tradition. In particular, he mentioned that the university as well as its alumni have a vested interest in preserving and passing down through generations the values, status, and traditions of the institution in a manner akin to businesses maintaining goodwill.

One of the justifications for endowments that Hansmann also found generally unlikely was the endowment as “financial buffer” against external forces. He stated: “A large endowment may also serve to protect a university administration and faculty from the need to cater too closely to the desires of those who ultimately provide the institution’s income—whether they be students, private donors, or the government.” Looking at patterns of both giving and federal funding, Hansmann determined that “it is not at all clear from the evidence that universities have accumulated endowments in important part as a means of protecting institutional autonomy.” Nevertheless, Hansmann speculated that endowments could, if necessary, prevent “the university as a whole from being held hostage in the short term by any particular source of current funding.” This statement is particularly resonant at a moment when federal funds are being held “hostage” by an hostile administration. Accordingly, sitting at a crossroads in the history of institutional politics and survival, this “financial buffer” justification merits additional exploration.

The Three Possible Threats to Institutional Autonomy

In Hansmann’s assessment, three potential threats to institutional autonomy exist: students, donors, and the government. These three groups, not coincidentally, also represent the three most important sources of funding that a university can call upon. Universities, unlike most businesses as Hansmann pointed out, operate on “capital surplus” as opposed to debt. The university can issue debt, and Harvard issued $750 million in taxable bonds in April – a move that, as Hansmann would have pointed out, is more typical of a “business enterprise [that] finances a substantial fraction of its capital needs through borrowing.” But the university, as the educational mission underscores, is not a business and the issuance of debt is not a sustainable or even suitable model for financing. Consequently, the importance of students, donors and government is paramount, and the policy of endowment accumulation can be understood as an attempt to decrease obligatory “responsiveness” to the preferences of any or all of these funders when those preferences are inappropriate, misguided, inefficient, or unwise.

Students, at first glance, seem like the unlikeliest group to threaten the university and its values, and Hansmann does not even enter into any discussion of what the student threat looks like. Students are beneficiaries of the endowment, beneficiaries and co-creators of the knowledge production that is central to the university’s mission, and the objects of both institutional care and faculty instruction. However, in a neoliberal state defined by the “hegemony of the market model,” students may also represent a threat as part and parcel of the market model, positioned as consumers and inappropriately elevated to a position of sovereignty through their consumerism. This student-as-consumer model has played an integral part in the rise of the corporate university, a governance system with a corporate mentality of consumer satisfaction, and many critics have enumerated the harms this model represents to the university, its mission, faculty autonomy, and the quality of the education that students receive. Endowments can, then, potentially protect a university from inappropriate student demands grounded in this consumerist model and accompanied by the threat of withheld tuition dollars.

Donors, as a group, are more complicated as is the threat that they represent.Donors have been, particularly for private universities, an integral part of institutional funding from conception (think of Elihu Yale’s original 1717 gift of “nine bales of goods, 417 books, and a portrait and arms of King George I” to found Yale College). Donors have funded buildings, programs, scholarships, faculty salaries and research funds, athletics, museums, libraries and more. And ever since the boom in development office staffing and sophistication, starting in the 1980s and peaking in the 2000s, matching donor interests to institutional needs has been a thriving proposition. As funders, donors have been generous and indispensable to both the progress and maintenance of universities.

Also indisputable, however, is the fact that donors have exerted influence and shaped universities through their giving, by helping to select priorities through directed giving and constraining university discretion through restricted giving. In this way, donors represent not only a boon to the university but also a possible threat to institutional autonomy through the mechanism of donor governance. That is to say, when donor restrictions on gifts become a central feature of institutional governance and the wishes of donors prevail over the decision-making processes of university leadership, donors represent a potential threat to the institution. Hansmann himself, again presciently, points to the possibility of donor restrictions becoming inefficient over time and discounts the likelihood of endowments acting as a buffer against donor demands since donors may prefer endowed giving as well as restricted giving.

Since Hansmann’s article, donor governance has only become more prevalent and more complicated. Donor governance has spread, some might say, and tightened its hold on universities not just through restricted giving but also through exertion of influence in policy matters using “pressure campaigns,” and threats to terminate giving. At University of Pennsylvania, Marc Rowan’s successful attempt to oust Elizabeth Magill as university president, after her testimony in a congressional hearing in 2023, was a spectacular example of this new kind of donor governance. Not only did he call for her resignation, he also sent a four-page document to the trustees in order to demand that the school’s “culture” and governance change. Similar things happened at Harvard, where powerful donors pushed out Claudine Gay, who was the institution’s first Black president, and only the second woman to act as president. Donors have also targeted curriculum  choices, leading in one instance to the resignation of Beverly Gage from the directorship of the Grand Strategy Program at Yale. Donor governance has, accordingly, turned in some cases from the now almost quaint form of restricted giving, to a bolder form of donor activism that mobilizes “shareholder-action tactics.” And, notably, these tactics are being deployed most often by a small cadre of mega-donors who are seeking to impose their personal values on educational institutional. The rise of the mega-donor reflects a move away from broad-based forms of donor control, which might possibly be more pluralistic taken collectively, toward outsized influence being wielded by a minority of donors. This new and hyper-charged form of mega-donor governance, instantiated through personal demands and threats, is a threat not only to institutional autonomy but also academic freedom, full stop.

