Monday, February 04, 2008
The Endowment Gap
The Times today covers a subject oft-discussed on this blog: the widening gap between rich and not-rich colleges and universities.
...America’s already stratified system of higher education is becoming ever more so, and the chasm is creating all sorts of tensions as the less wealthy colleges try to compete. Even state universities are going into fund-raising overdrive and trying to increase endowments to catch up.
I wrote in the last issue of 02138, "Harvard's billions are undoubtedly a blessing. But in ways that no one seems to have expected, they are also becoming something of a burden."
If I may pat myself on the back, in ways that I didn't expect, that statement seems to be increasingly true—especially as federal attention to and pressure on this issue grows.
Also troubling for Harvard, in a subordinate kind of way, is the fact that Larry Summers has completely defined this issue as his, rather than Drew Faust's. The Times (online, anyway) has a photo of Summers with the caption, "While he was president of Harvard, Lawrence H. Summers used endowment returns for expansion, financial aid and research."
Okay, so it's not the best picture of him, but that's not important. What's interesting, and what Drew Faust and her handlers should be concerned about, is the fact that he has become so publicly identified with this issue. Would Faust not talk for this article? Or did the Times not even bother to call her?
Dr. Summers said that when investment returns were particularly high he believed spending at wealthier universities should go higher, too. “There is a temptation to go for what is comfortable,” he said, “but this would be a mistake. The universities have matchless resources that demand that they seize the moment.”
The Times might have wanted to speak to an FAS professor to see how Summers' spending priorities affected other areas of the university. But as I've previously written, the Times and Larry Summers have a long and loving relationship.
And Summers is very good at using that relationship. Note how his quote—"a temptation to go for what is comfortable"—is ostensibly about endowment spending, but could easily refer to Drew Faust as opposed to, say, himself.
Smart guy, that Larry Summers.
That said, the money issue comes at a particularly tricky time for Harvard: As it prepares to go public with a massive fundraising campaign to pay for Allston. How will donors feel about giving more to the world's richest university, by far? ¶ 4:39 PM
...America’s already stratified system of higher education is becoming ever more so, and the chasm is creating all sorts of tensions as the less wealthy colleges try to compete. Even state universities are going into fund-raising overdrive and trying to increase endowments to catch up.
I wrote in the last issue of 02138, "Harvard's billions are undoubtedly a blessing. But in ways that no one seems to have expected, they are also becoming something of a burden."
If I may pat myself on the back, in ways that I didn't expect, that statement seems to be increasingly true—especially as federal attention to and pressure on this issue grows.
“These institutions continue to build up their kitties,” said Representative John F. Tierney, Democrat of Massachusetts. “They say it is the schools’ money. But it is not all the schools’ money. Some of it is. But when a donor gives them money, he is able to give more because he is not paying taxes. So some of what they have is federal money, every student’s money, every family’s money.”
“It may be time to change tax policy,” Mr. Tierney added.
Uh-oh! That would be very, very bad for Harvard.Also troubling for Harvard, in a subordinate kind of way, is the fact that Larry Summers has completely defined this issue as his, rather than Drew Faust's. The Times (online, anyway) has a photo of Summers with the caption, "While he was president of Harvard, Lawrence H. Summers used endowment returns for expansion, financial aid and research."
Okay, so it's not the best picture of him, but that's not important. What's interesting, and what Drew Faust and her handlers should be concerned about, is the fact that he has become so publicly identified with this issue. Would Faust not talk for this article? Or did the Times not even bother to call her?
Dr. Summers said that when investment returns were particularly high he believed spending at wealthier universities should go higher, too. “There is a temptation to go for what is comfortable,” he said, “but this would be a mistake. The universities have matchless resources that demand that they seize the moment.”
The Times might have wanted to speak to an FAS professor to see how Summers' spending priorities affected other areas of the university. But as I've previously written, the Times and Larry Summers have a long and loving relationship.
And Summers is very good at using that relationship. Note how his quote—"a temptation to go for what is comfortable"—is ostensibly about endowment spending, but could easily refer to Drew Faust as opposed to, say, himself.
Smart guy, that Larry Summers.
That said, the money issue comes at a particularly tricky time for Harvard: As it prepares to go public with a massive fundraising campaign to pay for Allston. How will donors feel about giving more to the world's richest university, by far? ¶ 4:39 PM
Comments:
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One has to love the way various conservative knuckle-draggers, in principle opposed to government's hand in the affairs of private business, are happy to prod into academia.
Liberal toad though I am, I have to say I agree with keeping government out of this one.
Liberal toad though I am, I have to say I agree with keeping government out of this one.
