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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.
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.
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.
Also 6% seems a very high price to manage money. Where they getting a return on investment of 12%?
They didn't get 12% ROI, they got more than 20%. And it was that success that got them their big payday.
According to the article, the fee for the investment managers is 2% plus 20% of the growth. 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. That's phenomenal. The bankers made a lot of money, yes. Too much? I don't know; I'd be happy to let them manage my investments under those terms with those sorts of returns. As for the university, they were able to spend $1B of their endowment while increasing its size by over $200M, net.
That's exactly what an endowment should be doing: Generating a health return and spending most of it, but retaining a modest increase to keep up with inflation.
I really don't see the problem here.
Note to ACs: I usually delete AC replies without reading them. If you want to talk to me, log in.
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.