On September 26, 2007, a headshot of Yale’s chief investment officer and global investment god David Swensen graced the New York Times business section, accompanying an article about the Yale endowment’s 28 percent jump to an unprecedented $22 billion. On that same day, Washington legislators were also thinking about Yale’s endowment. In a morning hearing championed by the Senate Finance Committee’s Ranking Member, Charles Grassley (R-Iowa), a debate about college endowments was circling around one question: Colleges are earning a lot, but are they spending too little of it on financial aid for their students?
The coincidence was not lost on Lynn Munson, a critic of college and university spending and the hearing’s star witness. “Despite the fact that that very week the Senate Finance Committee, which sets the tax policy for the nation, had signaled a strong interest in college university endowments,” Munson says, “Yale went ahead and came out with particularly prideful announcements of its returns. They called attention to themselves even as the Finance Committee was calling these issues into question.”
There is certainly evidence that Yale is proud to be well-endowed. Snoop around the Investments Office and you might find a plush, stuffed bulldog wearing an already outdated Yale blue sweater that reads “YALE ENDOWMENT $13 BILLION” in stitched white lettering. More recent investment office paraphernalia includes a tote bag lined with fabric that states “The Yale Endowment $23 Billion October 2007” written over and over again in the Yale font.
The bag’s lining is loud; the office that custom-ordered it isn’t. For all of its boastful openness about the market value of Yale’s endowment, the Investments Office is remarkably close-lipped when it comes to disclosing information about its financial practices. “The Investments Office has no comment to offer concerning this subject,” the financial analyst contacted for this article emailed. During the full year that Thomas Kaplan, the current editor-in-chief of the Yale Daily News, covered the Investments Office for the paper, Swensen did not once respond to Kaplan’s requests for an interview. Swensen recently visited an undergraduate class to speak about the endowment in a downward-turning economy, but he began by asking that the students not talk to their peers about the discussion.
The reticence of the YIO—and of similar offices at other colleges and universities—is particularly problematic given their primary argument in the endowment spending debate: Endowments are complex and critics are uninformed. Armored in expertise, the offices retreat into a tight-lipped justification for their tight-pursed practices: “Trust us.”
Munson, on the other hand, is so loquacious that the endowment critic’s critics accuse her of being a talking head. She first became interested in what she calls the “endowment hoarding” of some colleges and universities while she was serving as chief of staff at the National Endowment for the Humanities, a federal grant-making agency. Reviewing applications for funding from colleges and universities across America, Munson was stunned by the size of many endowments. “I would tuck that information away in my head and read about the GDP of small nations in the morning paper and realize that’s about the size of some schools’ endowments,” she says.
When Munson left her post at NEH to start a family, she began to more seriously research the endowments at US colleges and universities—schools to which, she realized, she might soon be paying tuition. Since then she has become something of an unofficial expert on the subject and is currently an adjunct fellow at the Center for College Affordability and Productivity.
But Munson is by no means alone in her critique. Though she was one of the first voices to question the size of college and university endowments, others—from college alumni to current students, from college students’ parents to the parents of future college students—have joined her in a debate that has been gaining momentum over the past two years. This year, Senator Grassley teamed up with Congressman Peter Welch (D-Vermont) to draft a proposal for legislation mandating that colleges and universities spend a minimum of 5 percent of their endowments annually, a figure already legally required of all non-academic non-profits.
Administrators and Swensephiles for the most part dismiss these criticisms as ill-informed or simplistic. They emphasize that institutions of higher education already have their own complex, self-imposed spending rules—mathematical formulas that designate what percentage of its endowment a college or university spends during a given year. While these models differ slightly from school to school, all are designed to smooth consumption over time so that the university doesn’t have a drastically irregular budget—say, a budget that oscillates as much as the rate of return does—from year to year. Yale’s long-term average for endowment spending is 5.25 percent. But that does not mean that each and every year Yale meets the 5 percent minimum that members of Congress have proposed. Though in years with low returns Yale is likely to spend as much as 5.5 percent of its endowment, when blessed with high returns, it may spend as little as 4.5 percent. (While half of a percentage point may sound negligible, when talking about an endowment in the tens of billions of dollars, even fractions of fractions are values worth debating.) Many considerations go into the equation, but one of the most important factors is the spending rule’s ability to self-adjust based on the endowment’s past performance in the market. “The spending rule is based on sound economic analysis. It’s mathematical and it makes sense,” says a current Yale student and former YIO intern who wished to remain anonymous.
The spending rule requires such delicate engineering because it is designed to sustain a college’s purchasing power to perpetuity. Since Yale expects to be around indefinitely, the equation must manage the present not only with an informed sense of the past but also with a keen eye to the future. The phrase that financial officers at universities use to describe this parity between present and future is “intergenerational equity.” A stable endowment ensures that scholars in the year 3008 will have no fewer opportunities than do their 2008 counterparts.
“In general, endowments are biased toward future students,” says Ken Redd, director of research and policy analysis for the National Association of College and University Business Officers, which conducts an annual and highly respected study of higher-education endowments in which Yale takes part. Redd’s tone provides no hint of value judgment, either positive or negative, on whether such a bias is desirable. “That’s a subjective question,” he says blandly.
Critics, however, do not avoid the subjective, and their opinions are pretty transparent. “Where is the line between saving up for students of the future and asking today’s students to make sacrifices that are too great and actually kind of deprive them?” asks Munson, who believes that many institutions of higher education in the U.S. have already crossed this line. “The policy seems to be more for the sake of more,” she says, describing a keeping-up-with-the-Joneses mentality.
