In a recent New York Times op-ed, Victor Fleischer, a professor of law at the University of San Diego, raises legitimate concerns regarding one university’s nearly half-a-billion-dollar payment to private equity fund managers for overseeing the investment strategy on a portion of its endowment fund. In particular, he calls into question the extent to which higher-education institutions with significant financial resources are using enough of that money for educational purposes, including easing the financial burdens of students who, left to their own devices, are borrowing increasingly large sums of money to pay for their schooling.
I agree with him, however the scope of the problem isn’t limited to the schools and universities with $100-million-plus bank accounts that Fleischer targets.
Certainly, nary a week or two goes by without word that a significant gift has been made to a prominent university. The much-heralded donations are often earmarked for specific projects, such as a new building, the modernization of an existing structure, the support of a new academic undertaking or, perhaps, the sponsorship of unique research. Less publicized smaller contributions, which are routinely made by parents and alums, may also be held in reserve to fund building projects or targeted academic pursuits, or, as is often the case, to bolster the school’s rainy day fund: the endowment.
A look at the typical not-for-profit school’s annual financial statements, however, suggests a slightly different story: Institutions are increasingly using the investment income (including interest) generated by these endowments (and, sometimes, principal amounts from the fund itself) to offset operational shortfalls.
Said differently, rather than taking steps to address the problems of spiraling administrative expenses, the dubious strategy of meeting enrollment goals by discounting tuition prices for some (which is analogous to marking down an exorbitantly-priced item to the level of “expensive”) and, perhaps, relaxing admission standards for others, school officials have instead chosen to bridge the widening gap between revenues and expenses by compromising the financial generosity that was intended to assure institutional longevity.
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