Issue 12 — Penn’s Endowment Can’t Overcompensate for Overspending

Penn’s first quarter financial results look strong on paper but mask deeper structural constraints. 

At last week’s Penn Board of Trustees meetings, the university reported that total assets ended 0.9% above expectations for Q1 of FY2026, which ended on September 30th. Revenue exceeded budget goals, as did costs, but the revenue surplus was larger and led to an increase in net assets. 

At face value, this sounds like good news. But much of the “extra” revenue in Q1 came from restricted donor gifts that can only be used for specific purposes and cannot be redirected to meet broader budget needs.  

This short-term pattern of covering above-budget expenses with temporarily elevated but restricted income is not a viable long-term strategy. 

With 90% of endowment accounts donor-restricted, an increased 1.4% to 4% tax on investment income looming, and Penn’s hybrid spending rule limiting annual endowment depletion, the university cannot rely on the endowment to supplement long-term operations.

While some have called for universities to fill funding gaps by spending down their endowments, Penn’s financial structure makes this impractical. The short-term surplus masks a broader challenge: ongoing revenue constraints that require more sustainable solutions.

The university reported both revenue and expenses above expectations for Q1 FY2026. As of September 30, Penn reported $34.4 billion in net assets, almost $500 million more than the end of the last quarter and $110 million above budget.

The increase came from key areas beating budget expectations, including:

But expenses overshot expectations as well, with capital expenditures landing $21M above budget. Higher than expected expenses were driven by:

Net assets ended Q1 0.9% above expectations, so the unexpected gains outweighed the unexpected losses on the whole this time. But a key detail changes the interpretation: gift commitments and receipts jumped 158% and 89% above Q1 FY2025 respectively.

Because 90% of endowment accounts (many of which are from gifts) are donor-restricted, this windfall does not translate directly into flexible funding for Penn.

The first quarter was good, but the trajectory of overspending is not.

Penn’s $24.8 billion endowment is not an all-access emergency fund. Instead, it comprises 8,000 individual accounts divided into two categories: donor-restricted funds – used only for dedicated purposes decided by the donors – and the other 10% of accounts used to fund specific operations across the university and health system.

The 90% of accounts that are restricted constitute about half of the endowment’s dollars, $11.5 billion as of June 2025. Even within the less restricted funds, expenditures are committed to various programs and causes.

Penn also follows a hybrid spending rule to ensure the endowment can sustain long-term operations. 

Each year, the spendable income from the endowment is based primarily on the previous year’s investment income. The amount spent is calculated by multiplying the previous year’s income by 70% (and an inflation factor). That piece is then added to the market sensitivity amount, which is equal to 30% of the market value of the endowment at the end of the last FY multiplied by Penn’s 5% annual spending rate.

This structure allows for enduring fund support for target programs, scholarships, and other commitments, based on conservative estimates of endowment returns and inflation. The 5% target exists to protect long-term operations. Spending more than that today would mean less support for instruction and faculty, research, financial aid, health care tomorrow. The endowment would also weaken structurally just as federal funding may tighten.

Pressure on the endowment is rising. During the trustees meeting, Penn’s leadership team also emphasized the expected impact of the Big Beautiful Bill Act’s changes to the endowment tax in FY2027. Penn expects an almost 200% increase in its tax burden on net investment income, with the tax rate expected to increase from 1.4% to 4%. 

When President Larry Jameson declined to sign the federal government’s draft Compact for Academic Excellence, overspending became an even riskier bet. The White House warned that universities declining to sign “elect to forego federal benefits.”

For Penn, which receives over $1 billion in annual federal funding, the impact may be drastic. If this funding disappears, no realistic endowment spending can backfill the loss. Penn’s $16.5 billion (and growing) in annual expenses would quickly overwhelm even aggressive endowment spending. 

Penn is still expecting good results for FY2026 based on a strong market, high donations, and a positive sponsored research variance in its first quarter. But overspending can be a slippery slope, and the first quarter’s unexpected gains are not stable, flexible, or repeatable sources of cash. 

Penn must confront the real problem: if expenses continue to outpace expectations, costs will become more than the university can sustainably support. Penn’s leadership made clear last week that the endowment is meant to secure the university’s future, not subsidize overspending in the present. 

Donor gifts cannot substitute a structural shift, and the endowment cannot shield Penn from the consequences of rising costs or new tax burdens. The endowment is a support, not a solution. Penn’s long-term strength will depend not on lucky quarters but on disciplined choices.

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