Reports of strong growth in the fourth quarter of 2009 were a welcome addition to the positive growth in the prior quarter, but I remain concerned about the sustainability of that growth. The recession took down the financially weakest firms and weakened the rest. Without robust growth in the rest of the economy, we will see the financially weakest of the remaining firms contract as well. My home institution of Dartmouth is a case in point.
For those not following the local news, the College has tasked itself with trimming $100 million from its annual expenditures over a two-year window. The number comes from the simple arithmetic of having lost a billion dollars of endowment (which, at a 5% spending rate, is $50 million) and from making a prudent decision to reduce its spending rate down by 2 percentage points to about 5% (creating the other $50 million, when applied to the remining $2.5 billion). The College's president has stated, correctly, that this cannot happen without reductions in staffing. I suspect that Dartmouth is not alone -- not only in higher education, but around the economy among firms that are having trouble with traditional sources of revenue.
The ramifications of this contraction are not going to be benign, for the local community or the college itself. Watch an edited video of a panel discussion on campus yesterday and read the report in The Dartmouth here:
Get Informed: Staff Representation in the Budget Cuts from The Dartmouth on Vimeo.
Values-driven institution -- NOT
So, having ONLY 2.5 billion in endowment is a crisis?
Does the college have a mission to educate, or hoard money?
Answer: Hoarding Money
They spend 5% of the endowment a year. These are tax-exempt non-profits that charge students tons of money to go there, which is financed by taxpayers. They should really be required to spend more of their budget on education (teachers and students), or be willing to stop taking advantages of these programs.
Overreaction
The first 50 million, due to the loss in the endowment seems prudent to me. The second, cutting the spending rate, does not. Have conditions really changed that much? Were they really profligate before at 7%? This sounds a lot more like administrators are taking the opportunity to make changes they wanted to do, and justifying it by hard times. That would be the cynical reading. The less cynical reading is that they are in a panic, and overreacting.
Becker's View
July 19, 2009
How Should Universities React to the Decline in Their Endowments? Becker
http://www.becker-posner-blog.com/2009/07/how_should_univ.html
The purpose of endowed universities revealed
Endowments were created on the rationale that they would serve as a buffer to protect universities against unexpected temporary hard times.
Now we see in action that it is the reverse -- universities cut their operations to protect their endowments.
Henry Hansmann of Yale Law School has observed that a person from Mars who watched a major endowed university function would think it is an investment fund that runs a small educational operation on the side for fund-raising and PR purposes, to get a tax exemption, and to buffer the endowment in poor years.
Harvard's former president Bok, while managing his leg of the run-up of the Harvard mega-endowment, famously said it should be managed to last *forever*.
That is a horror -- it means it will never be spent on education, but only get bigger and bigger -- and that should have have had the contributors marching on his office with pitchforks and torches.
Of course, the people who manage these endowments get huge compensation in cash (in nine figures at Harvard) and also indirectly -- when you have billions to invest in various places and the income from it to make purchases of your choice, people are very nice to you by way of sending you Christmas hams and good seats to the opera, shall we say.
So there is a class of decision-makers at these universities who do benefit from making their endowments grow larger and larger forever, and sheltering them from loss.
The last time I looked, Harvard's endowment was so large that if it was actually paid out at a measely 5% rate it would provide $90,000 per student for every student in all its schools -- what school really has costs anyhwere near that high in educating its average student? -- and yet Harvard was actually charging $77,000 per year in tuition and expenses for professional school students. What's "non-profit" about that?
If the education is worth that much, so they can charge that much for it on the market, fine, but why does such behavior deserve tax exemption? The whole campus looks like a den of rentier stakeholders operating at taxpayer expense.
Endowments, contributions to universities, should be spent on supporting education -- the principal as well as all of the income. If it is not going to be spent on education, what is the justification for making it double tax free: both deductible by the contributor and tax exempt to the university?
Contributions to endowments should be required by law to be amortized down through spending -- actually spent in full -- over a period of say 30 years, like the term of a home mortgage, using a market interest rate.
Harvard has gone so far pig overboard it should have its entire tax exemption revoked and be taxed as a for-profit busness, in total, as far as I'm concerned. Not just as a matter of justice, but also to get the rentier bloat out of it and get it expanding and using its impressive assets on an enconomically rational basis, improving the quality and productivity of eduation.
I know the Dartmouth endowment isn't the Harvard endowment, but the same principles apply.