WSJ: When $26 Billion isn't enough

Parent Cafe
1

<p>The Wall Street Journal has a huge splashy article on the front page of one of its sections this week.</p>

<p>
[quote]
Higher education gets $24 billion in donations annually, about 10% of all U.S. charitable giving. But despite what are often double-digit investment returns, many wealthy colleges are withdrawing less than 5% -- some about 4% -- from their endowments, according to data collected by The Wall Street Journal. The U.S. government, worried about hoarding, has for years required foundations to pay out at least 5% of holdings annually. But colleges aren't included.</p>

<p>Even fractions of a percentage point make a big difference in the realm of endowments. Consider what would happen if Harvard were to bump up the rate of spending -- about 4.3% for the fiscal year ended in June, and as low as 3.3% in 2000 -- by a mere one-half of a percentage point. The university, while still being conservative with its savings, could give a free ride to more than 3,000 students, based on the school's total fees of $42,000 a year. Last year alone, Harvard raised $590 million in donations, more than most schools' entire budgets. The university expects its rate of spending to "inch closer" to 5% by 2010, says Donella Rapier, Harvard's vice president for alumni affairs and development.</p>

<p>Many other rich schools -- including Yale, whose endowment passed $15 billion last year, and Princeton, which exceeded $11 billion -- have been taking out similar -- and, in some years, smaller -- percentages from their savings.</p>

<p>Paul Jansen, director of the nonprofit practice at consultant McKinsey & Co., says that, for the most successful schools, a 5% annual withdrawal from the endowment is far too conservative. In his view, based on analysis of giving patterns and investment returns at a variety of schools, 6% would be more reasonable. At 4%, he says, schools are signaling they won't use new gifts for decades to come. Increasingly, he says, donors are going to realize "My money is going to mean very little to you."

[/quote]
</p>

<p><a href="http://online.wsj.com/article/SB113477717881125159.html?mod=home_we_banner_left%5B/url%5D"&gt;http://online.wsj.com/article/SB113477717881125159.html?mod=home_we_banner_left&lt;/a&gt;&lt;/p>

<p>There is a table showing percentage of endowment spent in fiscal year 2004 for top colleges and universities, ranging from a low of 3.7% at Pomona to 6.1% at Emory.</p>

<p>Another interesting quote puts the numbers in perspective:</p>

<p>
[quote]
Rob Waldron runs Jumpstart, a Boston-based nonprofit that tutors inner-city preschool kids. A graduate of Harvard Business School, Mr. Waldron notes that the increase in Harvard's endowment last year -- $3.3 billion -- is half the budget of the entire federal Head Start preschool program, which serves 900,000 poor children. When a friend and former classmate asked him to contribute to Harvard Business School, Mr. Waldron balked. In the end, he did, with a condition. His friend had to pledge to Jumpstart 10 times what he gave Harvard Business School. So Mr. Waldron gave the school $50, and inner-city children got $500 worth of tutoring.

[/quote]
</p>

<p>Interesting reading.</p>

2

<p>Wisteria:</p>

<p>Thanks for posting this. I wonder whether the fact that much of the endowment of universities is restricted has a bearing on the payout rate. For Harvard, I think saving for Allston must be factored in; other factors: the $26 billion if for Harvard as a whole, not for the College or the Graduate School of Arts and Sciences alone; it includes funds for richer schools such as HBS, HLS, HMS.</p>

3

<p>Also today's journal has a great front page piece on some Catholic nuns doing great work for poor in Pittburgh. Quite a contrast to Harvard and other elite school's mega endowment especially in view of Harvard Management's compensation of its top fund managers-$15-25 million. Realize that this compensation will change due to Harvard alumni protest but snall donations will do a lot better with these nuns or other worthy charities like the Salvation Army.</p>

4

<p>My mother in India (with our help of course) manages to feed, clothe, house, provide health care, and educate 240 children, many of whom she picked off garbage heaps, for roughly $110 a year. We (or actually the people themselves, with our help) build good houses for $1,200 each - $400 of which they have to contribute themselves for the foundations, and they make their own bricks, $400 for roofs and electrical hookups is donated by the local oil and gas board, and $400 (for the walls and doors) we raise abroad. </p>

<p>It's hard (or at least has always been hard for me) to put in perspective. Surely I don't kid myself into thinking that if the money didn't go to H. or to my alma mater it would go to my mother's projects. But certainly the payout rate on the endowment hardly matters when yearly contributions (which is free capital independent of the endowment) are so high.</p>

<p>So I've just quit trying to justify it, and just hope that part of the education offered will equip future alumni with a conscience. Other than that, my money really DOESN'T mean that much to them, and there isn't that much of it, in any case.</p>

