Something seems wrong with the way elite U.S. universities finance themselves. The problem: They're addicted to multibillion-dollar endowments. When the endowments suddenly shrink, they can seem more like curses than blessings. Harvard University, the richest institution of higher education on the planet, gets about one-third of operating funds from its endowment.
Now that Harvard is expecting a roughly $11 billion endowment decline over the current academic year—30% of the total—the university is in such a financial squeeze that it has frozen faculty salaries and offered early retirement to 1,600 employees. Princeton is even more addicted to its endowment, which provides about 45% of its operating budget. Princeton Provost Christopher Eisgruber warned in February: "We are beginning to live in the 'new normal' and we should not expect to go back to how we operated in the last 10 years."
Is there a better way? There could be. Here's an idea: Maybe rich universities should act more like companies, which somehow manage to operate without endowments. Universities could raise just as much money from wealthy alumni and other donors as they do now, but they wouldn't hoard it in a great big piggy bank. They'd spend it as it came in, the way companies spend their revenue on current needs.Why must universities Hoard money?
Most universities that aren't super-wealthy already do behave like companies because they have little choice: They don't pile up endowments because they have urgent current needs for the money. Take California State University at Long Beach, where about a third of undergraduates are first-generation college students. The school does raise money from alumni and other sources, but it puts most of the proceeds to use right away for such purposes as scholarships. In a Feb. 27 interview, President F. King Alexander said: "Our students need that money. We're not wealthy enough to sock it away when we have so many needs on our campus right now."
Any ordinary company that followed the money-hoarding strategy embraced by such institutions as Harvard, Princeton, Yale, and Stanford would soon receive an inquisitive letter from the likes of raider Carl Icahn, who would want the CEO to explain why he or she couldn't find anything more useful to do with the money than stash it away. It's a fair question, both for companies and for universities.
The most frequent argument for having a big endowment is that it's supposed to tide schools over tough times. It sure isn't working out that way. True endowment funds can't be spent even in an emergency; only the cash income and capital gains from them can be spent. (Does anyone remember what capital gains are these days?) So-called quasi-endowment funds can be drawn down if necessary, but universities seem loath to do so even in the current circumstances, as if preserving capital is a higher priority than preserving academic programs.Big Endowments Flow To Risky Markets
Harvard compounded its problems by investing in exotic assets that it can't now sell at any reasonable price, but other schools are down as well. Between July 1 and Nov. 30 last year, endowments at 435 surveyed schools lost 23% of their value, according to the National Association of College and University Business Officers.
Sure, the bad economy is also walloping universities that don't have endowments, as strapped donors cut back. But a big endowment tends to tie a university's fortunes closely—probably too closely—to the vagaries of the financial markets. In 2007, when markets were still flying high and schools were loaded, BusinessWeek printed an eye-opening article called "The Dangerous Wealth of the Ivy League."