More On Endowments
Late last week Crooked Timber had a lively discussion about university endowments, prompted by my recent post here and Larry Solum’s response to it. Those who are interested in the topic should take a look at the discussion, as it partially mirrors the debate that is taking place more generally. I’ve been following Crooked Timber with interest, and here’s several points that have struck me:
* I’ll start with the observation I found most interesting: that some elite institutions have a mission that is as much (or even more) about research than about education. I agree that I need to emphasize this distinction more than I have to date. My proposal that an endowment per full-time student of $300,000 or more trigger less favorable tax treatment could penalize institutions whose primary output is research rather than education. Recall, however, that the most frequently proposed trigger is an absolute endowment value of $1 billion or more. Elite research universities tend to have endowments of this magnitude, so my proposal is not tougher on these institutions than the oft-suggested alternative. In fact, my proposed trigger would exempt some research-oriented universities that would otherwise be subject to new tax rules, such as Cornell and Columbia. The institutions most “negatively” affected by the $300,000 trigger are liberal arts colleges with endowments less than $1 billion and small student populations.
More important, however, is that a research-oriented mission actually strengthens calls for increased endowment spending. The sort of research taking place at America’s premier universities is designed to eventually lead to much social good: the easing of the global food crunch, the elimination of certain diseases, and so on, as well as the creation of knowledge more generally. Few science departments, for instance, are likely to argue that a dollar is better spent in the stock market than in their labs. The ability of researchers and scholars to make productive use of endowment funds seems almost endless, as do the potential gains from their work. This strikes me as a strong argument for elite research universities spending more of their endowments than they currently do.
* Any talk of a $300,000 trigger, however, presupposes that at least some universities and colleges should spend more. On this point, some of the comments over at Crooked Timber tipped up what can be characterized as a disagreement about who bears the burden of proof: Congress or universities with mega-endowments. That is, if Congress is considering changing the way it taxes these institutions, do universities bear the burden of convincing us about the wisdom of their endowment spending policies, or does Congress have to convince us that the social good produced by these policies is inadequate given the tax code’s treatment of these institutions and their donors? Because current tax policy so favors universities and colleges (they are exempt from the corporate tax and are not subject to some of the rules that govern other non-profits such as foundations), I tend to think that universities bear the responsibility for demonstrating the wisdom of their spending policies and the relative good created by them.
Regardless of who carries the burden, however, mega-endowments are starting to come under fire for a couple of reasons. One is the cost of tuition, which has skyrocketed. This concern is only partially about tuition at mega-endowment universities and colleges; some of these institutions have been aggressive about controlling tuition and reducing or eliminating it for lower and middle class students. The larger concern, however, is that mega-endowments enable expenditures that are only loosely associated with education or research, such as the construction of student amenities. These sorts of expenditures affect the priorities of less-prosperous institutions, which engage in this sort of spending at the cost of initiatives more directly related to education, including those that reduce tuition. Above all, however, is a belief raised by groups like the Harvard Alumni for Social Action mentioned in my initial post: institutions with mega-endowments could broaden their missions in ways that would require more spending and also produce additional social good.
* As Solum’s post alluded, universities defend large endowments by citing the need for a stable and predictable funding source (“saving for a rainy day”) and by invoking concerns about intergenerational equity. I am sympathetic to the threat of rain, which is why my proposed $300,000 trigger is most likely to affect schools who have 5 years or more worth of reserves, not including the value of their real estate and physical plant. This is also why I would likely oppose Congressional spending requirements aimed at all universities, regardless of endowment size.
Intergenerational equity is the notion that a university needs to spend less so that the endowment can support the same activities in the future as it does in the present. The work challenging the logic of intergenerational equity is not mine; it was done by Henry Hansmann almost 20 years ago. Solum has said that he finds the arguments against intergenerational equity unpersuasive (or at least my recounting of them); I disagree. But don’t take either of our words for it. Instead, check out Hansmann’s work for yourself. The best place to do so is here , although shorter versions have appeared in The Chronicle for Higher Education.
As I studied endowments, I was surprised by how little academic work exists on the subject. I’ve had several people suggest to me that this is because academics fear reprisal from their own institutions. While this may be true in isolated incidences, it doesn’t sound right to me, especially given the politically-charged issues that academics routinely tackle. But I do think that academics need to think seriously about mega-endowments; that’s one of the reasons I urge you to look at Hansmann’s work.
None of what I have written above or in my previous post discusses how institutions might be made or encouraged to increase spending. More on that later.