Regarding the current financial crisis, a consensus has developed that the government needs to do something, and do something dramatic. The argument is, basically, that the normal sources of cash flow that might stimulate the economy out of recession have dried up, either through idiotic investments, or out of fear caused by all the idiotic investments. The government, then, is the only entity with the financial resources needed to get things moving, and they should be pumping cash into the economy through infrastructure projects and the like, to get things moving again.
There is another class of institutions out there, though, with large sums of money at their disposal, who could be using it to do similar good: colleges and universities. As of the end of fiscal 2007, according to the National Association of College and University Business Officers, there were 76 colleges and universities with endowments of at least a billion dollars (including my alma mater), and 141 with at least half a billion. Harvard alone has more than $30 billion. This is a tiny fraction of what the federal government has at its disposal, but it's money that for the most part is just sitting there.
At the same time, though, these institutions are engaged in exactly the sort of austerity programs that really smart people say are a terrible idea for the government. I got a letter a while back through the alumni association saying that Williams plans to put construction projects on hold, and hold off on filling open jobs (see also here). Via Matt Yglesias, Harvard is making similar noises.
This strikes me as completely crazy.
The problem here is that too many academic institutions have lost sight of their real missions with regard to these huge investment holdings. In too many cases, college and university endowments have come to be seen as another way for rich people to count coup against one another. This is all over the current discussions of endowments, as the main concern of many people is not how the institution is performing but how the endowment is doing relative to other comparable schools-- see the comments at the Ephblog post above. Too many people are asking not "How will this affect our students and our communities?" but "How will this affect our US News ranking?"
I mean, look, I understand that investment income on the endowment is an important component of the operating budgets of these institutions, but ultimately, this sort of situation is what you have this money for. The endowment is money set aside for a rainy day, and it's raining cats and dogs.
This is a time when colleges and universities ought to be spending money, not hoarding it. You can't move forward as an educational institution if the whole country is sliding backwards into depression. The academic community should be doing whatever it can to invest in the communities that it depends on.
I have two concrete-ish suggestions:
1) Back your students up. The real crisis didn't hit until October, at which point most families have their financial aid arrangements locked down for the year. Come next September, though-- if not sooner-- I expect the academic world to be full of stories about students who needed to drop out or transfer for financial reasons. Either they won't be able to get financial aid from colleges and universities who are tightening their belts, or they won't be able to secure loans from a financial sector that has gone into panic mode.
No student should have their education curtailed because a bunch of idiot financiers decided that tulip bulbs were precious real estate prices would increase forever without limit. This is an area where academic institutions have a duty to step up-- either provide direct aid to families in trouble, or offer to guarantee private loans for students and families having trouble getting private credit.
2) Invest in your community. The word from smart economists is that we need government stimulus to get people working, and get money moving. The most common recommendation is to invest in infrastructure-- fix bridges, repair highways, upgrade the power gird. This creates new jobs, pumps money into the economy, and produces tangible and much-needed improvements.
Colleges and universities have the ability to do the same thing on a local level. Don't delay or postpone construction projects or infrastructure upgrades-- push ahead now. Especially don't put off hiring people-- people are cheap compared to buildings. Hire people, continue with planned projects, and get money flowing into the economy.
Yes, these probably require dipping into the endowments of the institutions in question. Isn't that what the money is there for?
We're constantly bombarded with high-minded rhetoric about the noble mission of academia, and the need for community service and public service. This isn't a mission that starts with the faculty and ends with the students-- it ought to reach up to presidents and boards of trustees, as well.
Community service ought to mean something more than just chasing frat boys out of bed to pick up litter a few Saturdays a year. If academic institutions are really committed to the public good, shouldn't that include putting some of their hundreds of millions of dollars to work doing what they can to improve the economy for everyone?
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Endowments are NOT rainy day money. They are there for the reason you cited: operational income. Eating away at an endowment, particularly at a time where they are typically getting hammered in the stock market, and you'll run short on cash pretty quick. For a school using an endowment to provide a big chunk of its budget, this would be the equivalent of the annual mid-year budget cuts Dean Dad has been talking about lately.
Plus, then you couldn't just up and buy yourself a prestigious but financially troubled medical school ::cough::
I do agree that going forward with smart projects and hiring that needs to be done (can you say retiring department administrator) are good locally as well as for the university. But these are things that should be done for the health of a university anyways. If it was a smart project before McCain's campaign got torpedoed economically, it's a smart project now. If it can be done in a way that benefits the community, that's even better.