# posted by 
: February 4, 2008 5:10 PM
: February 4, 2008 5:10 PM
Let's be specific. This is Karen Arenson. She has a routine call list no matter what the issue, and has a story line before she calls. She is a lazy reporter. She did not bother to check on Summers' claims. He did not do what he claims to have done. The initiatives he mentioned were begun by others. In some cases, he did not even "allocate" any significant increases at all beyond what was already committed. As for the endowment question, he was if anything on the other side. He objected to the increase in the spending rate of previous presidents. She should have known, but in this she is not alone, that Summers was driven out in part because of the integrity issue. Spin, and in some cases, outright deception. A good reporter would have been able to recognize this.
# posted by : February 4, 2008 9:35 PM
: February 4, 2008 9:35 PM
Well said, 9:35. Terrible article and a pity Pres. Summers' need to focus on himself and puff himself up is leading him down the path of mendacity, intentionally or otherwise. Six years ago Harvard's library acquisitions record was peerless, and well ahead of Yale's. Last year Yale moved ahead of Harvard, and others are moving up. This in part a result of years of an absence of presidential expectation about the centrality to 'research' of Harvard's libraries. He was reliant on his own superior intelligence and consequent ability to determine what mattered and didn't matter in the world, where resources should go, etc. etc.
And let's be specific: Pres. Summers was critical of the larger endowment payouts of the late Rudenstine years, and was quite a tightwad when it came to payout, although he promised and maybe even secured resources for favored projects -- no way to run a University.
Hey, RB, you became curiously indifferent to the importance and interpretability of the image in the Times piece: "Okay, so it's not the best picture of him, but that's not important." "Good listener" is an overdone but in some circles undervalued term, and it's amusing to juxtapose the term with this image.
And let's be specific: Pres. Summers was critical of the larger endowment payouts of the late Rudenstine years, and was quite a tightwad when it came to payout, although he promised and maybe even secured resources for favored projects -- no way to run a University.
Hey, RB, you became curiously indifferent to the importance and interpretability of the image in the Times piece: "Okay, so it's not the best picture of him, but that's not important." "Good listener" is an overdone but in some circles undervalued term, and it's amusing to juxtapose the term with this image.
# posted by : February 4, 2008 11:03 PM
: February 4, 2008 11:03 PM
Richard (Thomas). I think you’re incorrect with regard to your thoughts as to Larry being a tightwad. If you simply look at the investment results, you will see that the first three years of his tenure were marked by results that did not even cover the level of inflation being experienced by the University. Prudent financial people would have been very cautious, and I know for a fact that he and his CFO were. It would have been irresponsible to be otherwise.
Because of the nature of the budgeting process (long lead time), by the time financial results turned around, Larry had only one year left in his tenure. Furthermore, I think if you look back, you’ll see that in addition to the investment results, his hands were tied because of the remarkably imprudent endowment payouts which President Rudenstine had put through. Clearly, President Rudenstine and some others on The Corporation believed the bull markets of the late 90s were going to continue and, of course, they did not. As I look at it, if the university made two huge, imprudent payouts, it would necessarily have a marked effect on what could be done in the future. If you and 9:35 PM believe that Larry’s objection to the spending rate of the previous president was incorrect, I urge you to do two things. First, speak with President Bok and find out what his mind set was in the late 70s early 80s re endowment payout. Second, ask yourselves the following question: was it prudent to have two outsized endowment distributions based on two outsized years of investment returns? I think if you speak with those who have seen markets “revert to the mean” as far as performance goes, you would hear that the answer is “no.” As you know, I’ve been arguing just this point for some time, as current outsized investment returns seem to cause many to want to spend them, even if those returns are unlikely to be sustained.
As to where the budgets are spent, I think at the margin, The Deans of the schools have a great deal more to say than the president.
Am afraid I have to disagree with my friend Larry Summers on some of the things he is quoted as saying in today’s New York Times. One of the reasons that Harvard’s payout rate rose in several of those years was that the investment performance was down for two years. In fact, over the three year period encompassing the two down years and the year following, the average investment return was less than 4%. Assuming that the payout went up (and how could it not; inflation is baked into university costs), mathematically the payout ratio (however it was calculated) would rise.
There are other reasons of course; however, for three years investment performance was the main one. Furthermore, in those years, as I believe the case to be now, endowment payout was not measured by the percentage of payout to prior year’s endowment. It was a percentage of a poorly thought out convoluted formula (as are the payouts of all the other universities I’m familiar with). Larry’s comment that “when investment returns were particularly high, he believed spending at wealthier universities should go higher, too”, is not well thought out. If investment returns were particularly low, should spending go lower and if so, how would that be accomplished when inflationary factors do not recede. Would Richard Thomas and Standing Eagle be pleased to see their salaries cut? Would professors enjoy seeing their research funds cut? What about a cut in the university’s share of health care costs for faculty and staff? Clearly, none would be a palatable option.
