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Stopping Universities From Hoarding Money
HughPickens.com writes: Victor Fleischer writes in the NYT that university endowments are exempt from corporate income tax because universities support the advancement and dissemination of knowledge. But instead of holding down tuition or expanding faculty research, endowments are hoarding money. Last year, Yale paid about $480 million to private equity fund managers for managing about $8 billion, one-third of Yale's endowment. In contrast, of the $1 billion the endowment contributed to the university's operating budget, only $170 million was earmarked for tuition assistance, fellowships and prizes. Private equity fund managers also received more than students at Harvard, the University of Texas, Stanford and Princeton.
Fleischer, a professor of law at the University of San Diego, says that as part of the reauthorization of the Higher Education Act expected later this year, Congress should require universities with endowments in excess of $100 million to spend at least 8 percent of the endowment each year. Universities could avoid this rule by shrinking assets to $99 million, but only by spending the endowment on educational purposes, which is exactly the goal. According to a study by the Center for College Affordability and Productivity a minimum payout of 5 percent per annum, would be is similar to the legal requirement for private and public foundations. "The sky-high tuition increases would stop, and maybe even reverse themselves. Faculty members would benefit from greater research support. University libraries, museums, hospitals and laboratories would have better facilities," concludes Fleischer. "We've lost sight of the idea that students, not fund managers, should be the primary beneficiaries of a university's endowment."
Fleischer, a professor of law at the University of San Diego, says that as part of the reauthorization of the Higher Education Act expected later this year, Congress should require universities with endowments in excess of $100 million to spend at least 8 percent of the endowment each year. Universities could avoid this rule by shrinking assets to $99 million, but only by spending the endowment on educational purposes, which is exactly the goal. According to a study by the Center for College Affordability and Productivity a minimum payout of 5 percent per annum, would be is similar to the legal requirement for private and public foundations. "The sky-high tuition increases would stop, and maybe even reverse themselves. Faculty members would benefit from greater research support. University libraries, museums, hospitals and laboratories would have better facilities," concludes Fleischer. "We've lost sight of the idea that students, not fund managers, should be the primary beneficiaries of a university's endowment."
They are for empowering a small group of people.
College level should be 100% free to citizens in the USA, there is no reason at all to have to charge for classes up to associates, and it should be inexpensive to get to bachelors and beyond.
No the dean does not deserve $980,000 a year salary, he doesn't do shit. If you want to pay the coach well, base his salary on ticket sales for games.
Do not look at laser with remaining good eye.
That is just crazy. These are not high-risk/return investments funds. Just load up on a diversified bluechip portfolio, and make sure you follow all the other sheep so that you can't be singled out for getting something wrong.
The annual fund manager convention must just be putting up pictures of regular people and laughing profusely.
The analysis misses the real issue. Endowments are indeed spent and support perpetual operations. This has been attacked on several grounds and for various reasons, but in essence, if we accept that subjects like physics will always require future generations of teachers and researchers, there is no reason to inherently object to stable funding sources for this purpose.
However, since the 1970's (and periodically earlier), there has been a serious, problematic, society-wide trend: an increasing and now dominant fraction of the 'economy' is 'finance.' In theory, connecting every part of the economy with finance increases efficiency as money flows more freely. In practice, it all flows through certain hubs where frictions profit the finance professionals; their share of the pie has increased greatly. Is it disproportionate to the benefit of finance? That can be debated; but not up for debate is that yields and inflation will eat away at endowments if they don't get on that treadmill. You can't keep money in a savings account anymore; interest rates are too low to account for inflation. Only markets will do. With lots of money, the difference between a good return and a great return turns out to be game-changing compared to other factors like new donations. The only question left is whether 'good' investment professionals do a better job than 'mediocre' ones. If the good ones do a better job, then hiring them makes necessary sense - it would be incompetence to not - and their salaries are simply a tax taken by the finance sector, shared by people across the economy. You either pay at the bridge, or you pay by not being able to use the bridge.
The hoary trope about hoarding is usually a good indicator of someone trying to get hands on the money; as an aside.
College level should be 100% free to citizens in the USA
It's not free. Someone has to pay for it and frankly the students should have some skin in the game. Students who don't have to pay for their tuition routinely put less effort into it. It's almost a cliche. I agree that college tuitions have gotten WAY out of hand but I don't think it should be free either. Providing a quality education does cost money and people don't tend to value things they don't have to pay for.
No the dean does not deserve $980,000 a year salary, he doesn't do shit. If you want to pay the coach well, base his salary on ticket sales for games.
I have no problem with colleges paying market rates for talent. If that is a big number then so be it. What I have a HUGE problem with however is colleges raising tuitions to pay for things that have little to do with educating students. Want to pay the big name coach so the college can be in the business of professional football? Fine - no tuition money goes to his salary and you have to enable the athletes who are effectively university employees to earn a market rate too. Want to pay the dean a huge salary? That's fine but no tuition money goes to him unless he's doing actual work regarding educating students. Research is explicitly not educational in most cases.
I also think state colleges should actually be funded adequately to keep tuition costs reasonable but the funding streams for that should be kept separate from funding streams for research or athletics or social outreach or other non-academic goals.
The 2% amounted to $137M and 20% of the growth was $343M, which means that the managers' efforts increased the size of the endowment by $1.7B.
No that is not at all phenomenal and in fact is probably worse than simple index investing and almost certainly has little to do with their efforts. Using your numbers the fund grew by [(1.7-0.343)/(8-1.7)-1]=21.5%. Depending on the exact year in question putting the money in a simple broad US stock market ETF such as one offered by Vanguard would have generated a 33.51% increase in 2013 and 12.58% in 2014 and if this is the amount paid in 2014 it will likely include some or all of the 2013 gains because you cannot pay before you know what the gain is.
Doing this would have cost them a 0.05% expense. It's really easy to make "phenomenal" returns when the stock market is rising as much as it has in the past few years. What I do not understand is why they are paying such exorbitant expenses and, if they want to offer a bonus it should be based on performance above the market not just the total increase which has little to do with a manager's performance.