More Massive Endowments

I went to an event at AEI on Friday morning, focused on the question of whether Congress should obligate non-profit universities to spend a minimum percentage of their endowments every year, a requirement currently applied to non-profit charities. Parenthetically, it's worth noting that AEI puts on some of the best education-related events in town. The issues are timely, they get the right people in the room, and the discussions are pretty balanced, ideologically. The one downside is that the conference center is on the 12th (top) floor of the AEI building, which houses publications like The Weekly Standard along with organizations like the Project for the New American Century and, well, AEI. That means that if you go to enough of their education events, you inevitably have the experience of glancing at the person standing next to you in the elevator and thinking "Hey, I saw you on TV, you're that guy who seems to be hell-bent on destroying civilization as we know it." Is there an ethical obligation to say something in this situation? This troubles me.

Anyway, while I walked into the event glad that the endowment issue is causing people to scrutinize the much-understudied issue of how colleges spend their money, on balance I was against a minimum payout. Charles Miller, chairman of the recent Commission on the Future of Higher Education, made a principled argument against the feds interfering with institutional spending decisions while also pointing out that university endowments are encumbered by a lot of donor-directed legal restrictions on spending. Plus, he noted, any university financial official with half a brain could shuffle funds around in a way that would meet the letter of the law while leaving actual spending unchanged.

Other panelists, however, made some good counterpoints. For example, did you know that when it's reported that universities spend, on average, 4.6% of their endowments, that number includes the cost of managing the endowments themselves? Or that the single biggest category of donor-restricted spending is financial aid for low-income students? So when politicians suggest that institutions could do more to restrain prices for needy undergraduates if they bumped the payout up to 5%, that's not a crazy idea.

Richard Vedder also raised a larger issue: the generally unquestioned idea that colleges and universities deserve non-profit status because of the positive benefits they provide to society at large. Vedder argues that the empirical case for this, framed in terms of benefits vs. the cost in lost tax revenues, isn't as obvious as one might think. Of course, of course, much of what makes higher education valuable can't be measured in terms of dollars and cents. That said, I think the non-profit sector that most resembles higher education in longevity, attitude, and weakness for monumental architecture is organized religion, in particular the Catholic Church, and while the church spends money running charities and parochial schools for low-income urban students, colleges blow vast amounts of tax-subsidized funding operating professional sports entertainment franchises for the amusement of their students and alumni. There are few, if any, major non-profit sectors that are as fundamentally self-interested as higher education, where we're obligated to assume social benefits on faith in such a diffuse, attentuated way.

To be clear, I'm not advocating for revoking the tax status of your local university. Higher education does a great many things for a great many people, and in countles ways large and small enriches the world around us. But the time when policymakers and the general public simply take higher education's word for it--on spending, learning, and many other things--is, thankfully, coming to end.