The gigantic endowments that a few universities hold inevitably attract attention. (Harvard leads the pack at around $33 billion and there are 19 schools and systems with endowments in excess of $5 billion.)
That attention usually comes from people who think that the institutions are not using their endowments in the best way. They berate universities for “hoarding” money when they could be spending much more to reduce or even eliminate tuition for their students.
One such critic is University of San Diego law professor Victor Fleischer, who recently penned an op-ed for the New York Times entitled “Stop Universities From Hoarding Money.”
Fleischer begins by pointing out that in 2014, Yale paid some $480 million to fund managers who handled only $8 billion of the university’s $20 billion endowment. But in that same year, it devoted only $170 million of its spending to tuition assistance, fellowships and prizes. The comparison—spending two and a half times as much to maximize the endowment’s growth as to help students—leads him to state, “Instead of holding down tuition or expanding faculty research, endowments are hoarding money.”
Fleischer is voicing a complaint that we have often heard before.
Back in 2008, for instance, Lynne Munson, now executive director of Common Core, decried “the illusion of generosity” in this paper for Capital Research Center’s Foundation Watch. She opened with an attack on Columbia for announcing with fanfare that it was increasing financial aid to undergraduates. The problem, in Munson’s view, was that the increase was so small compared with the growth of the university’s endowment.
Munson went so far as to contend that the way universities let funds “just sit unused for generations, serving no purpose” was a violation of donor intent, since many of those who contributed to the endowments expected the money to be used to assist students.
Politicians on both sides of the aisle have also shown interest in the practices and decisions of university endowments. In 2008, the Senate Finance Committee held hearings about that and Senator Charles Grassley (R-IA) set forth an array of concerns, including: “If the endowment per student at an institution is greater than or equal to the price of tuition, room, board, and fees per student, should contributions to such an endowment still be tax-deductible?”
Changing the law on the deductibility of contributions would no doubt have a powerful effect on endowment spending, but Fleischer, Munson, and most other critics favor a different approach—compelling schools to spend at least a certain percentage of their endowment each year. Fleischer’s solution is to have Congress require universities with endowments in excess of $100 million to spend at least 8 percent of the endowment each year.
The good effects he envisions from that mandate are: “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. Donors would see the tangible benefits of philanthropy. Only fund managers would be worse off.”
All of that sounds irresistible at first, but there are reasons to doubt that aggressive federal intrusion into what has been the purview of college and university boards would have those good consequences. There is also reason to believe that there would be some bad ones.
First, the presumed benefits of Fleischer’s 8 percent rule are wildly exaggerated. Whether those “sky-high tuition increases” would stop depends on how the institutions choose to spend the mandated increase in outlays.
Some of that spending might go towards tuition reduction, making attendance less costly for at least some students. But unless we are prepared to allow federal bureaucrats to oversee endowment spending, there can be no assurance that university officials would spend more on tuition reduction or any of the other good uses Fleischer contemplates.
They might instead choose to gild their campuses with lovelier buildings, more alluring amenities for students, and showier sports venues. We have already seen a lot of spending on that and would probably see more still under a mandate to increase spending.
Second, bear in mind that only a very small number of colleges and universities would be affected by this rule. It wouldn’t do anything to stop tuition increases at the great majority of schools that have small endowments or already spend at the 8 percent rate or more. If rising tuition is your concern (and it should be), you need to think about the root causes of rising tuition. Elite schools failing to spend enough of their endowment is not among them.
Third—and the one with the most dire implications for all higher education—government involvement with endowment spending should worry us because of the “camel’s nose" problem.
Once federal officials get the power to direct how colleges and universities spend their endowment funds, we should expect that the degree of control they exercise will increase. In that regard, the history of Title IX is instructive. One look at the problems its seemingly innocent language forbidding schools from discriminating based on sex should has brought about should dissuade us from giving Department of Education bureaucrats yet more control.
If Congress wrote a minimum spending rule for university endowments, we would probably experience the same ratcheting up of regulatory power we have seen under Title IX. Department of Education officials, egged on by the various pressure groups that take advantage of their authority, would find ways to increase the degree of control they have over endowment spending.
Moreover, as Manhattan Institute scholar Howard Husock notes in this Chronicle of Philanthropy piece, federal meddling could very well deter donors from giving to higher education. He writes, “The assurance that their gifts will be applied to the purposes that motivated them is crucial to helping universities attract such gifts in the first place. And it cannot be assumed that the flow of philanthropic dollars to higher education … will continue if there is reason to believe a Congressional mandate might intervene.”
Even if you don’t think that university administrators and trustees make the best decisions with the use of endowment funds, federal bureaucrats are apt to make decisions that are worse.
Endowment “hoarding” is an illusory problem. Colleges don’t actually hoard money after all. Those pricey advisers keep the funds invested for the best possible return. But if you think that school trustees and administrators are not making the best use of the funds, you should look to persuasion rather than government regulation.
Concerned Yale alums could, for instance, set up what would amount to an anti-crowdfunding site to discourage Yalies (and all others) from donating money to the university, and perhaps suggesting worthier causes including scholarship organizations that directly fund students who merit financial help.
There are many ways of trying to convince presidents, trustees, and other college leaders that they should change the way they spend their endowments. Persuasion would be vastly better than turning to still another federal mandate.
