He is Peter Conti-Brown of Stanford law school, and he’s being quoted in my headline by Felix Salmon, who has a blog at Reuters.
Conti-Brown provides the hard numbers:
From 2003 through 2008, Harvard’s annual budget grew an average of 7% per year, starting at $2.43 billion in 2003 and ending at $3.46 billion. Including an estimated 30% loss to the endowment in 2008, the endowment grew an average of 10.15%, from $16.24 billion to $25.59 billion. In absolute terms, while the budget grew annually at an average of $206 million, the endowment grew an annual average of $1.56 billion. More strikingly, Harvard’s payout rates during this period remained a steady 4.4%, an average of more than 5.5% less than endowment growth. Far from spending like “drunken sailors,” universities were, if anything, not spending enough.
You already know all of this if you read University Diaries from ’03 to ’08. You also know that Harvard did spend like a drunken sailor on one thing: hedge fund employee compensation. (It didn’t need to spend like a drunken sailor on President Lawrence Summers’ salary because, at the same time he was running Harvard, he was a hedge fund manager. As Frank Rich at the New York Times puts it, he was “moonlighting in the money racket while running the entire university.”)
Salmon concludes, as does Conti-Brown that
If these institutions aren’t going to spend the money in their [ultra-bloated] endowments on providing educational services, they should pay tax on it.
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UD is particularly intrigued by Conti-Brown’s suggestion that the awesome, anally hoarded university endowment has finally transmogrified and hardened into a physical object, like a fantastic yacht, or Ezra Merkin’s Rothko room…. A commenter on the Salmon thread (all of the comments are worth a read) gets at something like this when he or she writes:
I see top universities with their massive endowments, tax free status, and generally state of the art and connected financial planning as becoming the new Church.
From the dark ages, to the middle ages and somewhat beyond the Church became an ever increasing landholder.
Yale in 2007 bought the nearby 137 acre Bayer Labs Complex which now makes it similar in size to the Vatican City.
Over the next hundred years, I see rich universities hoarding and growing their endowments and then splurging occasionally to buy up properties.
Are there any countervailing forces that will prevent Yale from owning one quarter of Connecticut 100 years from now?
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What if there were a car, the ultimate luxury car, called The Harvard Endowment? What would it look like?
Like this, I guess.
They took that Veyron and rammed it right into a wall.
If our top universities are going to become the new church, they’re going to have to manage their endowments better.
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But hey. Speaking of what you’ve got and how you should spend it… Allow UD, on this her birthday, a moment of payout.
The lesson of the crashed roadster is more than clear to me: Appreciate your assets, and be wise with them.
I’ve got a blog that a lot of smart, witty, and humane people read. It’s the most liquid asset in the world this thing, allowing me immense purchase on pleasure and understanding.
It even, amazingly, lets me do, in a small way, what I said from the start, in my blog’s tagline, I wanted to do: change things.
For this, I thank you.
August 15th, 2009 at 7:56AM
Happy Birthday!
While I am sure that many universities can spend more out of their endowments, as a department head one thing I’ve learned about endowments is that they are harder to spend than you might think. Given the donor’s restrictions, you may not be able to spend out the current balance. If you can’t spend it, you can either return it to principal (which means you lose the flexibility to use those dollars next year when you might have someone or something that meets the donor’s intentions), or it sits in the balance, meaning you end up spending only 10% of the endowment that year, maybe.
August 15th, 2009 at 9:08AM
Such nice things you say about the Constant Readers. In return, on the occasion of your birthday:
Upon this land a thousand thousand blessings
Which time shall bring to ripeness she shall be . . .
All princely graces,
That mould up such a mighty piece as this is,
With all the virtues that attend the good,
Shall still be doubled on her: truth shall nurse her,
Holy and heavenly thoughts still counsel her:
She shall be loved and fear’d: her own shall bless her;
Her foes shake like a field of beaten corn,
And hang their heads with sorrow
August 15th, 2009 at 9:10AM
Apibeursdé.
(Since, unlike Pascal, I had the time to be concise, I was told that this comment was too short, so I decided to come back and add this entirely superfluous verbiage. There.)
August 15th, 2009 at 9:40AM
On the fear-of-loss claim, pay attention also to the annual financial report, which for Harvard is still from 2007-08, but it shows some interesting things if you look at unrestricted net assets for the university, rather than the endowment. Net assets went from about $4B in 2003-04 to $6.6B in 2007-08. Harvard’s total operations in 2007-08 were about $3.5B. But here’s the relevant number from p. 18 of the 2007-08 PDF: $5.4B of assets were unrestricted. I.e., the university could do anything legal it wanted with them. At most university, from what I understand, the bulk of those unrestricted assets of the university proper (not the foundation) are in fairly liquid investments. In Florida public universities, almost all of it is in a statewide special purpose account that is essentially liquid if you look over 12 months or so.
In other words, Harvard essentially could run its entire operation for more than a year from the unrestricted net assets with no revenues whatsoever. That wouldn’t be wise, but Harvard has enough revenues coming in that it can dip into the unrestricted assets for a year or two until the economy recovers, and this DOES mean that all the discussion about a declining investment and operational expenses is a considerable part bunkum.
So why is Harvard along with everyone else laying off people to preserve those unrestricted net assets, which I expect are not in high-risk investments? Think debt load and bonds for construction projects.
