tag:blogger.com,1999:blog-582368152716771238.post3073722349085551110..comments2024-03-18T07:59:05.430-05:00Comments on The Grumpy Economist: University DebtJohn H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger13125tag:blogger.com,1999:blog-582368152716771238.post-26777602614279875592014-04-02T17:41:58.329-05:002014-04-02T17:41:58.329-05:00We have a fairly new paper on University endowment...We have a fairly new paper on University endowment asset allocation and spending using a formal model that shows that a university might want to borrow to invest more aggressively in a risky asset. In this case, the key insight isn't what Professor Cochrane mentions about a "tournament" between universities, but rather an option effect on donations. In our model donations increase when the investment opportunities are better or the endowment performance improves. We also relate this to optimal spending policies and find that smaller endowments ought to vary their spending rates more than larger endowments over the investment cycle. The link to the paper can be found by clicking my name.Neal Stoughtonhttp://ssrn.com/abstract=2348048noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-88367011977749848942014-03-27T15:13:41.088-05:002014-03-27T15:13:41.088-05:00The March 2014 AER has a paper I co-authored with ...The March 2014 AER has a paper I co-authored with Steve Dimmock, Jun-Koo Kang and Scott Weisbenner showing that many universities appear to operate consistent with a desire to preserve the size of the endowment for its own sake. Rather than using the endowment to smooth spending, they tend to cut endowment payouts relative to their own spending rules at precisely those times when any smoothing story suggests they should be doing the opposite. The effect is largest for those schools where the size of the endowment was hovering around its value at the time the university president took office. I think it is pretty clear that whatever endowments are maximizing, it is not the excellence of the university.<br />Jeff BrownJeffrey Brownhttp://www.business.illinois.edu/jbrownnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-29060909001351724392014-03-26T15:32:19.618-05:002014-03-26T15:32:19.618-05:00Had a case competition in business school very sim...Had a case competition in business school very similar to this except the borrower was a large not for profit hospital that had an investment portfolio larger than their borrowings. Same answer. Borrowing tax free and investing in high returns project is a no brainer. <br /><br />Its kind of funny to think that the hospital in question and UoC are really hedge funds that happen to provide services like healthcare and education on the sideAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-5540361192599032672014-03-26T15:14:52.836-05:002014-03-26T15:14:52.836-05:00Great business model, Medical Foundations and the ...Great business model, Medical Foundations and the like do the same thing, borrow at low municipal rates and invest the money in medical starts-ups and higher expected return enterprises and can make a nice spread on the difference.James Cnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-1523311957059578982014-03-24T02:42:01.738-05:002014-03-24T02:42:01.738-05:00Isn't there some kind of legal restrictions on...Isn't there some kind of legal restrictions on university endowments (501C's) acquiring debt? I thought it revoked their tax exempt status or something.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-53506777254914856692014-03-22T08:09:50.220-05:002014-03-22T08:09:50.220-05:00Just a note to the donors of the world, to correct...Just a note to the donors of the world, to correct a minor error on Prof. Cochrane's part:<br /><br />If you invest your money now, and realize a taxable return, you will pay taxes. Then, when you give your appreciated portfolio to the University, you will get a deduction that includes the increased return. Apart from the timing difference (which, for the moment, at below-zero real short-term rates, is not terribly significant), you will not be in a worse position for having delayed your donation. Furthermore, in reality, especially if you have made significant equity investments, a good deal of your appreciation will be in the form of unrealized gains that (unless you are a securities dealer) you will not have recognized for tax purposes yet. If you donate those investments to the University in kind, your charitable deduction, which offsets your ordinary income, will equal the full fair market value of the investments, but you will never pay the capital gain tax on the unrealized gains. So you actually have an incentive to time your donation to a period when you have lots of unrealized gains and lots of ordinary income to offset. <br /><br />(As always with taxes, the above should come with 20 or 30 caveats for people in special circumstances. Consult your tax adviser!)