Inside Higer Ed
July 31, 2009
By Lynne Munson and Donald Frey

Harvard Isn't Poor

It’s a dramatic tale: The story of the once-wealthy institution that houses America’s smartest -- our leading university, perhaps the world’s -- now just scraping by. Searches frozen and secretaries dismissed, hot breakfasts suspended, trash piled high: Harvard is “poor,” its endowment “collapsed,” according to Vanity Fair magazine.

Harvard isn’t taking issue with this impoverished profile. In fact, the stream of leaked letters and memos pouring out of this typically proud and stoic institution seem to suggest it is unopposed to its characterization as strapped. But is it true? Is Harvard really poor?

The university has lost a lot. The precise numbers will be in soon, but Harvard’s endowment appears to have lost about a quarter to a third of its value, or at least $8 billion.

Yet this massive loss has not made Harvard poor by any measure. At over $28 billion its endowment continues to tower over that of any other university, museum or private foundation aside from the Bill & Melinda Gates Foundation, which has a couple more billion in the bank. Today, Harvard has more than $4 million in its endowment for every undergraduate it enrolls. It has not lost generations of wealth, as reports imply, but merely returned to around its 2005-2006 value. Harvard remains the richest school in our nation’s history.

So why the firings and belt tightening? Because Harvard, like many universities, is committed to spending only meagerly from its endowment. In 2008, before the present economic disaster, Harvard spent just 3.25 percent of its endowment to support its operations. While the absolute amount may be large, this is a miserly level of spending.

Now, with the value of its endowment plummeting, Harvard appears unwilling to break this habit, even at the cost of imposing a hardship on education and research. This is stunning given that, even with Harvard’s shrunken endowment, just increasing spending to slightly more than 4 percent would maintain support to the institution’s operating budget.

News reports, again unopposed by Harvard, would have us believe that donor restrictions prohibit a higher rate of spending. But in 2008, 46 percent of funds in billion-dollar-plus endowments at independent colleges and universities were completely unrestricted, according to the data in a table produced by the National Association of College and University Business Officers. And Harvard hasn’t released any information to suggest that its endowment is more restricted than most.

Harvard's funds may be restricted in this peculiar sense: The institution appears, in effect, to have restricted its endowment itself by tying up huge portions of it in long-term investments that are costly to pull out of. Yet those costs should be paid if they are necessary to maintain the operating budget. After all, that's the “rainy day” purpose for which endowments were created. But even cutbacks and widespread talk of Harvard's demise don’t appear to be enough to get the institution to alter its assumptions about endowment spending. Harvard refuses to spend from its rainy day fund even when it is pouring.

That Harvard’s endowment exists to advance education and research is not what an observer would infer from the institution's behavior. Instead, Harvard appears to have decided to put financial dominance ahead of the current needs of students, families, and citizens -- even while the institution remains almost unfathomably wealthy. Taxpayers, who help to support this nonprofit, have reason to ask whether this is the best choice.

Harvard has options, even if its financial gurus find many of them unattractive. The institution’s academic leaders need to remind them that endowment investment and spending decisions must be guided by the twin goals of furthering education and research, not winning the hedge fund Olympics.

And if Harvard’s gurus found it acceptable to follow an investment strategy that could, and did, lose close to 25 percent in a year, then they should certainly deem spending a few tenths of a percent more to hold harmless the operating budget acceptable, too.

More than a decade ago, the Yale University law professor Henry Hansmann said that “a stranger from Mars who looks at private universities would probably say they are institutions whose business is to manage large pools of investment assets and that they run educational institutions on the side… to act as buffers for the investment pools.”

These words have only become more true with time.

Lynne Munson researches college and university endowments for the Institute for Jewish and Community Research. She has testified on endowment spending before the Finance Committee of the U. S. Senate. Donald Frey is professor of economics at Wake Forest University.

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