The management of university endowments has been increasingly criticized in recent years, notably because eye-popping growth of some major endowments has occurred at the same time that the list prices of college tuition have risen.
Recently, the idea that universities should be forced to disburse more of their endowment assets to cover operating expenses gained greater visibility when The New York Times published an op-ed by Victor Fleischer, a law professor at the University of San Diego, provocatively titled “Stop Universities From Hoarding Money.”
In it, Mr. Fleischer calls for Congress to require that colleges and universities with endowments of $100 million or more spend at least 8 percent of their value annually. Although he does not specifically call for the required use of increased endowment payments as a means to reduce tuition, Mr. Fleischer’s focus on that issue as a key example makes clear that that’s his preference.
For people concerned about the high cost of a college education, even at schools such as Harvard and Yale, whose endowments both top $20 billion, this can be a superficially seductive argument. But anyone concerned with the long-term future of U.S. universities and the independence of America’s philanthropically-supported nonprofits should view the argument as both substantively wrong and a dangerous precedent.
It’s important to understand, first, that because of the nature of philanthropy, colleges and universities do not have the kind of unlimited discretion to direct payouts toward tuition relief that Mr. Fleischer implies can be easily and painlessly achieved. Much of Harvard’s $30 billion-plus endowment, for instance, is constrained by the terms of underlying donations — whether for endowed professorships, research centers, or specific programs. The assurance that their gifts will be applied to the purposes that motivated them is crucial to helping universities attract such gifts in the first place. And it cannot be assumed that the flow of philanthropic dollars to higher education (a favored cause of affluent donors) will continue if there is reason to believe a Congressional mandate might intervene.
Moreover, it is ill-advised to force regular endowment payouts, even of income that has not been earmarked for a cause, at any given percentage rate. Such a rule would force endowment managers to keep disbursements high even in the inevitable years of lower returns (such as we may well be encountering now).
In effect, Professor Fleischer’s proposal is a recipe for shrinking the size of endowments altogether in the not-so-long term. He might rather like that idea, in fact, given the extent to which he criticizes investment funds and their managers, who, he implies, receive ill-gotten and outsize gains for their work. But populist envy is not a substitute for prudent financial stewardship, and relative stability and incremental gains in endowment assets simply can’t be assumed to be inevitable.
In addition, even if an increased payout were to lead to greater tuition relief — not a sure thing, given the complex consequences of government student-loan guarantees and the incentives they create for higher tuition — it is far from clear that this is the best use of endowment income. How can we be sure tuition relief should be privileged as a cause to support?
Universities, keep in mind, must compete for academic talent to ensure that the education they offer is worth the price, after all. More broadly, the value universities provide to society goes beyond classroom education. The American research university has advanced the frontiers of science and medicine in incalculable ways that are often the envy of the world. One cannot help but think, for instance, of the recombinant DNA patents held by Stanford and the University of California at San Francisco, which simultaneously provide endowment income and enable further research.
One may well wish that universities invested less in gold-plated fitness centers or politicized versions of the liberal arts and humanities. But no matter what problems one believes characterize the contemporary university, Congressional intrusion into the internal management practices of such independent pools of capital that have served American society well is not the right approach. It may make sense to require annual foundation payouts — lest such institutions be misused as vehicles for tax avoidance — but universities are another species altogether, accountable to donors, alumni, faculty, and government agencies.
Most worrisome about a Congressionally-mandated endowment income payout — especially one that might be tied to tuition relief, as Mr. Fleischer clearly hopes — is the precedent it establishes for political interference in the internal decision-making of major nonprofit institutions that rely on philanthropic support.
Such a possibility, which might seem more attractive by being tied to a popular cause such as tuition reduction, would inevitably diminish philanthropic giving and, indeed, creativity in the nature of philanthropic gifts and their use. Along with calls for reserving the charitable deduction for select purposes, such allocation rules for philanthropic capital are part of what I’ve characterized, in a short book of the same name, as “philanthropy under fire.”
With that in mind, we must keep our existing firewalls — between the political and the philanthropic — as high as possible.
Howard Husock, a regular “Chronicle” contributor, is vice president for policy research at the Manhattan Institute, where he also directs its Social Entrepreneurship Initiative.
