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As their investments sink along with the stock market, rich universities are under less pressure to spend. But charges of “hoarding” may resurface.

What a difference a few months make. As late as last summer and fall, university endowments were becoming a political lightning rod. For years, rising financial markets had swelled the largest endowments by double digits annually. The multibillion-dollar accumulations attracted critical congressional scrutiny as an untapped potential source of either tax dollars or largess for families struggling to pay tuition.

Sen. Charles Grassley of Iowa, the senior Republican on the powerful Senate Finance Committee, garnered headlines with his suggestion that universities, like foundations, should be required to spend at least 5 percent of their endowments each year. Many of the wealthiest schools have regularly spent considerably less. Last August, a new law directed the Government Accountability Office to report within 18 months on whether the huge tax-free nest eggs were, in fact, fulfilling the public purposes that earn them their exemptions. In early September, Grassley and Rep. Peter Welch, the Vermont Democrat who introduced the GAO provision, cochaired a Capitol Hill round table where university presidents sought to justify their institutions’ spending habits.

But then, quicker than you can say “global financial crisis,” everything seemed to change. By October, institutions that only recently had been celebrating their Wall Street wizardry were bemoaning 20 percent to 30 percent drops in their endowments’ value. And a few lost millions in Bernard Madoff’s alleged Ponzi scheme.

Now, with the attention of Congress and the Obama administration riveted for the foreseeable future on economic matters far larger than collegiate finances, some observers argue that the pressure to mandate spending levels may well be off, at least for now.

The plunge in endowment values and income “has been a hit on the popularity of the Grassley proposal,” says Richard Vedder, director of the Center for College Affordability and Productivity in Washington, D.C., and professor of economics at Ohio University in Athens. “I think the idea is going to lose some momentum.”


As the economic picture darkens, university presidents across the country have begun tightening their institutional, if not their personal, belts. The University of Maryland is just one example. “Hiring is frozen. There are unlikely to be salary increases,” says Jennifer Preece, dean of the College of Information Studies at the university’s main campus in College Park. Other economy moves at Maryland include encouraging professors to take leaves or longer sabbaticals, says Ben Shneiderman, professor of computer science and founding director of the Human-Computer Interaction Laboratory. “We have been told that fiscal year 2009 is bad, but 2010 will be even worse. No one knows what will happen after that,” says Preece.


Not even the most well-endowed schools have escaped the squeeze. Harvard’s endowment, worth $36.9 billion as of June 30, 2008, fell by about $8 billion, or 22 percent, over the next four months, the university reported, and faced an even sharper drop in 2009. In a letter to faculty, students, and staff, President Drew Gilpin Faust wrote, “Trade-offs and hard choices that can be avoided in times of plenty cannot be averted now. And, given the ongoing volatility and uncertainty, we need to plan and budget with a range of contingencies in view, including scenarios for reducing our spending both this year and next.” In mid-December, Yale reported that its endowment, second only to Harvard’s, had shrunk by roughly 25 percent since June. At Stanford, with the third biggest endowment, the president and provost took 10 percent pay cuts.

But the current hard times can’t obscure an obvious fact brought into sharp relief by last year’s agitation on Capitol Hill: the vast disparities in wealth within American higher education. These disparities persist among both private and public institutions.

Among private schools, only a relative handful boast endowments that generate enough income to fund a big chunk of their operating budgets. Princeton, with the fourth biggest endowment, uses this income to cover 44 percent of its operating budget, according to President Shirley Tilghman.
While the big elite universities have drawn most of the attention from Congress, schools exist that are both small and rich. Both Olin College in Massachusetts and Cooper Union in New York have big enough endowments to grant all their students full-tuition scholarships. In doing so, however, they serve to bolster the argument of Grassley and others that an endowment should be used to benefit students.

Yet the great majority of nearly 2,300 private U.S. colleges and universities in the United States have meager endowments. Of the 748 schools, both public and private, in the 2007 edition of an annual survey by the National Association of College and University Business Officers, 411 reported endowments under $100,000, 36 have under $10,000, and one has under $1,000. “In fact,” said Molly Corbett Broad, president of the American Council on Education, at the September Capitol Hill round table, “Seventy-five universities account for 71 percent of all the endowment assets” — and thus, of the more than $17 billion in annual taxpayer benefits that tax-free status brings.