5

<p>I actually think the alumni protest was misguided. Other universities pay a lot more to outside managers to manage smaller amounts of funds. The only reason that there is no outcry is that, because they are outside managers, what they get paid collectively is not reported by the universities that pay them.
When some money manager is reported as earning $$$ is it also reported that xyz university is paying that manager a large portion of the $$$? Of course not. In this instance, Harvard happens to be more transparent than most.</p>

<p>I don't know of money managers that have made a vow of poverty, like nuns.</p>

6

<p>This begs the question why isn't a Harvard education free?</p>

7

<p>Why should it be? Even state universities do not provide free education. Harvard educates children of janitors and children of millionnaires. (I know Mini will argue there are probably more of the latter than of the former). Should children of millionnaires receive a free education?</p>

8

<p>The WSJ article is in today's (Saturday) edition - front page of the Pursuits section.</p>

<p>I suspect some of the reasons none of these college educations are "free", even with endowments that could afford it, is:
1) alumni might protest, by withholding $$, since it wasn't that way when they went;
2) the colleges attract bigger, better money managers, the more their endowment is;
3) students are less likely to take their education as seriously if it doesn't cost them anything (just look at Congress: the easiest thing in the world to do is to spend someone else's money other than your own).</p>

<p>It would be a bold experiment for some well-endowed college to change that - say, "tuition is free, but you have to give to the endowment 10% of your earnings from years 5 to 15 after you're out, in return" - that way those who benefit most, give back, so future generations get the same benefit.</p>

9

<p>Hmmm.. Did newspapers not recently run articles on student loans defaulting?</p>

10

<p>Cooper Union offers free tuition, albeit for a much small class size.</p>

11

<p>Some useful data. If I interpret the graph correctly, about 500 students receive a full ride at Harvard.</p>

<p><a href="http://www.fao.fas.harvard.edu/fact_sheet.htm%5B/url%5D"&gt;http://www.fao.fas.harvard.edu/fact_sheet.htm&lt;/a&gt;&lt;/p>

12

<p>Harvard once claimed that if they stopped accepting any funds (tuition, research grants, etc), they would be bankrupt in 10 years. Marite is right - Harvard is, as an institution, huge. Their law school tuition, room, board, etc. tops $55,000/year; could you imagine the outcry from indebted law students if undergrads went free? </p>

<p>I do think there is a LOT of intellectual dishonesty in writing an article like that and using Harvard as your example. It's like writing an article on the saving rates of Americans and discussing Bill Gates. Please, people, Harvard is different. If you want to pick on all colleges, don't use H as an example. If you want to pick on H, then pick on H directly.</p>

<p>Generally, if you want your money to grow, you have to keep feeding some of your returns back into the fund to account for inflation. You also have to account for the fact that there are going to be bad years. The Dow is up above 10,000 again - but we all remember when it tanked after 9/11. There is something to be said for withdrawing conservatively during the good economic times.</p>

<p>Now - using my alma mater as an example - with an endowment of roughly $800 million, they need to keep feeding money back into that to 1) make it grow and 2) for capital projects. A building that costs about $25 million would eat up a fair chunk of the endowment - and that can only be more true for universities with even less money.</p>

13

<p>"It would be a bold experiment for some well-endowed college to change that - say, "tuition is free, but you have to give to the endowment 10% of your earnings from years 5 to 15 after you're out, in return" - that way those who benefit most, give back, so future generations get the same benefit."</p>

<p>Berea has been doing it for a 100 years, with no required payback, and provides a superb education. No experiment required. Endowment slightly under $800 mil. And a couple of dozen colleges and universities have larger endowments than Berea, so it wouldn't be that hard to do, IF they really wanted to. But why? It isn't that they don't have thousands of applicants begging to be allowed to pay the list price. Some of the prestige of the product comes from its cost, which is one of many reasons why I think we'll see list price rise (and a lot!) before it falls. (And I don't think that's a bad thing.)</p>

14

<p>Well, when it comes to Harvard is not always black and white, nor very simple to understand for outsiders..</p>

<p>Full article at <a href="http://www.boston.com/news/local/articles/2005/12/15/harvard_arts_and_sciences_faculty_are_told_of_deficits/%5B/url%5D"&gt;http://www.boston.com/news/local/articles/2005/12/15/harvard_arts_and_sciences_faculty_are_told_of_deficits/&lt;/a&gt;&lt;/p>

<p>
[quote]
Expansion plans seen driving costs</p>

<p>By Marcella Bombardieri, Globe Staff | December 15, 2005</p>

<p>Harvard University's largest school, the Faculty of Arts and Sciences, is facing growing annual deficits in coming years, from $40 million this academic year to $80 million in 2009-2010, a group of professors was told yesterday.</p>

