By Lynne Munson, Education News
November 8, 2010
We recently learned that fifteen of America’s wealthiest colleges and universities sold an unprecedented $7 billion in taxable bonds last year. The loans, needed to pay bills and restore reserves, will cost these schools $360 million a year in interest.
It is odd that these institutions would be so cash-poor, since, even at the depth of the financial meltdown, their endowments totaled more than $100 billion. A tiny percentage of spending from such enormous troves would keep the lights on and the libraries open.
But, instead of sailing effortlessly through troubled times, our wealthiest private institutions were reduced to feverish budget-cutting and to rattling tin cups. This is because their vast endowments proved useless, even burdensome, during the recent financial crisis. Nearly all of the riches that generations of alumni have given to Vanderbilt, Duke, George Washington and at least a dozen other universities are tied up in such complex webs of risky, illiquid, costly, long-term investments that these funds were simply unavailable when they were most needed. Endowment managers were so high on these types of alternative investments that, in the years leading up to the meltdown, they had convinced university leaders even to sink their cash reserves into such assets. So, when markets tumbled, there was no money around to pay the bills.
Education and research took an immediate hit. Stanford closed its physics library. Yale reduced graduate student enrollments. Harvard halted work on a vast new science complex. Countless faculty searches were put on hold. These cuts failed to balance the budget, triggering the bond sales. Now those loans further leverage institutions that possess portfolios that already teem with risk.
Some endowment leaders have blamed the financial crisis for their failure to have the necessary cash on hand. But that logic is absurdly circular, since it is precisely to protect schools from such crises that endowments were established in the wake of the Great Depression. Tellingly, hundreds of institutions with endowments a fraction of the size of Yale, Johns Hopkins, et al., did not have to borrow to make ends meet. It was the institutions with the largest endowments that were left scrambling.
If just one or two wealthy schools had suffered a cash crisis it would not be logical to speculate about a trend. That would appear more like an idiosyncratic case of terribly poor planning. But fifteen? And, among them, the institutions long considered to be the leaders in the field of endowment management? This widespread shortfall amongst our wealthiest institutions of higher education suggests something quite odd: That they have shifted endowment investment practice in ways that have left themselves vulnerable.
Yale law school professor Henry Hansmann, an expert in nonprofits, has 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 that can expand and contract to act as buffers for the investment pools.” Hansmann made this observation a dozen years ago, when today’s largest endowments were about half their current size. His words appear to have become truer with time.
For so long, teaching and research have battled it out to be academia’s top priority. Now evidence is emerging to suggest that, at a large proportion of our premier institutions, pure moneymaking is king. Their financial planning and decisions reflect this. What else would explain the fact that endowment managers didn’t make provisions to pay their schools’ bills? Or that they would close something as inexpensive, yet basic to research, as a physics library, rather than sacrifice some tiny portion of their portfolio?
The embrace of moneymaking for its own sake would explain a great deal about endowment spending practices in recent decades. While endowments have skyrocketed in value, spending has remained low and flat. If nurturing the educational and research missions of these institutions is the true purpose of these endowments, why let these riches sit dormant for so long? Why not pursue those goals by spending more now? Why keep preferential admissions programs, when you are in a position to remove any financial barrier to attending college and be certain that you are educating the nation’s best and brightest? And why wait to buy a building that could house scientific researchers? It will only cost more later. Neglecting these kinds of opportunities—and responsibilities—only makes sense if growing the endowment, for its own sake, is your driving priority.
Our largest college and university endowments have themselves become the research centers—laboratories where extreme investing ideas are tested. So untethered have endowment priorities become from any real need that their practices have come to resemble almost abstract experiments in investing. It is a case of investment for investment’s sake—not for the sake of any goal worthy of the nonprofit status that these endowments continue to enjoy.