A NYT article today brings up the subject.
http://www.nytimes.com/2015/08/19/opinion/stop-universities-from-hoarding-money.html?_r=1
The author makes a good case that Universities should be spending their endowments. Given the obscene tuition rates these schools charge, perhaps schools that do not disburse funds from their endowments should give up their not-for-profit status.
Of course, predicting how much one can spend from endowment without running out of money in the future can be a difficult thing to do accurately. It was not that long ago that much of the talk was about whether many colleges would run out of money and have to cease operations (and there is the whole Sweet Briar saga).
A separate issue may be whether they are paying more than necessary for investment management fees and expenses.
@boolahi What do you do when your beloved NYT criticizes your beloved Yale? ;
I disagree with the 8 percent because it ignores sequence of returns and the fact that endowment managers have to fund a steady state of expenditures. They can’t cut back in bad markets as easily as we would like. Sorry kid who got a scholarship in 2006, the market dropped- you have to pay full boat in 2008.
On the other hand, the elite privates are sitting on hoardes of cash that make no sense given the scale of their educational offerings. They either need to subsidize more students, increase enrollments or fund more research to justify the tax benefits they enjoy.
As someone who was graduating high school when the economy tanked, I’m glad that typical good, but not top, universities are conservative with their money.
The article is a bit muddled. There is little to no connection between private equity fees and how much a school chooses to disburse from its endowment for student funding. The author would have been better served in his argument for and 8% disbursement by backtesting what such a policy would have done to some endowment sizes over time and then explaining what the incremental 3% would have done for students/professors.
I think an 8 percent payout is too high, but there are ways to manage market volatility. Many schools base their endowment payout on a 3-year rolling average of endowment asset value. Using this approach, endowment payout doesn’t spike upward as sharply in years when endowment earnings are strong, but endowment payout also doesn’t shrink as sharply when there’s a down year on the markets. My alma mater, the University of Michigan, uses an even more conservative 7-year rolling average. Using this approach, Michigan’s endowment payout has slowly and steadily increased every year since 2003, even when asset values dropped 23% in 2009.
Michigan now has a $10 billion endowment, 9th largest of any college or university, public or private. Could they pay out more than the 4.5% they now take annually from their endowment? Well, theoretically, yes, but they certainly won’t do so voluntarily any time soon because they’re still playing “catch-up” to some of the mega private endowments. As are most other colleges and universities. The argument that endowments have grown too large applies, at best, only to a tiny handful of the largest endowments. Like Harvard, Yale, and Princeton, each of which has endowment assets of $20 billion or more ($37 billion in Harvard’s case), or roughly $2 million per student. Stanford also has a $20+ billion endowment, similar in size to Princeton’s but because Stanford has twice as many students as Princeton its endowment-per-student is only half that of Princeton.
HYPSM and maybe Rice are the only schools with per capita endowments big enough that they can afford to be more generous with endowment payouts.
Rice is a great example of why the author’s advice is poor, BTW. For a long time, Rice used excess endowment payouts to keep tuition lower than the other elite privates. Now they can’t afford to have a fin aid policy as generous as HYPSM because they were using their endowment.
UChicago is another example. At one time, maybe 80 years ago, they had an endowment second to only Harvard. However, they used that money to attract the top academics they wanted instead of growing their endowment more. That meant that their endowment is now far smaller than HYPSM’s which means that Harvard can just throw money at people to get any faculty they want but the U of C is more constrained now.
And I haven’t even mentioned Rochester, which has seen its endowment ranking drop precipitously. They were top 5 in endowment at one point, I believe.
It smacks of hypocrisy when the champions of equality are at the same time the biggest hoarders of endowment wealth. Any donation in excess of $1M to any university that has an endowment over $10B should be taxed. The tax receipts should be used to fund full ride scholarships to any student who wish to study STEM at their in-state university. This will help plug the talent shortfall that IT employers keep whining about, reducing our reliance on foreign talents.