<p>Sluggish fund-raising, the construction of buildings, and the costs associated with improving undergraduate education at Harvard are driving the deficits, according to two people at yesterday's meeting, who spoke on the condition of anonymity because participants agreed not to talk to the media.</p>

<p>The Faculty of Arts and Sciences, which includes the undergraduate college and the major doctoral programs, has an annual budget of more than $1 billion a year and an endowment of $12 billion, Kirby said.</p>

<p>The biggest portion of the growing costs, about $70 million a year, is associated with new buildings, especially two major science buildings under construction in Cambridge, according to the sources. Other costs, about $60 million a year, arise from ongoing efforts to improve undergraduate education, including expanding the size of the faculty. The ratio of students to tenured and tenure-track faculty at Harvard College, the undergraduate school, is 11 to 1 and is less favorable than at some of Harvard's closest competitors, such as Princeton, Kirby has said.

[/quote]
</p>

15

<p>Did I read Berea's website correctly? To be "eligible" for admission (and the free tuition), a student's family can't make more than $52K/year (assuming a family of 4)?</p>

<p>That's not quite the experiment I proposed, since Berea seems to only offer free tuition to those students who can't afford college - and no one else need even apply (most expensive colleges I'm sure would say they offer financial aid for almost anyone admitted with a demonstrated financial need - but that usually makes up only a small part of each admitted class). </p>

<p>Not exactly much socioeconomic diversity in Berea's student ranks, if my assumption from looking at their website is correct.</p>

16

<p>"That's not quite the experiment I proposed, since Berea seems to only offer free tuition to those students who can't afford college."</p>

<p>But that's just the point - why would you want to offer free tuition to folks who can not only afford it, but are begging to pay it (and would be willing to pay more?) What exactly is the experiment - to see how many wealthy people would stoop to pick up an extra nickel? Do you think paying tuition now (and getting the prestige that comes with paying) works against future contributions?</p>

<p>I think a more interesting experiment would be to auction off a certain number of places (to "qualified applicants" of course) to the highest bidder. Of course, they do that now (it's called "developmental admits"), but they could make it much more transparent, and let everyone in on the action. (I'm being serious - I have no problem with folks being admitted because they can fork over the dough - it would be nice, and it is nice, when a school uses some of it to support some proles in the process, and I'm thankful for it.)</p>

17

<p>I tend to believe that an education is something fundamental that everyone deserves. It should be available to everyone equally regardless of ability to pay. Two points.</p>

<ol>
<li><p>Even though Harvard offers substantial financial aid, not everyone knows about it. For most laymen Harvard and other elite institutions are seens as hugely expensive and beyond their reach. The HFAI hasn't garnered that much publicity. Certainly not as much as if Harvard were to announce free tuition to all, like Yale's music school did.</p></li>
<li><p>Second, Marite asks me "Should children of millionnaires receive a free education?" My answer is yes. The price of goods shouldn't be dependent in any way on the buyers ability to pay. You could theoretically force millionares to pay for air because they have the means to, but that doesn't mean you should.</p></li>
</ol>

<p>Free tuition would make our elite institutions into true meritocracies. Globalization continues on relentlessly, and education becomes more and more crucial to employment. Why shouldn't education be free, especially since its well within Harvard's means to do it for both graduate and undergraduate students.</p>

18

<p>
[quote]
You could theoretically force millionares to pay for air because they have the means to, but that doesn't mean you should.

[/quote]
</p>

<p>Clean air isn't free. It requires resources to monitor and protect air quality, and some of those resources come from taxes. Most people would say that millionaires should be paying at least some part of the tax burden (especially since many of them contribute to the dirty air problem in the first place, e.g., by driving SUVs.)</p>

19

<p>"I tend to believe that an education is something fundamental that everyone deserves. It should be available to everyone equally regardless of ability to pay."</p>

<p>Absolutely! but there's no reason why it should happen at Harvard. Does your state university have enough money to do the job? Why not? Are you out there campaigning for higher taxes to pay for it? Why is it now harder to get into the nursing program at Middlesex Community College than it is to get into Harvard? - I mean there's no shortage of Harvard-trained lawyers, but where are we going to get the nurses to take care of us?</p>

<p>(On a side note: if Harvard's student body looked more like Berea's, do you think they'd have the endowment they do today?)</p>

20

<p>Education may or may not be a "fundamental" right (are we talking Constitutional law here?). But NO ONE has a right to a Harvard or Yale or Princeton or MIT, etc...) education. Even the UCs don't claim that every Californian has a right to a UC education, so why should private institutions allow all comers in?
Pleeze.</p>