But in addition to the need to stabilize spending between the present and the future, administrators claim that, even if a university wanted to spend much higher percentages of its endowment, there are a number of factors that limit how much the university could spend. Though the YIO tote bags boast “$23 billion” in a repeating pattern, this number is not the whole story. “That’s the market value, but it’s not actually the amount of cash they have,” explains Redd. On average, about a quarter of college and university endowments are invested in illiquid assets such as hedge funds, private equities, and natural resources, which cannot be sold in the open market. Illiquid assets not only diversify a university’s investment portfolio, they also “prevent raiding the endowment,” says Redd.
Much of the endowment is inaccessible for another reason: earmarks. When donors give money to colleges and universities, they have the option of mandating it for a specific purpose. Restrictions range from well-known professorships such as the Sterling to the endowment for tulips at Jonathan Edwards, Yale’s wealthiest college. However, statistics from the 2007 NABUCO endowment study show that only a little over half of a school’s endowment, on average, is restricted and that of those restricted funds, 30 percent are set aside for financial aid. “Unless Yale could prove to you that they have a higher proportion of the endowment that is restricted than most institutions of their type, I simply wouldn’t let them get away with that argument,” says Munson.
Yale, she insists, could be more generous with its funds even under existing restrictions. But Harvard, Princeton, and Yale, the Holy Trinity of endowments whose piles of treasure stretch closer and closer to the heavens, are not the only schools that have, in Munson’s estimation, reached the other side of that intangible line. Naming names, she points out that not only private but also many public schools—the University of Texas, the University of Minnesota—are guilty of big endowments and little spending. Colleges and universities are nonprofits, but their endowments dwarf those of their not-for-profit peers. In fact, at least 26 American academic institutions have endowments larger than that of the nation’s wealthiest museum, the Metropolitan Museum of Art, whose endowment sits at $2 billion.
Professor Douglas Rae, who served in New Haven’s mayoral office in the early ’90s and who now teaches courses on capitalism and the city, believes that Yale has done its duty to its students, its scholars, and its city. In his estimation, the University has already paid the societal dues that Munson and friends demand the nonprofit begin to pay. Rae points to the tax revenues that Yale, as the largest owner of commercial property in New Haven, pays to the city, to the financial aid reforms of last year, to the institution as an engine of employment. “Yale is hands down the most beneficial institution in the city,” he says.
Munson claims that she won’t be able to assess whether Yale’s financial aid reforms and contributions to New Haven make up for its tight-fisted endowment policies until there is more transparency in the financial decisions of institutions of higher learning. Currently, schools are not obligated to disclose how they spend their budgets. “I believe it has really contributed to hoarding,” says Munson. Money management is made further opaque by the fact that, at Yale, the Investments Office is not obligated to make their investments public unless Yale accounts for more than 50 percent of a company’s stockholding.
Approaching the push for transparency from a different side, an undergraduate organization called the Yale Responsible Endowment Project has created a petition to encourage the University to reconsider its investments in a hotel management company whose labor policies are less than praiseworthy. The group is not officially recognized by the University.
Of course, there are other reasons for keeping Yale’s books under wrap. Because the University is a role model in the field of investments, other institutions clamor for the details of its portfolio so that they might mirror it. “If Yale were to disclose its investments, we could potentially be driven out of our own investments because people look up to us,” said the former YIO intern.
This kind of he-said, she-said debate seems to have come to a draw. In the past year, many colleges and universities—Yale included—have drastically revamped and greatly improved financial aid packages for middle-income families. In concession, the other side of the debate has shifted its proposed legislation to the backburner. After a congressional hearing with university administrators on October 8, Senator Grassley concluded that he would most likely not pursue the 5 percent spending rule.
Grassley’s decision was no doubt also influenced by the results of September’s economic downturn. The uncertain future against which university administrators insist that enormous endowments protect may have arrived. Fellow Ivies Brown and Cornell have instituted hiring freezes because of budget concerns. But with a minimum 5 percent payout like the one Congress proposed, Yale’s own endowment—which garnered only 4.5 percent in returns in the declining market—would have shrunk.
While college administrators point to decreased returns as evidence that these institutions need to protect themselves against an unpredictable future, endowment critics insist that these are precisely the conditions that call for universities to be generous. “Harvard uses the phrase ‘a rainy day fund,’ but it would have to be a rainy day of Biblical proportions,” says Munson. “There is simply no excuse whatsoever to be sitting on those funds in a time like this.”
With both sides claiming the recession as proof of their victory, the endowment debate has sharpened rather than settled. Financial aid, which was always a large part of the discussion, is now its core. “Students and their families need help,” says Munson.
Still, though some have suggested that schools such as Yale could offer a free ride to every member of each incoming class merely by spending its endowment returns, very few people actually argue that schools should pursue such a policy. “If a university could dip into its endowment and reward all the needy students that needed to be rewarded, eventually the endowment would cease to exist,” says Redd.
Translating Lehman’s terms to layman’s terms is not a priority—at least not for the YIO. Perhaps critics of endowment spending believe that the machinery of college and university finances have something to hide because financial and administrative officials often behave as though there is. With this in mind, the use of the word “treasure” to describe massive university endowments is less hyperbolic than it might seem. The money’s whereabouts—its uses and its potential abuses—are disconcertingly buried.