Allowing for the early 20th century’s more florid prose style, it’s not hard to imagine a sentiment similar to that 1914 editorial being voiced today.

The University of 90 years ago was expanding physically, blazing new intellectual trails on campus, and extending its influence locally and on a global level. The Old Penn editorial goes on to boast of the “matchless equipment” and international reputation of the dental school’s new Evans Institute at 40th and Spruce streets, which would be dedicated later that winter to much fanfare, and also of the new graduate school (in which, it was hoped “the summit of truth shall be like a mountain peak in a clear sky, not hidden in a fog of words”). The establishment of the School of Education had been announced earlier that year; Wharton’s new “extension schools” in Harrisburg and Reading, Pennsylvania—that era’s Wharton West—were thriving; and the Department of Electrical Engineering was given its own departmental status in the Towne Scientific School. Penn’s international reach was demonstrated by articles on foreign students’ presence on campus and dispatches in the magazine from Penn faculty or alumni in Jerusalem, South America, and China, while other articles highlighted Penn-sponsored charitable efforts—what we’d call service-learning today—in the surrounding community. All of which sounds pretty familiar.

The note of wistful comparison to those more fortunate “sister universities” also has a contemporary ring. A decade later, in 1925, as the University was launching its first fundraising campaign, the Gazette (as we were called by then) editorialized more specifically on Penn’s resource-gap, noting that other schools had already amassed considerable endowments—Harvard, $64 million; Columbia, $48 million; Yale, $40 million—while Penn made do mostly with what it took in from tuition.

While the University’s endowment has grown in the intervening years to $4.5 billion, Penn continues to lag behind many of its peers. For example, the latest U.S. News & World Report ranking has Penn in fourth place. With the exception of Duke, tied for fifth with Stanford, its companions in the top five are considerably richer: Harvard ($25.5 billion), Princeton ($11.2 billion), Yale ($15.2 billion), Stanford ($12.2 billion).

The gap is even more pronounced when endowment per student is the criterion. According to the most recent figures from the National Association of College and University Business Officers (NACUBO), Penn’s endowment ranks 12th overall in size, but while Harvard, Yale, Princeton, and Stanford remain comfortably within the top 10 schools for endowment per student, Penn plummets to number 71, followed only by Cornell among the Ivies at 73.

The reason this matters, officials say, is that income from endowment is the engine that fuels new initiatives and bold ventures, and it does so in two ways—first directly, by funding priorities like financial aid and endowed professorships, and then indirectly, by making more revenue available for unrestricted uses by the University.

Financial aid is maybe the clearest case in point. Admission to Penn is “need-blind,” which means that any student qualified to get in is guaranteed a package of grants, loans, and work-study to make attending Penn affordable. In a column in the Gazette last year, Penn President Amy Gutmann called maintaining need-based financial aid “a sacred trust.” However, the great majority of the millions in aid that Penn provides each year comes from the University’s operating budget, while other institutions fund their financial-aid programs largely from endowment income. And the stakes keep getting raised: Several other schools have instituted programs reducing or eliminating loans and increasing grants for students from lower-income families.

Though they have a variety of formulas for deciding how much endowment income to spend annually, Penn and most schools fall somewhere around 4.5 percent; the actual dollars made available are thus a function of the size of the endowment. Given the rate of inflation generally and in higher education, conservative assumptions about long-term average returns, and the need to preserve the value of the funds that make up the endowment, spending more—as wealthy institutions are sometimes called upon to do—is not seen as prudent by decisionmakers.

This imbalance in resources makes the University’s performance over the past decade all the more remarkable, and Penn certainly continues to thrive. Besides the U.S. News ranking, this fall’s Kaplan-Newsweek Guide to Colleges cited the University among its 25 “hottest schools”—specifically, as the “Hottest for Being Happy to Be There”—and early-decision applications for next year’s freshman class were up by 21 percent.

The University is about to stretch itself once again, with the implementation of President Gutmann’s Penn Compact and its aim to take Penn from “excellence to eminence” by increasing access to a University education, integrating knowledge across disciplines, and engaging locally and globally [“Special Report: Presidential Inauguration,” Nov/Dec 2004]. To support those broad goals, Penn is preparing to embark on a multi-billion dollar fundraising campaign, likely to be announced officially by the end of next year.

Which makes this a good time to take a look at “whence the money” comes from and how Penn makes the most of it.

For many purposes, it makes sense to think of the University as a company composed of two principal operating divisions—the health-care component (made up of Penn’s hospitals and physicians’ practices) and the academic component—and to talk about them separately. For fiscal year 2005, which ended last June 30, the University’s total operating revenue was $4.05 billion, divided about equally between the two. (We won’t say much about the health system’s share here—except to share the good news that 2005 was its fifth straight year in the black since the financial crisis of the late 1990s, when deficits ballooned into the hundreds of millions.)

Breaking down the academic component’s FY2005 revenues:

Sponsored programs, which includes direct and indirect costs of research, contributed about $733 million of the total. By far the largest provider of funding is the National Institutes of Health, with federal funding overall accounting for three quarters of research funds. Penn ranks second nationally in NIH funding, and research support has grown by nearly 9 percent annually over the past decade—though the NIH budget is projected to see much smaller increases in the coming years. New grants were essentially flat in FY2005 at $750 million. Research support from other sources was up, however—foundations up 21.6 percent to $95.5 million, corporations up 5 percent to $45.6 million. The pharmaceutical company GlaxoSmithKline, for example, made a second $10 million unrestricted grant to support academic research last year, following up on another gift in 2003.

Tuition and fees totaled $553 million —after spending on student aid. In FY2005, the University provided $104 million in grants to graduate and professional students and $116 million in undergraduate financial aid. Of the undergraduate amount, $87 million came in the form of grants or scholarships, of which $73 million were from University resources. Grants from endowment income have grown about three times faster than from general funds over the past five years, but the University still funds only 12 percent of its grants from endowment income. (By way of contrast, Princeton, Yale, and Harvard fund about 80 percent or more of financial aid from endowment.)

Other principal sources of revenue were investment income ($373 million) and contributions ($343 million).

The bulk of expenditures go to fund instruction (40 percent; $767 million) and research (31 percent; $579 million), with the rest distributed among additional educational and other expenses, management, and auxiliary enterprises.

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©2006 The Pennsylvania Gazette
Last modified 03/01/06

Whence the Money
By John Prendergast

Illustration by Rich Lillash

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