Can anyone comment as to what the schools reasoning is to amass such huge vast sums? It seems like the goal is just to have ever increasing endowments for the sake of it.
I understand the school presidents are evaluated on fund raising but I guess it is like asking a rich person…how much is enough?
Endowments are intended to be a never-ending stream of income. But it’s the return on the investment that is the income, not the endowment itself. A fairly common setup. Our church is building an endowment (mostly with contributions from wills) that is meant to be a stable supplement to annual funding through pledges from the congregation.
Most schools, even those with very large endowments, manage their endowments somewhat conservatively in the sense of not spending every dime that comes in as income, since they need to plan for good years as well as bad. It’s not like they are amassing the money just for the hell of it. That income is used to help run the school, and a lot of it is used for financial aid to poorer students.
I don’t deny that. I just think we can/should have this discussion on the merits of the proposal (or lack of) without a discussion of the underlying politics. Otherwise the thread will end.
It’s depressing how often the kinds of arguments being made by various posters upthread (not all!) are repeated, when a little research would show that they’re logically incoherent.
The Harvard endowment (to pick the most famous one) is, inconveniently, not a $37.6 billion pot of money somewhere. Here are a few facts about it (you can find more here: https://www.harvard.edu/about-harvard/harvard-glance/endowment):
So, basically, the endowment consists of thousands of funds that have to be spent in accordance with the wishes of the original donors, and the income from the endowment is a critical source of support to the university’s operations, so the income level must be maintained and grown forever if Harvard wants to continue to do all the things it does, including educating the number of students it’s educating. If the endowment is spent down, and therefore generates less income, Harvard has to shrink.
Harvard’s business is teaching and research, which it conducts through 12 degree-granting schools. These schools have their own endowments, which are managed collectively. Amazingly enough, these endowments are used to support the schools to which they belong - e.g., you can’t arbitrarily redirect a fund some donor designated for programs at Harvard Law School to financial aid in Harvard College.
Harvard has some 22,000 students, of whom some 6,700 are undergraduates and the remainder are in the graduate and professional schools. Anyone who claims that Harvard isn’t educating enough students needs to provide a number that they think Harvard should be educating and a justification for why that number is the right one. How many undergraduates? How many graduates? What sort of housing or other facilities should Harvard be responsible to provide? How many departments should Harvard have to maintain, with how many faculty at what levels? How big should classes be? How many labs should Harvard have, and to what standard should they be built? I could go on and on…
The point is, everything costs money. Harvard could put up Quonset huts on Cambridge Common to house 30,000 undergraduates who get to attend at no cost, have no graduate or professional schools (thereby losing most of its world-class faculty and research efforts), have five or ten academic departments instead of over 40 and class sizes in the thousands (actually, why stop there? They could get rid of seminars, only have MOOCs and educate hundreds of thousands more remotely). They could do all that - but it wouldn’t be Harvard anymore, and the world would be a lot poorer for it.
Which leads to the final point: Harvard, and its peers, are nonprofits. They don’t have shareholders getting rich (although I think there are probably more than a few well-paid administrative staff that are surplus to requirements at all these places). They spend roughly what they take in (assuming the endowment performs and enough money can be raised) and hope they can cover the ever-rising costs of maintaining their positions as some of the top universities in the world. Their business is doing pathbreaking research that benefits the entire world, while educating some subset of the world’s future leaders in many different spheres. You might think they should be educating more people, but nothing’s free. If you tax Harvard, you get less Harvard.
Agree with @DeepBlue86 . Look at any other of the schools with large endowments and they operate about the same. Then look at their budgets and you’ll get a chance to see just how the funds are used. I reviewed both from my son’s school and it all looked pretty good. Are things expensive? Yes. That’s life.
An endowment but definition is meant to provide a return on investment for income without ever touching the principal.
Perhaps there is a reference in the current article, but years ago (2008) there was a push to tax endowments that didn’t spend a minimal percentage (5-8%) per year. I’m neither an accountant nor a tax specialist, but it makes sense to me that these tax protected groups should have to spend a portion each year. Maybe Harvard doesn’t need to apply it to tuition, but could provide medical care to underserved areas, etc. …something to spend the designated percentage for the public good.
^Here’s the problem: Even by taxing income at a minimal level, the government is basically telegraphing its desire that these large endowments be spent down. It’s a slippery slope. At a 5-8% level of spending, university budgets would almost assuredly be touching capital during lean times and weakening their ability to recoup losses during bull markets, IMO.
While entirely possible, that is really just your opinion. (nothing wrong with stating your opinion, but lets just be clear on what it is.
First, so what? As in what is the connection to grad education being taxed? Secondly, these two are probably not good examples to support your pov, since these wealthy two could easily offer grad students another $2k/yr to offset a potential tax.
