Is It Raining Hard Enough Yet?
Here’s a common exchange we’ve all seen online recently.
Critic: How dare [Wealthy University X] cut staff or plead poverty? How about they use some of that billion-dollar endowment to help?
Realist: You just don’t understand. That’s not how endowments work. The money is restricted and it’s not some kind of savings account.
Does that debate miss something more fundamental, though?
Thomas Gilbert, an associate professor of finance at the University of Washington, certainly thinks so. He’s studied this for years, co-writing a paper back in 2015 titled “Why University Endowments Are Large and Risky” and a 2017 column in the Wall Street Journal: “A Hedge Fund that Has a University.”
Sure, the realists have a point. A good portion of the endowment is restricted. These aren’t rainy day funds, we know. Then again, maybe we should be shifting strategies and policies before the next cataclysm. For what exactly is an endowment for if not, at least in part, to weather a world-wide crisis?
“You’ve got to spend it,” he told us this week. “Otherwise, what is it? Just a coffer? It’s just going to get bigger and bigger and we keep it forever? The goal is not to make the endowment as big as possible. The goal is for Princeton to be the best university in the world. Win more Nobel prizes, cure more cancers. It’s not about my endowment is bigger than yours so I’m a better university.”
So what have colleges learned since the last recession, when their endowments tanked and even wealthy places had to make substantial cuts?
Not very much, says Gilbert. The fact that places like Stanford are already announcing cuts and hiring freezes, he says, means that the paper losses they’re seeing within the endowment must be “ginormous.”
To Gilbert, the revealed preferences of wealthy universities are clear.
“They care more about the size of the endowment than they care about the productive nature of the university.” If they felt the opposite, he maintains, they’d make different choices: “We have this buffer. Let’s use it. Let’s increase the payouts. Now we don’t want to spend 20 percent of the endowment, I get that, but we can increase the pay out. And yes, the endowment size is going to go down, but what we care about is the productive nature of research and teaching at the university.”
Gilbert argues that none of this is the money managers’ fault — they’re just maximizing the returns given the goals laid out. It’s the trustees and regents who set the investment policy and the pay-out decisions.
So what would Gilbert tell trustees at this moment? Not exactly about how to address the current crisis — the die on that is already cast. But how should they change their endowment strategy in 2021 and 2022 to be ready for the world-wide emergency in 2030?
First, think hard about the mission of the university. “It’s not an endowment with a university. It’s a university with an endowment.”
Second, set up an asset allocation that’s consistent with this mission. You can’t look at the endowment separately from all the other revenue and spending streams.
Third, the spending rate is not an independent decision from everything else going on at the university.
“You need to invest in a way consistent with how you want to consume. If we want to make sure we can consume in bad times because we want the endowments to buffer the next shock that will come in 10 years, then the investment allocation needs to be consistent with our future ability to eat more in bad times.“
Gilbert said he hoped this new crisis might awaken people but instead he expects we’ll hear a predictable marketing message in the years ahead: “We lost a bunch of the money in the crisis. We stopped spending. Please give us more.”
+ More reading: A decade-old but still relevant piece by Burton A. Weisbrod & Evelyn D. Asch from Northwestern University in the Stanford Social Innovation Review “Endowment for a Rainy Day”
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The End of a (Partial) Recovery
The authors of an annual report on higher education finances came right out and said it: They’re “deeply concerned” about what’s coming next.
While the main part of the State Higher Education Finance Report, published this week, “reviews financial and enrollment trends in American higher education without editorial commentary,” the executive summary reads, “trends from the last two recessions indicate that higher education will likely be severely impacted by the current economic situation.”
Per-student education appropriations went up by 2.4 percent in the 2019 fiscal year, to an average of $8,200 per student, the report says. However, it adds, that marks the likely end of a seven-year recovery in higher education funding.
Here are three takeaways from the report, by the State Higher Education Executive Officers Association:
Higher ed funding still hasn’t fully recovered from the last recession.
Despite seven years of increases following the Great Recession, states have only recovered two-thirds of the state funding they lost, the report says. Education appropriations per full-time student remain 8.7 percent below what they were in 2008, just before the last recession hit.