August 15th, 2009 at 9:42AM
Yikes — that should be "most universities" and "bulk … is," and at least one "essentially" is not essential.
August 15th, 2009 at 10:07AM
Sherm has nailed it. We are throwing up (unnecessary) buildings at our place, and laying off people. Sad.
But Happy Birthday and keep up the good work for many, many years.
Bill Gleason
August 15th, 2009 at 12:09PM
Happy birthday, and thank you so much for writing.
August 15th, 2009 at 12:22PM
Happy birthday, UD, and thanks for the blog. There are distressingly few places on the web where reasonably well informed people can gather to discuss important issues without the conversation devolving into an ideological food fight or a hackneyed exchange of Culture War talking points. University Diaries is one such place, and that’s largely because of the tone you set. Plus, you somehow manage to cover depressing and infuriating stories on a daily basis without losing your sense of fun. In other hands, UD (the blog) would be a real downer.
If nothing else, reading University Diaries has caused me to change my career aspirations. I want Chuck Long’s job.
August 15th, 2009 at 1:30PM
Over the next hundred years, I see rich universities hoarding and growing their endowments and then splurging occasionally to buy up properties.
Are there any countervailing forces that will prevent Yale from owning one quarter of Connecticut 100 years from now?
Yeah, Henry VIII. Well probably George Bush VIII or some Clinton descendant.
The problem isn’t just universities, but the entire nonprofit sector which is around 10% of the economy and growing. Eventually some politician under stress will do what Henry did to the Catholic church… confiscate the one third of the country it controlled to hand out to those who coould help him.
August 15th, 2009 at 1:54PM
TAFKAU–you’re aiming too low. Chuck Long still has to come to the office. Ron Prince was fired from Kansas State, and might have $6 million coming his way to NOT show up at the office.
August 15th, 2009 at 2:35PM
Just back from the beach, and loving your kind birthday greetings. Thanks.
August 15th, 2009 at 10:27PM
I’ve been saying that what’s coming is the Dissolution of the Universities for years – and my early modernist friends keep saying that it’s a bad analogy. I still believe it.
August 16th, 2009 at 6:36AM
Happy Birthday! Thanks for so much, and please keep the posts, in both your SOS and your larger UD capacities!
August 16th, 2009 at 6:36AM
Aargh, that was meant to be: keep the posts coming!
August 16th, 2009 at 7:53AM
Sadly, Faust is revealing the trust-fund-baby mentality. She ought to order every one of her department chairs to identify at least two of the best young kick-ass scholars out there in their respective fields and make them offers they can’t refuse. At the same time, provide funds to buy out the slugs: Harvard has more than a few of these.
August 16th, 2009 at 8:49AM
Happy birthday!
The "elite" universities face the following quandry in managing their finances: much if not most of the value of their degree comes from its scarcity. If they were to spend money on increasing the number of students they educate, then even if they were able to maintain equal quality–and surely they could if they wanted to, up to some reasonable multiple of the current number of student–then the value of the credential would fall.
August 16th, 2009 at 9:02AM
That’s one of the reasons, david (thanks for the birthday greetings! — and tony — thanks too!), UD has proposed a radical reduction in freshman classes at Harvard and similar schools. If Harvard admitted, say, fifty new students each year, the scarcity principle would be put into play brilliantly, and there would be the additional benefit that Harvard would save significant money on student-related expenditures, from housing to scholarships.
Tuition for each incoming student would be $300,000 a year, so slots would be reserved (with some exceptions for the sports teams) for children of families like the Kushners, whose Jared recently graduated from Harvard.
August 16th, 2009 at 9:23AM
Mr UD, a Harvard grad, demurs:
“I’m personally invested in the maintenance of Harvard’s brand value, and I don’t like your idea.
First, if you were going to implement it at all at Harvard (which I’m about to argue you shouldn’t), you’d want to look not so much to the students as to the faculty. That’s where your big expense lies.
If it’s true what they say — students learn more from each other, and college is essentially about making useful connections — then removing Harvard’s faculty would be an obvious step.
In place of faculty, Harvard would hire, at little cost, people with experience as summer camp counselors. People good at getting other people together in order to have fun and forge bonds.
But anyway I’m opposed to the idea because of transition difficulties. There’s no question that while Harvard transitions to the changes you’re proposing, its market position will be threatened.
I think Yale, not Harvard, should try it.”
August 16th, 2009 at 9:26AM
Oh, and belated happy birthday!
August 16th, 2009 at 9:29AM
Thanks, Sherman!
August 16th, 2009 at 11:20PM
Midst the encomiums flowing yesterday for your birthday I am relieved this day to see you were not taken up to Heaven knows where on Assumption Day. Whew! We need you here. Happy birthday again.
August 16th, 2009 at 11:47PM
adam: Yes, still right here. Thank you for the warm words.
August 17th, 2009 at 3:27AM
I’m pleased to discover we (almost) have the same birthday, UD.
many happy returns from a fellow Leo.
August 17th, 2009 at 4:13AM
Thanks, Alan – happy birthday back.
August 17th, 2009 at 8:28AM
H(belated)B, UD!
August 17th, 2009 at 8:39AM
Thanks, Christopher!
August 17th, 2009 at 9:17PM
Sto Lat!
“Too short,” WordPress admonishes. Well then, Jeszcze Raz!
August 17th, 2009 at 11:03PM
Dziękuję, Dom.