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“Hoarding” and Endowment Outliers

“Hoarding” and Endowment Outliers

In a two-part series, David Bass, AGB’s director of foundation programs and research, responds to a recent New York Times editorial by Victor Fleischer about endowments. In today’s post, he addresses two major problems in Fleischer’s argument; next Tuesday’s post will discuss two more.

Writing in the August 19th edition of the New York Times, Victor Fleischer issued a call to "Stop Universities from Hoarding Money."  Not only does he fail to make the case that requiring universities to spend at least 8% of their endowment annually would address the problems, real or imagined, on which he focuses, he also misses important facts about endowment management.

Arguments that university endowments should be subject to required minimum payouts tend to focus on a handful of outliers. Fleischer looks at Yale, Harvard, Stanford, Princeton, and the University of Texas and points out that these institutions all paid more in investment fees to private equity managers last year than was allocated to tuition assistance, fellowships, and prizes. With endowments ranging from $21 to $36 billion, these 5 institutions are wealthier by magnitudes than most others, accounting for about a quarter of all endowment dollars held by the 854 college and university endowments reported to NACUBO and Commonfund for FY 2014 (source PDF). The business models and financial aid practices of these institutions are correspondingly rarefied.

Imposing endowment-spending requirements wouldn't have an effect on investment management fees and compensation structures. Fleischer conflates the tax treatment of fund managers, who benefit from the carried interest rule, with the tax exemption from which universities benefit by virtue of their charitable and public purposes. The connection isn't clear, but he gestures towards the possibility of some sort of nefarious collusion among investment tycoons and the institutions that might be their clients and/or beneficiaries of their charitable largess. The conflicts of interest hinted at here are serious (see AGB's Board Statement on Conflict of Interest and Compelling Benefit) but are already addressed by IRS rules regarding excess benefit transactions.

Tuesday’s post will discuss two more problems with Fleischer’s argument.  And learn more about foundation finances with Understanding Foundation Finances: Financial Oversight and Planning for Foundation Boards.

Thanks to Flickr user Roger for the image.

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