News and analysis
December 01, 2015

College Endowments Are Flourishing Again — and Critics Are Taking Note

There’s something about a nearly $35 billion endowment that just keeps Congress coming back. A decade ago, as lawmakers eyed legislation to require the richest colleges to spend more from their endowments, the Ivies and their counterparts bought time by voluntarily increasing financial aid for undergraduates. Then the financial crisis hit, the endowments sank in value, and the debate quieted down.

Now, after six years of strong returns, college endowments are flush again, with Harvard University still leading the pack at $35.3 billion. And they’re ripe for another round of attacks.

Victor Fleischer, a professor of law at the University of San Diego, kicked off the endowment-bashing this year with an August opinion piece in The New York Times. He opened with a startling statistic: Yale University paid about $480 million to its private-equity managers in 2014, nearly three times the amount that the endowment paid out for tuition assistance, fellowships, and prizes.

Endowments Show Strong Gains — and Provoke Controversy

A survey and analysis by The Chronicle shows big asset gains that are being used to launch new projects and better prepare balance sheets for the future. But impact investing and divestment are growing points of contention.

That column got the attention of Malcolm Gladwell, the best-selling author, who took to Twitter and National Public Radio to complain about how taxpayers were subsidizing the income of hedge funds and private-equity funds through elite-college endowments.

"I was going to donate money to Yale," he tweeted. "But maybe it makes more sense to mail a check directly to the hedge fund of my choice."

Mr. Gladwell also called attention to research by the Nexus Research and Policy Center, which found in an April report that taxpayer subsidies for the elite private institutions dwarf subsidies for public institutions when you consider that endowments aren’t subject to tax. The report found a per-student subsidy at Princeton University of more than $100,000, compared with a per-student subsidy at Rutgers University, a nearby public institution, of just $12,000.

Universities like Harvard, Yale, and Princeton argue that their large endowments are important because endowment spending accounts for a big portion of their budgets. They note that much of their endowments is typically restricted for a specific purpose. And they point to strong long-term endowment returns as evidence that the investing fees have been worth the cost.

"Of course there’s income inequality," says John Griswold, executive director of the Commonfund Institute, the research arm of Commonfund, which manages college endowments. "To say that a small number of wealthier colleges should try to solve that is utter nonsense."

Bipartisan Concerns

At a congressional hearing in October, House Republicans criticized the way wealthy colleges were spending their endowments. Representative Tom Reed of New York, a Republican, said he was drafting a bill to require universities with endowments of more than $1 billion to spend more on students, which could include reducing or even eliminating tuition, or face tax penalties. He also said he’d like to change the tax code so that restricted gifts to universities receive fewer tax benefits than unrestricted gifts.

In a statement provided to The Chronicle, Mr. Reed said the greater endowment spending would free many students from crippling student-loan debt. "It is a disservice to the next generation of Americans to continue to allow them to struggle when we could so easily address the problem of out-of-control costs by making simple changes to our tax code," he said.

An often-cited benefit of endowments is the cushion they provide during downturns. But Brian Galle, a professor at Georgetown University Law Center who studies endowments and taxation, testified at the hearing that Harvard has taken its "rainy day" account to an absurd extreme. The endowment could cover Harvard’s entire budget for 12 years, Mr. Galle said.

"We can make better use of the money now than the future can," Mr. Galle said in an interview. "By not spending the money now, we’re giving up social-investment returns that are bigger than the dollar returns that organizations are getting by investing their money."

Spillover Effect

Mr. Fleischer thinks the time may be ripe for legislation, with Republicans concerned about college costs and Democrats concerned about concentrated wealth and the role that tax-exempt colleges play in padding the income of hedge-fund managers.

"There’s support from both the left and the right for some kind of legislation that would refocus attention on the true beneficiaries of the endowment — the students and the faculty," Mr. Fleischer says. "But you can’t underestimate the lobbying power of the universities or Wall Street."

Any legislation targeting the wealthy private colleges always runs the risk of having spillover effects that have an impact on other endowments, including at charities. Those groups will watch any legislation with trepidation, says Diana Newman, a consultant specializing in endowment fundraising.

"For the great majority of organizations, the endowment is not some huge wad of money that they’re sitting on," Ms. Newman says. "It’s focused, and they’re using it pretty wisely and depending on it."