Senate Finance Committee Chairman Max Baucus, Democrat of Montana, seemed to acknowledge this fact in December, when he told reporters that “not all colleges have Harvard-size endowments” and that he was “more concerned about rising tuitions than how colleges spend their endowments.”

“Seventy-five universities account for 71 percent of all the endowment assets.”


Because nonrich schools have both much smaller endowments and much tighter budgets than their wealthy brethren, they spend their endowments “way more aggressively than the ones with larger endowments,” according to Lynn Munson, a former deputy chair of the National Endowment for the Humanities and an independent researcher on university finance. Larger endowments provide a flexibility that the less pecunious don’t enjoy. And at this point, many tuition-dependent private schools are very worried that students will choose lower-priced public colleges because their families, too, are suffering from the market meltdown.

“People will have more trouble getting home-equity loans,” says Sandy Baum, professor of economics at Skidmore College and senior policy analyst at the College Board, who coauthored the report “Trends in College Pricing 2008.” “Many people will lose their jobs,” she predicts. “For people who have money in the stock market, it’s not worth as much….There’s much more demand for financial aid,” which lightly endowed schools must struggle to fill.

As pressure mounted on them from Congress last year, a number of the wealthiest schools introduced aid packages that wipe out or sharply reduce tuition for low-, middle-, and upper-middle-income families. Princeton, for example, paid out $81 million in scholarships last year, according to Tilghman, or $6 million more than it took in as tuition. Harvard, Yale, and other affluent schools have pledged to continue their aid plans despite hard times. Because of financial aid, notes Baum, these highly selective schools may end up being cheaper for most of their students than schools with lower tuitions.

Touted by the universities as evidence of concern about access, this newfound generosity doesn’t convince Munson. It’s just “a public relations sop…to Grassley and Welch,” she charges. “Harvard basically threw $22 million more to their undergraduate aid budget….This is chump change.”

With the less wealthy struggling, the richest schools are, in Munson’s view, “hoarding for the sake of hoarding. … If [they] had had more generous spending policies, they obviously would have lost less in the recent credit crunch.” Instead of evaporating in a bad market, these billions could have been used to further research and “enrich the missions of our colleges and universities. It’s money that could have been very actively and smartly spent.”

Munson suspects that “Harvard’s president is using the current credit crunch as an excuse to make some cutbacks that she perhaps wants to do. That’s a smart managerial move.” For the richest schools, “it’s all very convenient, and it’s all an illusion.”

“I’m not shedding any tears for Harvard,” agrees Vedder. “Yale announced that it went to a 5 percent [spending] rule [from just under 4 percent] voluntarily just to assuage people. They increased their spending by $300 million a year, and they only used about $25 million of that on student aid. If they’d used all $300 million, they could have wiped out all tuition in Yale College with a hundred million left over.”

As with private schools, public universities’ endowments range widely. After the University of Texas, the nation’s richest public university system, with $15.6 billion, the best-endowed include the University of Michigan, the University of California, and the University of Virginia. Given its small size relative to the others, Virginia is particularly well off, with $4.3 billion. But at the University of Vermont, the proceeds of its $330,000 endowment provide only 2 percent of the budget, its president, Daniel Fogel, told the Grassley-Welch round table. For the great majority of the nation’s nearly 1,700 public institutions, “the much bigger issue is state budget appropriations,” Baum comments. These are being slashed across the country because, as Vedder notes, “over half the states in the union are anticipating deficits based on current trends, and they’re not allowed to have deficits.” However, some states are in much worse fiscal straits than others, deepening the wealth gap among public institutions.

Despite state support, Fogel noted that tuition is the major element keeping the University of Vermont running. Vermont also charges one of the nation’s highest rates for out-of-state students.

Even if wealthy private and public institutions are now feeling squeezed like every other school, some observers say the long-term concerns inspiring Grassley and Welch’s proposals haven’t gone away. Once Congress finishes massive legislation aimed at the nation’s economic woes, these questions may regain the spotlight they held last spring. “All these institutions’ endowments have lost a lot of money, but so has everybody else; so have students and families. That makes it more of a priority,” says a Capitol Hill insider who spoke on condition of anonymity. Welch has announced he will reintroduce a bill to require universities to spend 5 percent each year or face tax consequences. For his part, Grassley hasn’t changed his tone. In a mid-November statement about university presidents’ rising salaries, the Iowa senator declared, “In these hard economic times, apparently belt-tightening is for families and students, not university presidents.”


Beryl Lieff Benderly is a freelance writer based in Washington, D.C.




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