And that follows a similar pattern from the downturn before. Historically, the report notes, states would reinvest in public higher education as the economy improved. But, starting with the tech bust in 2001, the increases during recovery periods never fully made up for the declines.
There are big differences across regions and states.
Some states are entering this downturn on stronger footing. In seven — Alaska, California, Hawaii, Nebraska, New York, Oregon, and Wyoming — education appropriations are now at or above levels from before the Great Recession.
Other states are much further behind. Education appropriations are more than 30 percent below pre-recession levels in these seven states: Alabama, Arizona, Delaware, Louisiana, Mississippi, Oklahoma, and Pennsylvania.
There are regional differences, too. Over the past 35 years, education appropriations per full-time student have declined in all regions but the West, with the sharpest declines (more than 12 percent) in the Northeast.
In most places, students are now paying more than states for the cost of higher education.
There has been a big shift in who pays for public higher education over the past generation, with students and families shouldering increasingly higher percentages of total revenues. In 1980, tuition made up just under 21 percent of total revenues. Now it makes up 46 percent.
In the majority of states, tuition makes up more than half of total revenues. In three places — Delaware, New Hampshire, and Vermont — tuition accounts for more than 75 percent.
There are some places — California, New Mexico, and Wyoming — where tuition makes up less than 25 percent of revenues.
But expect the student share to pass the 50 percent mark nationally during the next recession, the report says. It rises most rapidly during economic downturns.
The View from One State
Colorado is one of the places starting off in a tougher spot on funding for higher ed.
Cuts over the years have placed Colorado near the bottom of the nation in public support for colleges,reports Jason Gonzales, who works with us in Denver through a partnership with Chalkbeat. (In 2019, the state spent $4,700 per full-time student compared with the national average of $8,200.)
And Colorado charges some of the highest tuition in the nation for public colleges. For instance, Colorado residents pay about $23,000 to attend the state’s flagship University of Colorado at Boulder. They would pay less in 38 other states.
With Colorado lawmakers facing an estimated budget hole of $3 billion, here’s some of what hangs in the balance, according to Jason’s story:
- Access and equity. “If we see cuts to higher education … we are really limiting the opportunities for many of the Coloradans that never had access to them in the first place,” Tyler Jaeckel, policy and research director for the Bell Policy Center, told Jason. “It could be putting us back decades on making progress on larger equity goals.”
- Rural economies. State budget analysts predict Adams State and Western Colorado universities might not be able to endure a 10 percent — let alone a potential 20 percent — cut in state support. “If those schools fail, their communities fail,” says Angie Paccione, Colorado Department of Higher Education executive director.
- Community colleges. They rely more heavily on state dollars than many four-year colleges. And the potential of drops both in enrollment and in state funds creates a troubling scenario, says Joe Garcia, Colorado Community College System chancellor. “It’s a double whammy. We would be way down on revenue.”
Follow what’s happening in every state through our public higher ed budget tracker.
A Delayed Reprieve
Millions of borrowers who are in default on their federal student loans learned in March that they would get a temporary reprieve. As the coronavirus continued to spread, and more Americans found themselves jobless or working reduced hours, Education Secretary Betsy DeVos announced the government would stop garnishing their wages.
But dozens of borrowers who had fallen behind on payments have said that their wages are still being seized to pay for defaulted loans. Some joined a class-action lawsuit against the Education Department and DeVos, accusing them of mismanaging the order to stop collections, which Congress extended to Sept. 30.
The department said that all accidental collections will be returned to borrowers, but it could take months.
Many people work paycheck-to-paycheck and can’t wait that long, especially now, says Seth Frotman, executive director of the Student Borrower Protection Center.
“This is the money to keep a roof over their heads or make sure they can make a car payment to get to work.”
Whether garnishing the wages of borrowers struggling with payments makes any sense in the first place was up for debate before the pandemic. But, like many issues now being brought to the forefront, the questions have intensified.
Frotman says most people take out student loans believing a degree will pay off, but unexpected circumstances like a family emergency or injury cause them to fall behind on payments. In the midst of those setbacks, the government can then collect up to 15 percent of their wages.
“For a lot of these people, they’re already struggling financially,” he says. “When they see their earned income tax credit or money taken out of their paycheck, it really is the thing that pushes them off the financial cliff.”
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