Finally, the last group or the third funding branch is the government. The government (primarily federal but also state) represents a threat to institutional autonomy through their ability to withhold funds from any institution. Federal funding is generally thought of as going to public institutions but, if the current moment has taught us anything, it is that even private colleges and universities receive a substantial amount of funding from the federal government. Moreover, the government has affirmatively, at various points, attempted to use federal funding (or the threat of its withdrawal) to further its own agenda. Hansmann recounted the historical wrangling between institutions like Harvard and Yale and their respective state legislatures between 1700 and 1800, when Harvard received 55% of its income from the Massachusetts legislature and Yale something similar from Connecticut. Because of this funding, “both institutions found themselves under pressure to be attentive to the legislatures’ opinions … and their public funding was cut at various times when the universities resisted those pressures.”

Endowments, in this historical context, gained importance as educational institutions actively began to seek funding from sources other than the legislature, and started looking to the business elite in their communities. This shift attenuated the strength of legislative power over the institutions, but this new giving did not “free them from outside influence entirely but, rather, served to shift the source of that influence.” Moving to the period following World War II, Hansmann demonstrated more skepticism about the idea that endowments acted as buffers against government influence, noting that “[i]f the universities were concerned that public funding threatened their intellectual freedom, they would presumably have increased their endowments proportionately as reliance on public funding increased. Yet this has not occurred.” More likely, in Hansmann’s estimation, was the idea that private giving and public giving became, over time, two different and yet sometimes interchangeable streams of support. More importantly, however, in the same historical period was the entwinement of federal funding and the growth of the American research university. Whereas state funding had subsidized general operations, financial aid, and programming, significant amounts of federal dollars in the post-war period were funneled into subsidizing research and development in major universities, with the aim of enabling innovations that furthered industry growth. Federal funding, over these decades, became such a central source of support for the university that the withdrawal of the federal government as a funder, at this point in time, represents not just a threat to institutional autonomy but also a withholding of lifeblood from the research university.

Deciding What to Do with the Time That Is Given Us

One of the important take-aways from Hansmann’s article is the identification of these three funding groups for the university. This is a moment when universities are rethinking their funding models and trying to figure out what a sustainable model looks like, absent government funding. Increasing tuition, one of the possibilities, is contrary to the mission of access and opportunity at a time when tuition is already staggeringly high for average-income families. Increased private giving is the most obvious option, and it comes with its own set of issues and outcomes, as we have seen. Nevertheless, government attacks on storied institutions may act as catalysts and motivators and private donors could step in, at least in the short-term, to support universities as they struggle to maintain their missions and, in some cases, their very existence. For example, after Harvard declined to accept the government’s terms of oversight, the university saw a huge increase in donations. The fourth funding option, which also comes with an enormous set of problems, is increased “academic capitalism,” or the university leaning into the corporate function and deepening partnerships with other corporate entities, including private equity firms.

In an aspirational vein – colleges and universities need to start thinking about new funding models based on coalition building with new external partners, reduced student debt, increased access, and increased endowment spending on the part of those who have the largest reserves. The problem is that university budgets have become so enmeshed with donor gifts and government funding that it is difficult to imagine a funding model without them. Major giving, particularly giving done by the highest rung of mega-donors, is no longer thought of as transformational but rather necessary to the survival of the university. Similarly, government funding has been and continues to be so vital to the university (as well as to industry advances), that envisioning a thriving research university without such funds is supremely difficult.  

Ultimately, Hansmann never settled on any particular normative reasoning to justify large endowments. After charting the range of possibilities, however, we might argue that all of the explanations have or may come to bear at some point in time. That is to say, the normative justification for large endowments may be historically contingent to some degree. When private institutions were in beginning phases, endowments and private gifts did help insulate the universities from legislative demands. In the 1970s, endowments did help institutions weather financial tumult, and, in the past several decades, endowments may be fulfilling the less laudable role of accumulating Wall Street wealth and signaling prestige. The landscape has, however, changed quickly and dramatically with the new administration and its aggressive and hostile attacks on universities, institutions that the government now views as “the enemy.” From this perspective and in this historical moment, then, the time has come for endowments to act as financial buffers that help insulate the university from outside demands. Endowments and increased endowment spending can help stanch the flow from the worst institutional wounds and institutions should use this valuable tool. Endowments may not be enough, however, to staunch the decline of the research university as we have known it for the last seventy-five years and so, while we reimagine funding models, we might also start reimagining what a major research university looks like in an age in which the federal government seems hostile to its very survival.

-Allison Tait

Allison Tait is professor of law at the University of Richmond where she teaches trusts and estates, family law, family abolition, law and inequality, and feminist legal theory. She has written articles about the legal framework of high-wealth exceptionalism; the use of family trusts to safeguard social and cultural capital; and role of marriage in the creation of economic privilege.