Critics Take Aim (Again) at Rich University Endowments

Fat endowments make for attractive, fat targets.

That was true earlier this summer, when the Twitterverse went, well, all atwitter, over the news that John A. Paulson, a hedge-fund mogul, decided to donate $400 million to Harvard, the richest university in the world.

And it seemed true again last week, after Victor Fleischer, a professor of law at the University of San Diego, skewered Yale University in a New York Times op-ed column for paying out $480 million to the equity-fund managers of its endowment, while spending just $170 million on tuition assistance.

Mr. Fleischer’s essay, laden with references to endowment “hoarding” and none-too-subtle questions about the “symbiotic relationship” between elite universities and the hedge-fund managers who donate to them, argued that the management and performance fees that Yale and other universities pay to private-equity managers reveal a deeper problem: “We’ve lost sight of the idea that students, not fund managers, should be the primary beneficiaries of a university’s endowment,” he writes. “The private-equity folks get cash; students take out loans.”

Apparently, that’s the kind of argument that struck a nerve with Times readers — it drew 787 responses before the newspaper closed off comments. Malcolm Gladwell, the author and New Yorker writer, also jumped into the fray, at first issuing a series of snarky tweets about the Wall Street culture overtaking academe …

… and also about a tax system that favors wealthy institutions at the taxpayers’ expense.

Mr. Gladwell, who was later invited onto NPR’s Weekend Edition Saturday show to explain his outrage, said he’s “gotten increasingly incensed” by the inequality in higher education, a discovery that no doubt prompted many others who have been sounding that alarm for years — groups like the Institute for Higher Education Policy; the Council for Opportunity in Education’s Pell Institute; the Education Trust; and the Center on Education and the Workforce at Georgetown University, to name just a few — to wonder, What took you so long? The economic divide in higher education has been growing for decades.

(This isn’t Mr. Gladwell’s first foray into college matters. He tweeted mockingly about Mr. Paulson’s gift to Harvard, and in his 2013 book David and Goliath, he argues that many students would be better off skipping elite institutions for the sake of their rankings and attending less-prestigious institutions instead, where they could have more chance to rise to the top.)

Mr. Fleischer brought a fresh approach to his analysis with his pointed comparison of financial-aid spending to that of payments to private-equity fund managers (while never quite noting, as BloombergBusiness later did, that Yale’s overall spending from its endowment in 2014, including $830-million in additional expenditures, provided about one-third of the university’s operating budget).

But his argument builds on a noisy, and heretofore unsuccessful, history of endowment shaming, an effort that seemed to have its heyday in 2007. That was the year that U.S. Sen. Charles Grassley, Republican of Iowa, raised his own questions about endowment hoarding, and wealthy colleges found themselves on the defensive to explain the limits to their endowment spending.

Like Mr. Fleischer, Senator Grassley proposed forcing endowments to spend more, although he focused his ire on those with $500-million or more. (There were 136 university endowments in the United States of that size back then; today, with many endowments more than recovered from the Great Recession, there are 166.) Mr. Fleischer proposed that all endowments over $100-million spend at least 8 percent a year.

The endowment debate has been a lot quieter since the recession, but it never stopped simmering. In fact, a proposal voiced in 2010 by Charles B. Reed, then chancellor of the California State University system, to penalize endowment-rich institutions that enroll low numbers of Pell Grant students, would fit nicely in the current debate.

And a Nexus Research and Policy Center report last spring by Mark Schneider and Jorge Klor de Alva, pointing to the ways the federal tax system overwhelmingly bestows benefits on wealthy private institutions, compared to the benefits that go to community colleges and public four-year colleges, continues to have the kind of legs its authors hoped it would. Mr. Gladwell, for one, must have found it good reading. He cited several of its findings in his Twitter barrage.

While some of the observers (this author among them) have publicly wondered why so little of the response to Mr. Fleischer’s essay has focused on the private-equity fee structure — and by implication the tax benefits it enjoys — Alexander Holt at New America took a much-bigger-picture point of view. Let Yale spend as much or as little as it wants, he says in a blog post. But since “there’s not much about Yale’s behavior of paying $480 million to equity fund managers versus $170 million for tuition assistance that suggests that Yale’s top priority is ‘dissemination of knowledge,’” he argues, just tax the endowment. “Colleges act like corporations and they should be treated as such,” Mr. Holt writes.

Of course there are plenty of people of people who question whether corporations pay their fair share. So as for the can of worms that proposal would open. …

Correction (8/24/2015, 9:28 a.m.): This article originally misidentified John Paulson, who gave $400 million to Harvard. He is a Harvard alumnus but was never secretary of the treasury.

Correction (8/25/2015, 11:30 a.m.): The Pell Institute is a project of the Council for Opportunity in Education, not the Institute for Higher Education Policy, as this article originally reported.

Goldie Blumenstyk writes about the intersection of business and higher education. Check out www.goldieblumenstyk.com for information on her new book about the higher-education crisis; follow her on Twitter @GoldieStandard; or email her at goldie@chronicle.com.