Monday, May 18, 2020

Endowment humor

Steven Wood writes a wonderful letter from a university president, responding to suggestions that a university dip in to its endowment,
As president of this University, there is nothing more important to me than the health and safety of our community. Though I’m currently away from campus, summering on my private island off of Maine, my thoughts are almost always with you, and my secretary is literally always available to field your questions and hear your concerns.
...a number of you have reached out to provide us with valuable feedback regarding our recently announced budget adjustments. Specifically, many of you have asked why an institution with a $46 billion endowment is freezing salaries, rescinding job offers, refusing to adjust tenure tracks, and laying off staff instead of using an endowment the size of Iceland’s GDP to keep our community afloat.
Let me say this: We hear you. You are valid. You. Matter. Secondly, and no less importantly, let me make something clear: The. Endowment. Is. Not. For. You. 
...the first rule of the endowment was “Never talk about the endowment.” At the end of every quarter, they blindfold me, take me to an undisclosed location which I suspect is the Chairman of the Board’s rumpus room, show me the quarterly returns, rough me up a little, then blindfold me again, and dump me on the lawn of my University-owned home. This is as close as I’ve ever gotten to the endowment, so good luck getting anywhere near that money.
Oh, I give up, just go read the whole (short) thing and have a nice chuckle.

Thanks to a colleague for the pointer.


  1. Northwestern.5% pay cut.Contract breach? “The vast majority of our endowment is restricted or illiquid.We are charged with keeping our annual draw from it at a sustainable level,so that it can provide as much support for future generations as for this one.”
    Duke and Hopkins are also cutting salaries, int eh disguise of no pension payments made for employees next year. Surely somebody just hired, at least, has a case for breach of contract. And the comments on the need to protect the endowment are laughable.

  2. As funny as the note is, it unfortunately repeats some themes that some people actually take seriously.

    The endowment must be used according to the will of those who donated the money. They did not want to create an "unemployed professor fund" they wanted to create a multi-century source of funds for learning. It would be an incredible violation of trust and property rights to use the funds to give charity rather than for what they were donated for.

    Mixing charity and property rights undermines the whole point of property rights. It also undermines charitable efforts, as it's never clear whether the law or government will take care of them or not.

    Wealth and wealthy people are not evil. In any country with effective law, wealthy people are more helpful and more well meaning than the poor. There is no shame in having a private island. There is shame in demanding a salary when it's really charity. And there is shame in demanding charity when part of one of the most educated, wealthy, and talented demographics.

    1. There's undoubtedly some truth to this, but only some. It is, for example, stretching things to describe maintaining the quality of learning today (which was the future when the money was donated) as 'charity'.

      And the article's point about the 'private island' appears to have gone whoosh...

    2. I wholeheartedly agree with the sentiment that wealth and wealthy people are not evil and the current political climate is all too quick to vilify money in any form. Also respecting the limitations in ethically using the money donated to an endowment, I think there is a broader sentiment being tapped into here rather than the actual logistics of using the endowment.

      Many of these universities receive public funding and are tax exempt entities classified as public charities themselves. 'Unemployed professor fund' joke aside, professors are not the only folks impacted by pay/hour cuts. These cuts apply to academic and medical divisions (including front-line staff) and all the other less-visible people that help keep universities operating. In many cases these staff are actually working harder to keep services functioning at a high level with reduced staffing levels. Continuing to pay these folks a contracted wage for their hard work in a time of crisis and calling it charity is a difficult pill to swallow.

      Additionally, colleges and universities often are a central economic pillar (or perhaps the central economic pillar) of the communities in which they are located. Ten years removed from the financial crisis it is hard to justify why universities seem to be no better prepared for this 'black swan' event than we were for the last crisis. In a world where we expect public companies to maintain a cash hoard large enough to weather a cataclysm and come out the other side, there is a certain irony in the idea that we don't expect the same of these organizations that are supposed to serve as thought and practice leaders and are foundational elements of many of our own communities.

      In the end, I think the 'endowment outcry' is less about endowments specifically, and more about the idea that resource rich organizations and recipients of public funds send letters to the community about pulling together and supporting each other but have failed to use the lessons of the past decade to prepare for the next (and current) economic catastrophe.
      Wealth is good. But one wonders if the wrong people are getting taught a lesson about planning for the unknown. In 30 more years, when the endowments are even larger, and we have another economic catastrophe, will we still pull out the same argument about those monies specifically, or will we be outraged when we furlough and lay off workers and still haven't planned for the next event?

      I also wonder if there is a pure economic argument to make here. If we had such a collection of resources we could deploy to help limp through a few months at major colleges and universities, would the economic fallout be less severe and the impact on securities minimized in a way that might in the near term decrease damage to the very investments that underlie an endowment?

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  4. An endowment is a stock of savings. We keep savings to guard against uninsurable losses. If a tad of the endowment, and I don't even mean income from the endowment, is not to be used in surprise emergencies, THEN the institution is putting itself at greater risk. It's like not using your health savings account when you get sick. Morons.

  5. I agree that a Parody can’t always address any and all arguments supporting a status quo characterized by numerous "flaws" (a catch word for in need of improvement). Starting the attack on the endowment status quo solely in defense of protecting the privileges of, solely, staff denudes the argument from a lot of its public policy appeal. From a public policy perspective, I would start by questioning why such private arrangements – Fish Goldstein’s defense – deserve more than (some form of) respect. In this case, tax treatment, financial reporting, opacity that seems incongruous with what is afforded or required from arrangements that serve a similar function for corporations, partnerships, and even charities. Al these other arrangements seem to have accountability to many other parties, from taxpayers to myriad stake holders.
    After stripping out most preferences away, we should establish if there is a need to introduce mandates to better align agreed objectives with delivered outcomes. Of course, this will require a discussion of exactly what an endowment is for and in what way.

  6. "..if you think about this whole thing less as a school with an endowment and more as an endowment with educational benefits, our budget adjustments start to appear quite reasonable.." I love this!

  7. In all fairness, wouldn't public choice suggest that universities are more likely to favor spending out of the endowment for current needs over spending for future generations? After all, who is around now to advocate for future students and faculty? That certainly seems to be the case for federal deficits.

    I can think of a couple of reasons why universities may be reluctant to increase spending out of the endowment even during an "emergency". (1) They are afraid that once they set a precedent of "emergency" spending increases, the same public choice forces that lead to perpetual federal budget deficits will indeed lead to perpetual "emergency" spending. The "good times" in which endowment spending can be cut to below average levels will never arrive. (2) They worry that, without a credible way to conserve the endowment for future generations, donors will be reluctant to make large gifts. (3) Public universities worry that setting a precedent of excess endowment spending will lead state governments to cut future state allocations to universities out of a belief that universities can just make up the difference from the endowment.

    Having said all that, when setting a spending rule like 5% of endowment annually, universities usually use something like a 7-yr average value of the endowment to smooth out endowment spending with respect to market value fluctuations. Maybe, there can be a similar averaging rule to allow endowment spending to offset fluctuations in revenue from tuition and other sources to smooth out total university spending while still credibly committing to cap average endowment spending over long periods. I'm not exactly sure how that would work though. Are universities able to establish and commit to 7-yr budgets?


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