Paul L. Caron

Thursday, March 11, 2021

Enormous Endowment Fund Management Fees Contribute To Higher Ed's Financial Woes

American Prospect, Are Endowments Damaging Colleges and Universities?:

Endowments are supposed to help institutions weather periods of financial difficulty. Instead, they’ve become a source of it.

These are perilous times for private, nonprofit, independent higher education, and not just because of changing demographics, ever-climbing tuitions, and pandemic shutdowns. For years, education researchers have charged that institutions are unable to control costs effectively, especially their operating costs. In public discourse, colleges and universities are often characterized as reckless spenders. So when they slash academic budgets or cut staff, nearly everyone shrugs. Higher education has gradually accommodated itself to austerity thinking. But as any critic of neoliberalism can tell you, austerity is really just another way that money and resources are redistributed upward, and outward.

It is rarely, if ever, discussed how endowment fund management is an integral part of the budget problem. As the tax filings of virtually every private college or university show, enormous investment management fees are pouring out of nearly every substantial endowment and into the pockets of fund managers. Most of these fund managers are not university employees, but rather work for industries such as private equity, hedge funds, and other so-called “alternative” investments. According to its tax filings, Oberlin College (my alma mater) paid out a total of $14,872,522 in investment management fees between 2013 and 2017, averaging around $3 million per year. During that same period, Amherst College paid out $186,601,258. At both colleges, investment management fees actually exceeded reported profits from investments several times. Excluding Harvard (which manages its roughly $41 billion endowment internally and has also faced criticism for immensely high overheads), the remaining Ivy League colleges reported paying out $241,653,279 in fees in 2017 alone. That same year, Stanford University paid out $47,901,005, and Johns Hopkins $28,112,000. The list goes on and on. ...

[W]e can say that the pattern reflects a widespread institutional practice with endowments, tax-free investments held by nonprofit institutions that provide education as a public good. Increasingly, endowments are invested in expensive, secretive, unregulated, illiquid, risky, and hard-to-value financial instruments—the strategy laid out by David Swensen in his book Pioneering Portfolio Management and nicknamed the “Yale Model.” While acknowledging the greater risks involved, Swensen credits Yale’s returns to this strategy, noting that “developing partnerships with extraordinary people” is the single most important element for its success. What makes these people extraordinary is not specified, but the enormous amounts of money they are paid does fit that description.

Nontraditional asset class investing has become so widely fashionable among university endowments that it has taken the form of ideology. Very few institutions seem to balk at putting alumni and other donations into risky, illiquid investments, something that would have been regarded as foolish and dangerous only a few decades ago. ...

The inescapable conclusion is that our private colleges and universities are being used to support and enrich a private investment industry whose sole purpose is extracting extraordinary profits for itself, and which has no fundamental interest in either the value or the demanding work of education, research, and scholarship. When institutions with substantial endowments nevertheless plead financial hardship and proclaim the need for cost-cutting measures, clearly something has gone badly, systemically wrong. Endowments, after all, are supposed to help institutions weather periods of financial difficulty. Instead, they have become a principal source of financial difficulty, and this fact endangers the fundamental educational mission of our private colleges and universities. ...

Our private institutions of higher education are endangered by a powerful and corrupting combination of money and secrecy, which has led to pillage. But accountability is not a one-way street, and colleges and universities must be made answerable for their management of endowments. Institutions could renounce the Yale Model and invest in standard index funds, which yield similar or better returns and are far less expensive. They could also commit to sustainable endowment policies with clear guidelines about conflicts of interest, in order to reassure alumni and other donors that their contributions are not lining the pockets of investment managers. Faculty and other stakeholders can pressure administration and trustees to become more open and transparent about the financial condition of their endowments and how they are invested. Task forces could be formed to assess and challenge imposed austerity measures, against the trend of top-down managerialism and administrative fiat.

There are any number of paths forward. But the extreme conditions of the pandemic have clearly revealed the need to change course.

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