The Oddly Selfless Use of University Endowments

Like many organizations, colleges and universities are feeling the effects of the battered economy--revenues are down or growing less quickly, forcing higher education leaders to confront the possibility of layoffs and other painful austerity measures. A relatively small number of institutions, however, have the good fortune to be sitting on gigantic piles of money in the form of endowments that swelled to record size when times were good. There's reason to think that, for some, the aggressive investment strategies that added so much lucre to the treasury are now shrinking the hoards of cash at an equally rapid rate. But they still have a lot of money left, much more than they had even 10 years ago. Yet, as Harvard freshman and ace blogger Dylan Matthews writes (via Matt Yglesias, an alum):

Harvard has tens of billions of dollars. How many tens of billions they won't say, but it's in that ballpark. However, because they're slightly less obscenely wealthy than they were before the economy went to hell, the Harvard administration has started laying people off without cause. Some students, like the Student Labor Action Movement (SLAM) and its supporters (like me and Perspective), think that this is uncalled for. We think that Harvard should be more forthcoming about its financial situation, so that students and other members of the community can evaluate whether we really need to lay off workers to weather the recession. And until Harvard releases the information that would allow such a debate to take place, it should stop cutting jobs and find other ways to make up the shortfall. After all, if they're going to cut the jobs of valued members of our community, we have a right to know why that's happening, and how necessary or unnecessary that is. I, for one, kind of doubt that a university that can pay for massive concerts/carnivals can't cough up the cash necessary to pay its workers.

This raises a larger, intriguing question of how university administrators and trustees balance their personal interests against the long-term welfare of the institution. From a selfish perspective, it's in the best interests of college leaders to aggressively spend the endowment in the short term--to avoid layoffs and angry students when times are bad, and to pay for new buildings and famous professors and various other things that cover the institution--and thus the leaders--in glory when times are good. 

And yet, this doesn't tend to happen. Instead, most institutions are pretty conservative when it comes to endowment spending--to the point where they had a tremendous conniption fit when Congress mulled over the idea of requiring them to adhere to the modest five percent annual payout requirement currently imposed on other non-profits. Even when the investment and donor dollars were pouring in, the typical university only spent about 3.9 percent of its endowment on actual stuff other than the cost of managing the endowment itself.

Partly, I imagine even the wealthiest universities haven't quite come to grips with the reality of owning assets larger than the annual GDP of a typical developing nation. But mostly I think this is just one symptom of a larger way of thinking that seizes the minds of college leaders everywhere--a kind of institution-centric view of things that dominates their thinking in profound and important ways.

By that I mean: the institution comes first--before the students, before the faculty, before even the people in charge. In many ways, it's an admirable way of doing business. Universities are among the most long-lasting, essentially virtuous institutions in all of human society. They've preserved crucial values and knowledge in times of great unrest, adapting and improving along the way. The particularly American philosophy of institutional self-reliance--foreign universities often get proportionately larger state subsidies but are more tightly regulated and have far less capacity to raise money on their own--has resulted in an elite higher education sector of great standing, longevity and wealth. For example, I'm writing this from the University of Wisconsin-Madison, where I'll be knocking around for the next couple of days and speaking on Thursday. The university is really kind of awesome, full of museums and theaters and grand buildings, packed with bright, energetic people trying to make the world a better place. 

But there's a downside to all of this: Institutional and societal interests aren't always aligned. For example, it's good for a university's reputation and bottom line to focus on enrolling lots of rich smart kids, but frankly what we need are more colleges that are good at, and want to be good at, teaching students at the median (among the population of potential college students, which isn't the whole population) or below. Institutions tend to want to grow into fully autonomous city-states when we actually need a more interconnected, cooperative higher education community. Institutions often take a dim view of employee unionization. Belief in the greatness of the institution can also become a little cultish and weird, disconnected from the day-to-day reality of the outside world. And so on. 

And I suspect the perpetual building of the institution causes college leaders to inappropriately discount the urgent needs of today in favor of a more abstract tomorrow. Which isn't to say that universities should blow out their endowments for short-term benefit, but there is a balance to be struck. Harvard's been around for over 370 years. It's future is pretty secure. It's gotten steadily richer and more famous over time, and those long-term trends will probably continue. Future leaders will likely be better positioned to deal with future crises--just as the university today is better off than it was 25 or 50 or 100 years ago.  But the people the university employs today need jobs right now. Universities might be among the few--perhaps the only--institutions that have become too adept at taking the long view.