Are you ok with balancing a university’s books on the [below-minimum-wage?] servitude of TA’s and RA’s? (To me, this is a moral/ethical question.)
If a criterion were to be set, I think that 5% is tolerable, whereas 8% is completely unreasonable. I can’t think of any well run endowments that have less than a 5% inflation-adjusted return over the long-term. A minimum spend of 4% (averaged over 3-5 years) is reasonable.
If the issue is fleecing taxpayers, then the elite colleges don’t really belong on any such list.
The biggest taxpayer fleeces come from the sub-elite category (and from certain departments within the elites) that admits marginally qualified students (relative to the jobs they expect to compete for) and then takes their tuition money financed by student loans or otherwise, and hands them a degree that won’t do squat for their employment prospects.
Overall, you can make an argument that the higher education system is one giant money sump that amounts to a jobs program for PhDs and others. It also requires being pumped up annually with “grants” and research dollars that have highly questionable utility.
As far as spending down their endowments, several of the elite schools have recently started to sing a tune of how important it is not to overly advantage future generations at the expense of the current generation by not spending “enough” of the endowment today. To me, its a recipe for demise, and for closing the spigot of donations, but the elites are no different than many on this board and they have self-interested feelings when they see the numbers behind the endowment.
It is hard to believe in the context of the current stock market and state of endowments, but there were years at Yale when the university not only stopped all capital improvements, but stopped basic maintenance as well. I visited with a sibling in the early '70’s and the place was a dump. Dirty, shabby, unkempt. And this was a consistent story even among universities which had been raising funds for their endowments for over a century.
Any legislation on the spend down of endowments assumes that the market will always be robust and that there will never be a year, or two years, or five years where there is 1% return or 2% after inflation.
And I don’t think that’s a good way to proceed. Equities go up, equities go down. Inflation can be minimal or it can come roaring back. My first mortgage was 12%, with a student loan (still to be paid off) at 14%.
Must we always assume that the last 5 years represents reality forever and ever?
What makes you think $2,000 per year would do it? If tuition is $50,000 per year, and the otherwise-applicable stipend is $25,000, with a $12,500 personal exemption a student’s marginal tax bracket would be 25%, and the student would owe at least about $8,500 in taxes more than would have been owed if the tuition waiver were not taxed. Giving the student enough additional stipend to create the same after-tax cash flow – i.e., writing a check that will go entirely to the government to pay additional taxes caused by this change – will cost about $13,375. (Actually, it will be worse if state taxes follow federal taxes.)
That’s more than a 50% increase in out-of-pocket cost.
Endowments are highly diversified in terms of their investments. In a typical large endowment, you will find a mix of public equities, private equity, real estate, bonds, and commodities. Often the risks offset each other. For example while bonds suffer from a rise in inflation, commodities and real estate benefit from inflation.
University endowments still have bad years, however. Just go back and look around 2008.
To be clear, I am not advocating that endowments should be taxed or should spend a minimum amount each year
What I am saying is that if such a minimum spending amount was required to avoid tax, there are ways to do so reasonably, including using a multi year average endowment value for determining the minimum spend. And while 2008 was a horrible year, it did come after a number of strong years, and is being followed by a number of strong years.
Hebegebe- I’m just pointing out the law of adverse incentives. Don’t punish universities which manage their resources effectively. Don’t provide incentives to endowment managers to push into inappropriate assets in order to meet an artificially imposed target. Don’t assume that spending 6% or 8% or whatever the number is “easy” to achieve without spending down the assets.
And of course- don’t assume that the folks who donate are such morons that they don’t understand how their gifts are being used. People donate art to the Metropolitan museum all the time. The museum has SO MUCH that they can’t even display a fraction of it at any point in time. Why do people still donate? Because the museum has a track record in scholarship and preservation and education.
Are you going to make people donate to their local historical society instead? In my city, the historical society has problems with mold and ventilation.
People who donate to Harvard’s endowment have a full understanding of what they are giving to!
I actually agree with all of your points.
Be aware some of this spending is “percent of income,” not percent of the endowment.
^Well, yeah. IIRC, the concept is “total return” which means in flush years it’s going to be all income. But, in other years it could be a mixture of income and a hunk of principal to meet spending targets. To give you an example, Wesleyan has been accused of spending down its endowment during the sixties and early seventies in order to, among other things, finance co-education, provide seed money for doctoral programs and to jumpstart what would eventually be coined “affirmative action”. An admittedly minority position would say it was all worth it, considering how small its alumni base was (people forget Wesleyan was <1000 students as recently as 1960.) But, that was an extremely exceptional time and place. Not too many boards of trustees would undertake that kind of decision nowadays.