The Globe has an article on this very topic today. Suggesting that Harvard might instead demonstrate its public service by taking on the task of educating non-traditional students, people who experience several forms of social challenges, single parents for instance.

It's interesting to see that attention to how wealthy Universities use the returns of their endowment seems to be increasing. Perhaps John Edwards' influence in the public conscience...
 

I heard that Sam Spektor had his wallet stolen while riding a bus in Rome. Wonderful Italy!
 

I'm sure that ten or fifteen years from now, Yale and Harvard will very much regret having used a payout ratio of 5%. Faculty and students will be moaning about cutbacks ("you can't cut down on our post retirement health benefits").

With inflation, as it impacts universites, probably over 4% (and that is without even properly recognizing the single largest liability that Harvard has...post retirement health) and a payout of 5%, the endowment has to earn 9% a year compounded, just to remain even in terms of real purchasing power. That is going to be difficult to do. Very difficult. People tend to confuse "investment brains" with bull markets and some think gains of double digits are a given. Not correct.

It will also be interesting to see if the 5% is based on the year end endowment of the previous year, or on some arbitrary nonsensical scheme (50% of last year,30% of the year before and 20% of the year before that). If the latter, it will exacerbate the problem.

Why doesn't The Crimson do an interview with President Bok and focus on how he thought about the budgetary constraints in the 70s and early 80s?
 

Sam,

Is it true about your wallet? Sorry if it is.

I wonder how this announcement will look at year's end if the stock market continues to sag....

Richard
 

Richard,

You have an anonymous person saying an inane thing and you think it might be true. Come on, you're much smarter than that. Besides, the infrequent times we're in Rome, we walk :)

Now... to the key point. It's really not how things will look at the end of this year if the stock market continues to sag. It's simply a question as to the real purchasing power of the endowment over a longer period of time (15-20years plus). In any one year (or five years), it's not that important. It is vitally important longer term, and as I said the other day, that what makes a university endowment different from a foundation. Large foundations come and go (and some put a finite date on their expiration), but we hope that Harvard and Yale are able to continue to be vibrant academic institutions, 200 years from now.

The increase in payout still doesn't address the issue I raised several months ago. If you don't know what you're going to get, how can you adequately plan? If Mike Smith doesn't know what his payout is going to be in 2012, how can he plan? University planning is very long term in nature and not knowing what your revenue is going to be, does not allow for good planning and leads to waste. My suggestion was to set a fixed amount to be paid out today (and a lot of thought would have to go into the number) and increase it by a fixed percentage every year, no matter what happens to the endowment. If everyone is so sure that the endowment will do well over a long period of time (and this is what Levin et al are saying), then this method ensures that proper financial planning will occur and that resources will be distributed wisely.

Why aren't the faculty who post here (Richard Thomas, Warren Goldfarb, Judith Ryan, SE) advocating this? If they need a tutorial on the subject in order to better make the case to their colleagues and the administration and The Corporation, I'll be happy to provide it.
 

I believe it is true that Harvard's endowment payout is essentially based on a flat amount (i.e. last year's payout) that increases by a known percentage year-by-year. Around budget time, I always hear that the endowment payout will increase 4% this year or 5% next year, not that the endowment payout was 4.2% last year and will be 4.4% next year.
 

Whether it's the percentage of the payout that increases or the percentage of the endowment, it amounts to the same thing if the percentage by which the dollar amount is going to be increased is unknown until budget time. Sam is suggesting (I think) increasing the DOLLAR payout by a FIXED annual percentage to ride out the fluctuations in the value of the endowment due to market transients and to make 5-10 year budget planning a sensible exercise. His whole point is not to jump the payout by varying amounts depending on whether the markets just had a good year.

I applaud his way of thinking, based on the retro notion that universities are in it for the long run. You would think the government would be thinking about the long run too, except that today governing is mostly about getting in the news and getting re-elected, and for that, shaking the piggy banks of the universities makes better press. And more entertaining blogs.
 

Sam for President!

He knows what he is talking about. Listen to him.

Enough with the payout discussion. If you are not a professional money manager leave it alone. Would you challenge your brain surgeon on his/her technique? Of course not. So stick to your knitting and leave running money to the professionals.
 

Sam:
My failure to advocate has to do with lack of expertise, which is why I appreciate your postings on this, and SE's provocations as well. I'm hoping the FAS Resources Committee will become more communicative on some of these questions.

Why don't you write something for the Chronicle? Quite so on walking in Rome. Why would you do otherwise?
 

Richard (Thomas),
That would be good if the Resources Committee would focus on the problem. My proposal seems to be one rational way to approach long term budgeting and payouts and the Committee might want to look into that approach.

Anon 10:57 You understood my suggestion perfectly.Thanks for putting it more succinctly than I.
 

Was anyone appointed to the FAS resources committee this year? It doesn't seem to exist anymore. I wonder if someone "forgot" to appoint anyone to it. Some insider, please help!
 

Good point about Resources Committee. Does it still exist? Seems to have gone the way of many, many things--stalling and no action.