This is just a guess as I'm not in a position to audit anybody's endowment fund performance, but often college endowment funds look for conservative investments to guarantee that they have some kind of income stream. With interest rates as low as they have been throughout the 00s (and falling over the past year), it would not surprise me one bit if a lot of endowment fund money went into the same CDOs that got Wall Street into trouble. (We already know that significant amounts of state and municipal pension money went into these things.) Lots of conservative investors were looking for AAA rated stuff with good returns, and here were these allegedly safe investments with better returns than Treasuries or anything of the sort. Except that, oops, the AAA rating was based on overly optimistic assumptions, and the securities are now worth pennies on the dollar.
I'm also hearing rumors (e.g., on Matt's Harvard endowment thread) that some of these big-endowment universities got involved in hedge funds and are losing big that way. On that one I call WTF: If you have a Williams sized endowment (let alone Harvard), you have enough money to run your own hedge fund, rather than paying some Wall Street bozo 2-and-20 to chase that return on your behalf. Williams could pay their in house management team 10 basis points (which is a factor of 20 better than the typical hedge fund, excluding performance bonuses) and still be paying north of $1M in salary to money managers--about the right order of magnitude for this kind of work. A Harvard would need more firepower, but for them even $10M would be about 3 basis points. They'd pay that much (again, excluding performance bonuses) if they had even half a billion invested in hedge funds. Which amounts to a very expensive welfare program for certain Harvard alumni.
Echoing some of the previous comments, endowment money is not cash. So Harvard, for instance, after the financial crisis took hold in September and October, probably watched it's endowment shrink by a significant amount. Most non-profits try to take their operating expenses solely out of the interest earned on their endowment. The more you send down your endowment, the less you will have to spend on operating expenses both in the near term and the long term.
Someone I know who has worked extensively for decades with non-profits has said (and he said this a few years ago) that any non-profit expecting to be around for the long haul in the 21st century needs to have a bare minimum endowment of $100 million. I thought he was nuts when he first said this, but now I'm starting to wonder.
They are probably concerned with selling low. It will take a larger percentage of their endowment (number of shares of stock) to build that building now than it would have last year. Of course, if they had been seriously planning to build it, they should have converted those assets to cash *last* year (like someone planning to retire in the next few years) and the problem would not exist to the same degree. They gambled a bit too long, like someone who is 65 or actually retired but still 100% in equities.
The risk to Williams is similar to the risk of turning equities into cash now. The only hope of recovering value for those equities is a revival of the stock market. It will take over 20 years to double your money at a 3% fixed return. The question for Williams is whether the building itself has more present and future value than the stock they need to dump to build it. I think the answer might be a qualified "yes" if the building isn't just to compete with the Jones'.
Also, unlike a community college where the people building the building might actually attend and use it, the local community will not be giving that money back to Williams. So the other question is really how 'invested' Williams is in the community, how much responsibility it feels for the town around its gown.
I like the idea of these universities increasing their financial aid, as parent's are hit harder and banks are increasingly getting tighter with their credit, students need all the sources of aid they can get.
However as two the second of colleges giving back to their community I just don't see that happening. There are a host of factors that go into a university or any business making the decision to build a new building, not all of them have to do merely with how much interest they are making on their endowment fund. Also I don't see a couple of hundred colleges or universities making that much a change beyond the local economy. Which the local economy that depends on a college probably stays pretty stagnant most of the time anyways. Colleges don't go on a hiring binge (100+ employees in a single year), they don't increase the number of students drastically from year to year, and what students they do bring in overall aren't exactly brimming with wealth.
Colleges aren't even going to cause a recession, local, national, or global to even blink.
Which the local economy that depends on a college probably stays pretty stagnant most of the time anyways.
I disagree with this statement. As someone who has spent most of his post-undergraduate life in small college towns, I see significant effects. My current institution has been going through a series of building renovations that were planned for years in advance, thereby keeping the local building trades going. Sure, the year-to-year fluctuations are usually not large, but in the current economy that means many jobs that aren't being lost. It's reflected in regional real estate prices: they're holding up better in this town than in many other nearby towns where a larger fraction of the people are worried about losing their jobs.
I'm also going to make a prediction here that this economic downturn may well put several third-tier private colleges out of business. These are schools that don't have endowments to dip into to cover increased need for financial aid. What's worse is the demographic factor: the baby boom echo generation that has swelled college enrollments for the last decade is coming to an end, meaning that there will be fewer students to fight for in the next decade (independent of whether some of them forego college because they can't afford it). It's this combination that will kill off the marginal private colleges, since as the better quality students move up the chain and many others decide to save costs by going to State U. (or not go to college at all) these colleges will be left with little or nothing. Ian's comment about needing at least $100M in endowment to survive is probably in the right ballpark for a small college, if not optimistic. In many of these cases the host town's economy is built around the college and will be devastated if the college closes.