Fleischer: Stop Universities From Hoarding Money By Requiring Them To Spend 8% Of Endowment Each Year

New York Times op-ed:  Stop Universities From Hoarding Money, by Victor Fleischer (San Diego):

Who do you think received more cash from Yale’s endowment last year: Yale students, or the private equity fund managers hired to invest the university’s money?

It’s not even close.

Last year, Yale paid about $480 million to private equity fund managers as compensation — about $137 million in annual management fees, and another $343 million in performance fees, also known as carried interest — to manage about $8 billion, one-third of Yale’s endowment.

In contrast, of the $1 billion the endowment contributed to the university’s operating budget, only $170 million was earmarked for tuition assistance, fellowships and prizes. Private equity fund managers also received more than students at four other endowments I researched: Harvard, the University of Texas, Stanford and Princeton.

Endowments are exempt from corporate income tax because universities support the advancement and dissemination of knowledge. But instead of holding down tuition or expanding faculty research, endowments are hoarding money. Private foundations are required to spend at least 5 percent of assets each year. Similarly, we should require universities to spend at least 8 percent of their endowments each year.

Despite the success of its endowment, in 2014 Yale charged its students $291 million, net of scholarships, for tuition, room and board.

In 2012, Harvard spent about $242 million from its endowment on tuition assistance; in 2014, it paid $362 million in private-equity fees, and nearly $1 billion in total investment management fees.

Smaller institutions aren’t any better. The University of San Diego, where I teach, spent about $2 million from the endowment on tuition assistance in 2012, compared with $5 million in private-equity fees in 2014 and $13 million in overall investment management fees. ...

We’ve lost sight of the idea that students, not fund managers, should be the primary beneficiaries of a university’s endowment. The private-equity folks get cash; students take out loans.

As part of the reauthorization of the Higher Education Act expected later this year, Congress should require universities with endowments in excess of $100 million to spend at least 8 percent of the endowment each year. Universities could avoid this rule by shrinking assets to $99 million, but only by spending the endowment on educational purposes, which is exactly the goal. ...

[U]nder my proposal, the sky-high tuition increases would stop, and maybe even reverse themselves. Faculty members would benefit from greater research support. University libraries, museums, hospitals and laboratories would have better facilities. Donors would see the tangible benefits of philanthropy. Only fund managers would be worse off.