Corporate College Presidents and Super-Sized Endowments

Yesterday The New York Times had two articles that left me thinking about university endowments. One discussed the increased Congressional pressure on charitable institutions to spend down their endowments; the other noted the soaring salaries of college presidents. Combined, the articles highlight the need to challenge conventional thinking about what constitutes a strong endowment.

The Times reports that in the last 10 years, the amount of assets held by non-profits has nearly doubled, to $2.5 trillion by the end of 2005. Educational institutions held almost $600 billion. (If nothing else, employees deciding whether to enroll in TIAA-CREF should take note of what compounding interest and tax-free gains can yield!) Private foundations are required to spend 5% of their assets each year; educational institutions are not subject to even this minimal requirement.

Grinnell College, with 1500 students and an endowment of over $1 billion, was highlighted in the Times article. Russell Osgood, Grinnell’s president, points out that Grinnell gave about $1 million more in financial aid than it received in revenue from tuition and fees. He also says,“We’re here to ensure the long-term health and function of Grinnell College. That’s our sole objective.” But the Times does not quote Osgood as explaining why more than $1 billion is necessary to protect a small liberal arts college against an economic downturn. Rather, Osgood says:

Society at large benefits from those monies being invested in our economy. . . . The United States has a problem with its rate of savings, and one of the few bright spots are colleges and universities, which are two of the largest contributors to the national rate of savings. Anyone thinking about reducing endowments should think long and hard about what that might do to the overall ability to generate jobs and fund good ideas.

Maybe, although no-one is suggesting that universities empty their coffers. And the national savings rate is what not alumni were thinking about when they wrote checks to their alma mater, or what Congress was considering when it extended favorable tax treatment to educational institutions and their donors.

As the Times article suggests, the philanthropic wind is shifting. Spurred by individuals like Warren Buffet, whose multi-billion dollar gift to the Gates Foundation stipulates that his donations have to be spent within a year, donors are focusing anew on whether institutions use dollars, not just accumulate them.

This is where the salaries of college presidents come into play. The Times reports,

Soaring compensation of university presidents, once limited to a few wealthy institutions, is becoming increasingly common, with the number of million-dollar pay packages at private institutions nearly doubling last year, and compensation at many public universities not far behind.

The rising pay is consistent with a “corporate mindset” at educational institutions, with “intense competition to hold onto talented executives necessary to help build institutional wealth and prestige.” That is, boards of trustees justify the high salaries by pointing to what the president has done for the size of the endowment.

I’m not suggesting that college presidents are refusing to spend down endowments because they want to justify the next big pay hike. But like CEOs in the corporate world, presidents have to show that the “stock value” of their institution has appreciated during their tenure. A college’s stock value entails a lot of subjective evaluation, as the endless criticism of the U.S. News rankings illustrates. But the size of the endowment is a concrete and convenient shorthand for the overall strength of an institution.

Except, of course, when endowments get so large that their primary virtue is the contribution they make to the national savings rate. So why not devise a different measure of what constitutes a successful endowment–one that would reflect the size of the endowment, the percentage of earnings and assets spent each year, and how the spending reflects the college’s (realistic) short and long term goals. Such an individualized assessment would be difficult to do from afar, but donors, particularly big ticket ones, have the clout to demand that universities start thinking a little more like Warren Buffet. The result would have immediate benefits for university communities and those that benefit from their work, and would be more in keeping with the reasons for extending favorable tax treatment to universities and their donors.

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3 Responses

  1. “…but donors, particularly big ticket ones, have the clout to demand that universities start thinking a little more like Warren Buffet.”

    …which you would think should start with Grinnell since their wealth is in a large part due to Warren Buffet’s efforts.

  2. Grinnell College, with 1500 students and an endowment of over $100 billion

    And here all that time I spent at Yale they said they had a big endowment…

  3. Tim Hopkins says:

    Grinnell has less than two billion dollars in their endowment and not “over
    $100 billion” as posted by John Armstrong.