Endowment Hoarding?

It’s been a few days since I linked to Inside Higher Ed, and the Internet itself was threatening to collapse. They’re got a provocative article today about university endowments, though, so disaster is averted. The author, Lynne Munson, compares colleges and universities to private foundations, and doesn’t like what she sees:

A recent survey of 765 colleges and universities found they are spending 4.2 percent of their endowments’ value each year. Meanwhile, private foundations — which are legally required to spend at least 5 percent of their value annually — average 7 percent spending.

Higher education endowments differ from private foundations in one particularly important respect. Private foundations exist to give their money to others, while college and university endowments support just one charity — their school. But isn’t being your own sole beneficiary reason to spend more, not less? Particularly when a substantial area of spending — financial aid grants to current students — targets precisely the people you expect will be your future donors?

She notes that increasing Stanford’s draw on endowment to 5% would provide enough extra income to let all of the students attend tuition-free.

The question of what, exactly, colleges and universities are doing with all that money is a good one. There are times when it seems like the large endowments are there more to allow the wealthy businessmen who serve on Boards of Trustees to count coup against their colleagues at other institutions than for any real educational purpose– “My endowment is bigger than your endowment…”

Tapping some of that money to increase financial aid sounds like a good idea, as does tapping some of that money to provide internal research funds and reduce the strain on grant agencies like the National Science Foundation. According to the endowment data linked in the article, Harvard’s endowment grew by $3.44 billion-with-a-“B” between 2005 and 2006. The entire NSF budget for grant support in 2006 was $3.7 billion. And yet the NSF is giving Harvard millions of dollars every year– $38 million in 2006, according to Harvard’s online fact book.

Harvard is an extreme case, granted, but there are vast sums involved all the way down the list. The University of Texas earned $1.62 billion, while MIT got $1.66 billion. The top liberal arts college on the endowment list, Grinnell at #36, made $81 million, while my alma mater, one spot back, made $114 million– chump change compared to Harvard, but still a huge amount of money, larger than the total endowment of some 440 institutions.

Now, it’s a little unfair to look at the total income, because of course, you need to account for inflation and the like, and you’d like to be able to maintain the same level of operation for years down the road. But even the percentage increases are significant– Harvard’s endowment grew 13.5%, Texas’s 14.0%, MIT’s a whopping 24.7%. If you reinvested just enough money to stay ahead of inflation, there’d still be plenty left over to put to good use. And even if you went for the completely absurd extreme, and stopped bringing in any money at all, these endowments would keep schools running for years– Harvard’s annual expenditures, according to that fact book, are about $3 billion, which means they have endowment enough to keep the place up and running for another decade, without charging tuition or soliciting donations.

I’m sure there’s some convincing economic reason why it would be a bad idea to actually do something with that endowment money, rather than just letting it pile up somewhere (mental image: the Trustees of Harvard swimming in a vault of gold coins, Scrooge McDuck style). Maybe some of the very smart economist bloggers out there could take a whack at explaining it.

One thing that does give me pause is the author credit on the Inside Higher Ed article:

Lynne Munson, an adjunct research fellow at the Center for College Affordability and Productivity, served as deputy chairman of the National Endowment for the Humanities from 2001-5. She is at work on a book on endowment hoarding.

I’m sure Ms. Munson has the highest personal and professional integrity, but the sad fact of the world that we live in is that when I see somebody who worked for the Bush Administration saying things that sound appealing, I immediately start asking “What’s the angle?” I’m at a loss as to how encouraging colleges and universities to spend more of their endowments on financial aid would possibly work to funnel money to Republican campaign contributors other than just relieving them of tuition payments, which doesn’t seem like enough money to be worth the hassle), but maybe some smart economist blogger can explain that, too.