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."

Comments

Colleges are not for education

[Lumpy]

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.

Re:Colleges are not for education

[blue9steel]

You are doing it right now. You admit that the value of any education is not infinite, but thats so damaging to your method of argument that you accuse the other side that they believe the value of any education is zero as if your accusations are a logical argument, and yet you have continued to not actually discuss what the value of any specific education actually is. Society cannot feel its way to prosperity. If you have to generalize to make your argument because specifics always seem to hurt it, its because its full of feels rather than thinks.

Well you're not going to get a full position paper in a Slashdot posting, sorry to burst your bubble on that one.

Yes as conservatives say, degrees have a definable monetary value which can be calculated using the discounted cash flows of the individual's projected salary. No, I don't agree with liberals that education has unlimited value and is worth any cost. However, I do agree with them that the social value of an educated person is greater than the DCF of their salary improvement. How much greater? Well that's an interesting question and one worth debating.

My personal position is that having members of the populace who both desire a college education and are capable of handling the material but not educating them due to their personal life circumstances is a waste of potential human capital and that currently the break even point is likely the bachelor's degree or it's equivalent. As a society I think it would be in our best interest to ensure that everyone has the opportunity to achieve at least that level of education. During the Agricultural period grade school was sufficient, during the Industrial period high school was sufficient, during the Information Age we now need a post-high school educated populace. This doesn't have to mean college, but it should mean significant education past the 12th year.

The free market is great at optimizing resource allocation given the correct constraints but like any optimizer if the constraints aren't set properly you get strange answers. Our current funding model for post-secondary education creates significant labor market inefficiencies that won't self-correct.

Not phenomenal: Index Better!

[Roger W Moore]

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.