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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.
So they are spending almost three times as much on bankers to keep their money safe than on the education of students!
Also 6% seems a very high price to manage money. Where they getting a return on investment of 12%?
Or is this the old boys club where they are shoving student's money around to justify higher wages for themselves?
Thank you, Bradley Manning, Edward Snowden and so many others, for courageously defending humanity, my freedom and more!
It isn't just education. It's everywhere.
In the past couple of decades, we've seen a rise in need for "administration" in the engineering field.
I've been to plenty of meetings where there have been more PMPs (or prior to the last five years, proto-PMP administrative types) than there have been engineers. I've been to technical interchanges that could have been cut down in attendance by half to two-thirds if the engineers in attendance could have been bothered to do their own damn reporting. I see that "meeting minutes" is a deliverable on any contract I'm working on.
I can't say that I get where this is coming from, whether it is because engineers don't want to be managers, or because the "everybody gets a trophy" generation required employers to start giving aspirational administrators more power for less qualification, or because contractors needed to pad out how many employees they needed on any given contract to establish perceived value, or maybe any combination of these.
But there's a perfect storm of "my small function, no matter how small, is worth an extra man-year and I will make a meal out of a nibble to justify it" going on here.
Some people don't believe in fairies. I don't believe in The Patriarchy.
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.
Colleges are being run like businesses, not education centers. That in of itself is not a problem. However couple that with the multiple other factors: they can milk state and local governments for gobs of money via "financial aid", they can charge their financially incompetent students (customers) a ridiculous amount of tuition and they rarely say no because they can just borrow it and pay later, and they themselves are often rated on how much they cost. Colleges and universities are not even expected to prove their "value". They just make some BS marketing and some numbers out of thin air or bending existing ones and then get in trouble for it by some government watchdog a half decade later. I mean, how can this freaking NOT end up as a disaster?
For Pete's sake, even the "non profit" "Catholic" college I went to, established in 1870, originally run by humble Jesuits, no longer has any Jesuits running the place. In fact 3-4 years after I graduated the replaced the damn Jesuit president with guess who? Mr. MBA man who has a background of being CEO of profitable businesses, a proven track record of raising tons of money, and making sound financial decisions and investments. I gave them a piece of my mind next time they called me and asked for donations, which I halted immediately. Their tuition has more more than doubled in a span of 10 years. When I went it was a tall $17K/yr... it's now a ludicrous $35K/yr. From what I've read, all of that money is not being spent on students nor faculty. No it's going to their precious endowment fund.
I know the government has done minor things like require colleges to post Net Price Calculators but that's almost pointless. You could have researched that information prior to that law being passed if you were determined enough to do it. IMHO, what they should really do is require them to create a ranking and scoring system they all have to abide by. Post entry-graduation rates, by year, by field/career, indicating how many attained jobs in each respective field or whether they had to leave their field, and how long it took. I'm sure prospective students would love that, especially if they could also see what graduates are getting paid as their salaries though that's a slightly too invasive. At least with this they could compare colleges apples to apples, on equal footing. Students could truly shop around and see what their dollar could get them.
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.
I expect that the "hoarding money" is confined to the Ivy League Universities, and by the time you get to Texas A&M and the like they are desperately trying to get funds and have no spare money to hoard. It would be interesting to know the spread in funding.
It would be interesting to know the spread. Per U.S. News, here it is (2013 figures):
http://www.usnews.com/educatio...
Harvard is #1 at $32B
Texas A&M is #8 at $8B
Google: "What is a university endowment"
A: Endowments represent money or other financial assets that are donated to universities or colleges. The sole intention of the endowment is to invest it, so that the total asset value will yield an inflation-adjusted principal amount, along with additional income for further investments and supplementary expenditures.
It is a donation that is invested. It is a donation that you cannot guarantee will be given every year. You grow this money so you will have a stable amount of income into the future.
A university is an institution. It is in the business of educating intelligent people, by retaining intelligent people. If you have a large endowment why should a congress that cannot balance a budget tell you how to spend your money?
Please remember not all universities have huge endowments. Many prestigious universities have large endowments ( snark ), from wealthy alumni, or wealthy people in the state that just like that university and left them money. These often one time investments are MEANT TO LAST. so you invest them. You do the smart thing and use 1% and try to gain 8% every year. A university can survive 100's of years so it can apply good financial practices. This is why endowments have boards that review how the money is used and invested and those boards do it for free or a small nominal amount.
A little maths:
( if you cannot grow your money )
1 billion fund spent over 100 years: 1% is only 10 million a year
10 million fund spent over 100 years : 1% is 100k a year
The hope is to grow your money on average by 7% a year. And thats a big HOPE nowadays. Leave them alone, because otherwise those same universities will be broke in 30 years cause they spent the money now for a short term drop in tuition and facilities with no way to replace that money.
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.
Bigger list:
https://en.wikipedia.org/wiki/List_of_colleges_and_universities_in_the_United_States_by_endowment