As I’ve mentioned several times before, the current payout policies make little sense, have nothing to do with long term on-going institutional needs, and are playing right into the hands of people like Senator Grassley. How is it possible for the schools to have a long term budget process (and Harvard, because of the way higher education is structured, needs to think long term… very long term) when they have no idea of what monies they will be receiving from the endowment, three, five, ten or more years from now.
I’ve proposed a rational way of handling payouts (and have commented about it extensively on this site), but no one at Harvard seems interested in exploring it. If Harvard and others continue to use irrational methods with regard to endowment payouts, my bet is that, in the future, it is going to lead to trouble for universities. With The Congress looking into endowment payouts, I believe we’re seeing the start of those troubles.
Standing Eagle… will you be testifying before Senator Grassley’s committee as to why Harvard is fully able to have an endowment payout of six, seven or eight percent of the previous year’s value? :)
Because of the nature of the budgeting process (long lead time), by the time financial results turned around, Larry had only one year left in his tenure. Furthermore, I think if you look back, you’ll see that in addition to the investment results, his hands were tied because of the remarkably imprudent endowment payouts which President Rudenstine had put through. Clearly, President Rudenstine and some others on The Corporation believed the bull markets of the late 90s were going to continue and, of course, they did not. As I look at it, if the university made two huge, imprudent payouts, it would necessarily have a marked effect on what could be done in the future. If you and 9:35 PM believe that Larry’s objection to the spending rate of the previous president was incorrect, I urge you to do two things. First, speak with President Bok and find out what his mind set was in the late 70s early 80s re endowment payout. Second, ask yourselves the following question: was it prudent to have two outsized endowment distributions based on two outsized years of investment returns? I think if you speak with those who have seen markets “revert to the mean” as far as performance goes, you would hear that the answer is “no.” As you know, I’ve been arguing just this point for some time, as current outsized investment returns seem to cause many to want to spend them, even if those returns are unlikely to be sustained.
As to where the budgets are spent, I think at the margin, The Deans of the schools have a great deal more to say than the president.
Am afraid I have to disagree with my friend Larry Summers on some of the things he is quoted as saying in today’s New York Times. One of the reasons that Harvard’s payout rate rose in several of those years was that the investment performance was down for two years. In fact, over the three year period encompassing the two down years and the year following, the average investment return was less than 4%. Assuming that the payout went up (and how could it not; inflation is baked into university costs), mathematically the payout ratio (however it was calculated) would rise.
There are other reasons of course; however, for three years investment performance was the main one. Furthermore, in those years, as I believe the case to be now, endowment payout was not measured by the percentage of payout to prior year’s endowment. It was a percentage of a poorly thought out convoluted formula (as are the payouts of all the other universities I’m familiar with). Larry’s comment that “when investment returns were particularly high, he believed spending at wealthier universities should go higher, too”, is not well thought out. If investment returns were particularly low, should spending go lower and if so, how would that be accomplished when inflationary factors do not recede. Would Richard Thomas and Standing Eagle be pleased to see their salaries cut? Would professors enjoy seeing their research funds cut? What about a cut in the university’s share of health care costs for faculty and staff? Clearly, none would be a palatable option.
As I’ve mentioned several times before, the current payout policies make little sense, have nothing to do with long term on-going institutional needs, and are playing right into the hands of people like Senator Grassley. How is it possible for the schools to have a long term budget process (and Harvard, because of the way higher education is structured, needs to think long term… very long term) when they have no idea of what monies they will be receiving from the endowment, three, five, ten or more years from now.
I’ve proposed a rational way of handling payouts (and have commented about it extensively on this site), but no one at Harvard seems interested in exploring it. If Harvard and others continue to use irrational methods with regard to endowment payouts, my bet is that, in the future, it is going to lead to trouble for universities. With The Congress looking into endowment payouts, I believe we’re seeing the start of those troubles.
Standing Eagle… will you be testifying before Senator Grassley’s committee as to why Harvard is fully able to have an endowment payout of six, seven or eight percent of the previous year’s value? :)
# posted by : February 5, 2008 4:37 AM
: February 5, 2008 4:37 AM
Sam:
"Would professors enjoy seeing their research funds cut?"
Ahem, that was my point. They were, in large part because the pressures on FAS from Mass. Hall did not include support for my research funds (i.e. maintaining the excellence of Harvard's libraries).
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"Would professors enjoy seeing their research funds cut?"
Ahem, that was my point. They were, in large part because the pressures on FAS from Mass. Hall did not include support for my research funds (i.e. maintaining the excellence of Harvard's libraries).
# posted by : February 5, 2008 8:37 AM
: February 5, 2008 8:37 AM<< Home