The irony is that the elite privates Fletcher is complaining about have among the most generous need-based financial aid policies. Does he really want Harvard to lower its tuition for the children of hedge fund managers?
Perhaps a better option would be to ask the wealthy elite schools to raise their PILOT payments.
http://www.thecrimson.com/article/2014/10/30/harvard-defends-pilot-contributions/
In addition to HYPSM, the WASP LACs (Williams, Amherst, Swarthmore, Pomona) all have endowments in excess of $1 million per student. Caltech is close to that figure at 948K per student, and Rice a little lower at $852K.
Are you speaking about public Unis? (Surely, you can’t be speaking of the top privates, who are are prestige-bound as any.)
A better option is for Harvard to raise its tuition to $100k for the children of hedge fund managers…and for Harvard to voluntarily reject any federal Pell and subsidized loans aid and replace it with a H grant.
One problem is that much of these endowments are tied up in assets that are not very liquid. Harvard is not some modern-day Smaug sitting on a pile of 37,000,000,000 one dollar bills. Witness all the severe cost cutting they and the other colleges had to do just to keep the lights on back in about 2009-2010 during the recession. They found to their dismay that owning say a hundred million dollars of prime timberland in New England isn’t much help when it comes to paying the monthly bills. For example, to save a few pennies on the bottom line, Harvard dining halls quit serving hot breakfasts back during that crisis. That indicates that cashflow-wise these schools are skating a lot closer to the edge than the raw endowment numbers would suggest.
In addition, a lot of the endowment comes in the form of grants from foundations, bequests from estates, and gifts from individuals, all of which usually come with all sorts of restrictions and strings attached on how they can spend it.
That said, their endowments are so big that it’s hard to see how they couldn’t be doing more than they currently are to defray student costs. And maybe they don’t really need to build that fancy new state-of-the-art concert hall or rugby field or whatever. But the picture is not so nearly out of balance as a superficial glance at the endowment numbers would suggest.
What I’d really like to see is legislation that makes these 1%ers pony up funds to shore up the poorer educational institutions.
That just makes no sense to me. The colleges are already free to literally, the middle class. And HYPS offer a huge discount everyone below the top ~5%'ers. Should it be free for them, too? And to the Wall Street hedge fund manager?
@Dadof3 Maybe you could explain your rationale on that.
So they have really bad asset management?
So an unprecedented 8% is OK because, well, you’ve always received gifts before, and without doing any research at all, I’m sure that, under the new system, donors will give as much as they always have. Because, well, reasons.
If claims on the spending per student are to be believed, the elite schools are subsidizing even list price paying students by tens of thousands of dollars per year.
However, it is theoretically possible for those schools to increase subsidies to students by admitting a higher percentage of them from outside the top 3% or so income and wealth families (currently, around half of their students receive no financial aid, which tends to mean a very high level of family income and wealth), or by increasing enrollment (though this could be more expensive than it may seem at first glance, if a lot of capital investment in new buildings and such is needed).
It has been pointed out in other threads that endowment money is often divided into buckets with restrictions on what it can be spent on, based on donor stipulations, so a giant endowment may not have as much unrestricted money as its size may indicate, which presumably plays into decisions on enrollment, tuition and financial aid policy, etc…
It seems these endowments consist of many separate buckets of money donated to specific purposes. Each UG and Grad school may have their own bucket. Just judging by our limited personal experience whenever my daughter gets any money from her University (including regular finaid) they match her to a specific benefactor or a fund and she is supposed to thank them, write reports how she benefited from their money, etc. I think she even went out to dinner with her benefactor family. It looks like the University has to spend some additional efforts to properly allocate money donated for finaid. I would assume that people who donated large sums of money can track how their donations are growing, how they are spent, etc. and may have some say in this process. Plus they have capital campaigns for specific purposes that can, for example, produce money donated to renovate a library that cannot be spent on financial aid, etc. So in real life spending these large endowments may not be as simple as NYT makes us believe.