<br /><br />Also, to put some numbers on Prof. Cochrane's point: In FY 2013, the University paid interest of $28 million (net of derivative gains) on average debt of $3.6 billion. Its endowment return for that year was 6.6% (below its 10-year average annual return of 10%). So the University earned a bit more than $200 million extra by borrowing rather than consuming endowment. That's like getting a free building in your cereal box.Johnhttp://kleinbard.comnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-11440397989985688972014-03-21T12:35:22.490-05:002014-03-21T12:35:22.490-05:00"But I would rather take a class from Dr. Coc..."But I would rather take a class from Dr. Cochrane in a drafty tent than a lesser professor in a gilded palace...."<br /><br />Would be nice to have a similar comment on my job performance review!Falstaffhttps://www.blogger.com/profile/06865552505521389155noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-32423007995145506512014-03-21T08:14:19.559-05:002014-03-21T08:14:19.559-05:00The idea of arbitraging the advantage of a tax-fre...The idea of arbitraging the advantage of a tax-free municipal rate comes up from time to time, Decades back the City of Los Angeles would borrow a bil at the start of the fiscal year, and ram it into into higher-yielding assets, and draw it down over the year. They got away with this for a while, but then somebody somewhere clamped down on it.<br /><br />Dr. Cochrane is not alone in wondering why universities seem to build up more and more staff and inefficiencies...and I am sure he suspects the lack of immediate market discipline plays a role.... evidently staff to faculty ratios keep ballooning...<br /><br />Maybe the U of C needs new buildings. But Cochrane's post raises the question; What if instead the U of C said, "Well, let's refurbish what we have, and start a 100 Minds program. We will get the best 100 minds on the planet. Use the money for that."<br /><br />Or start some sort of X prizes, that will be awarded to super tech achievers, on the condition they spend a year or two on campus....<br /><br />I am too old for college, and I disagree with Dr. Cochrane on many issues. But I would rather take a class from Dr. Cochrane in a drafty tent than a lesser professor in a gilded palace....<br /><br /><br /><br /><br /><br /><br /><br />Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-58479344108794318262014-03-20T16:33:17.050-05:002014-03-20T16:33:17.050-05:00Absalon,
Chicago's debt has grown $1.2 billio...Absalon,<br /><br />Chicago's debt has grown $1.2 billion in the last four years (50%). Maybe you should read the linked (original) article.Charlie Clarkehttps://www.blogger.com/profile/02079017903923824877noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-70759716987622544412014-03-20T13:46:47.306-05:002014-03-20T13:46:47.306-05:00I think it says something interesting about the cu...I think it says something interesting about the current recession and the effectiveness of monetary policy that a large, sophisticated, credit worthy, tax exempt, borrower like University of Chicago is only now, after years of low interest rates, thinking of borrowing money to invest in the future. No wonder the recession has continued as long as it has (and obviously tax policy has no first order impact on U of C decision making). Absalonhttps://www.blogger.com/profile/09131268683451462949noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-54336728520354136892014-03-20T13:09:00.746-05:002014-03-20T13:09:00.746-05:00See the recent AER paper:
http://www.aeaweb.org/ar...See the recent AER paper:<br />http://www.aeaweb.org/articles.php?doi=10.1257/aer.104.3.931Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-90918986990702146552014-03-20T13:05:02.159-05:002014-03-20T13:05:02.159-05:00This post just got emailed out to the listserv at ...This post just got emailed out to the listserv at the business school where I work, subject: "U of C borrowing analysis from an insider". I guess not everyone reads to the end...Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-84788489703967079542014-03-20T11:45:46.681-05:002014-03-20T11:45:46.681-05:00I have not read the trust deeds for the endowment ...I have not read the trust deeds for the endowment but I suspect that the endowment contains restrictions on the use of principal and that is the real reason the University is borrowing rather than dipping into the general endowment.Absalonhttps://www.blogger.com/profile/09131268683451462949noreply@blogger.com