Podcast Transcript: Do Endowments Protect Colleges, or the Other Way Around?

Dan:     My guest today is Paul Campos, a professor at the University of Colorado Law School. His most recent books include Don’t Go to Law School Unless…, and The Obesity Myth. He writes frequently for both academic and popular publications, and blogs at LawyersGunsandMoney.com. Professor Campos, welcome to the podcast.

Paul:     Good to be here.

Dan:     I wanted to give you some time to talk about the op-ed that you published in the New York Times entitled “Rich Colleges Can Afford to Spend More.” The subtitle is “They’re acting like they exist to protect their endowments instead of the other way around,” a terrific title. Before I talk about that article, I’d love to know what are things like right now at the University of Colorado?

Want to listen to this podcast in its original audible format? Click below. Otherwise, just scroll to keep reading!

Paul:     I think that they’re the way they are at a great number of institutions right now, which is that there’s a tremendous amount of uncertainty as to what the fall is going to look like, what will be possible in terms of classes and especially residents, undergraduate students in particular. And so we’re still in a state of considerable flux in regard to what is actually going to happen in the fall. And again, I think this is pretty standard right now in higher ed in America.

Dan:     Could you take a few moments to describe to our listeners just how large the endowments are at the country’s wealthiest universities?

Paul:     Yes, they are remarkably large and it’s remarkable how much they have increased in size over the past generation really, especially the last 40 years. So for example, in the piece, I use Princeton as a paradigmatic example; Princeton’s endowment has increased from around $900 million in the early 1980s to about $26 billion today. So it’s increased 28-fold over the course of roughly the last generation. What that means is that Princeton spends normally about 5% of the value of its endowment every year on a university expenditures; 5% of $26 billion is 1.3 billion. There’s about 8,200 students at Princeton. That means Princeton spends about $158,000 per student every year out of the endowment to help pay for the university’s activities. Harvard has an endowment of about $41 billion. Yale has an endowment of $30 billion; Stanford, 33 billion, I believe.

And for me, one of the most remarkable aspects of this entire situation is that the explosion in endowment wealth has not just been limited to a handful of hyper-elite private schools. Most strikingly, I’m a graduate of the University of Michigan, a public university. At the time I graduated from the undergraduate school in 1982, Michigan basically didn’t have an endowment. The endowment of the entire university was $115 million at that time, which was really generating just a few hundred dollars a year per student in regard to expendable endowment income. Thirty-nine years later, that endowment has increased more than a 100-fold. It is now $12.4 billion, to the point where Michigan’s endowment now throws off more income every year than the endowments of every single public college and university in the country – and there’s about 1,500 of those – was generating at the time that I graduated, and those figures in fact are inflation-adjusted, so it’s in constant dollars. I think that really throws a light on the remarkable changes that have had been happening at the higher end of the higher education system in the United States, where private money has been pouring in at an astounding rate. You have a number of schools now that fund half or more of their operations just from endowment income, all of which I think has very considerable implications for higher education in general, and especially for higher education during the COVID a pandemic crisis.

Dan: Let’s return to the example of Princeton. Obviously, the numbers that you gave are pretty staggering, and I’d like to focus in on the $150,000 per student in annual revenue. So their endowment is throwing off that money; you’ve divided it by the number of students. On what are schools like Princeton currently spending that revenue?

Paul:     At Princeton that revenue is spent on a huge number of things. As a starting point, note that Princeton’s students pay on average, probably about half of the nominal tuition that they’re supposedly charged, because their tuition is being paid for in many cases from endowment income. So for instance, none of the graduate students at Princeton are paying tuition, even though on paper, Princeton is charging them, I don’t know, $60,000 a year to go there, and then undergraduates have their tuition discounted on the basis of financial need. So, for example, if you come from a middle class, a genuine middle-class background, say a family that has an income around the median family income in the United States right now, which is around $60,000 a year, then you don’t pay any tuition if you should be so fortunate as to get into Princeton, because they offer extremely generous financial aid to undergraduates on the basis of need.

So that’s one thing it goes to, although that’s not really a large part of the expenditure per se. The other things that it goes towards are supporting the vast research apparatus of the university (which engages in a lot of very expensive work in that regard), and supporting the immense administrative structure of these universities, which has exploded over the course of the last generation. You have way, way more administrators, and they’re quite expensive, and they have to be paid for one way or the other. And paying for the general function of the university, in regard to all kinds of activities beyond scholarship and teaching, including what at some time has been called, the amenities race, where especially elite universities provide ever-more elaborate services for those students because that’s now becoming more and more an expected part of what a university is supposed to offer.

All of this is just extremely expensive. It’s striking here that Princeton’s operating budget has tripled in real inflation adjusted terms over the last 30 years, they’re spending three times as much money per student today as they were 30 years ago in real inflation-adjusted dollars. And I’m not picking on Princeton here because they’re in some way a bad actor or an outlier or anything like that, quite to the contrary, their budget just looks very much like the budget of other elite wealthy universities in the United States, which is kind of a point I was trying to emphasize in the in the Times piece.

Dan:     If I understand the piece correctly or not actually arguing that schools like Princeton are supposed to decrease that spending instead, you are arguing for increased spending from their endowments on other things on new things that would help move the schools through this crisis.

Paul:     Yes, that’s correct. I’m agnostic on the question as to whether their normal budgetary expenditures are all justified or not. I don’t have the internal expertise that I would need to have to make that kind of a judgment. But if we assume for the purposes of argument that Princeton is paying for what it ought to be paying for under normal circumstances in regard to the structure of its budget, then what I’m arguing is that it would be appropriate for them to tap some of their immense financial reserves. So as to not disadvantage their employees, their most vulnerable employees, in the context of the COVID crisis, because of the temporary down term of income that is starting to be generated by that crisis. In other words, I don’t see any possible justification for furloughing or laying off a staff, contingent faculty, independent contractors and the like the basis of claims that it’s necessary to engage in austerity measures, which is what the presidents of these elite wealthy universities are all saying.

Now they’re saying, well, we’ve got to be austere because we’re going to have this big downturn, you know, this coming academic year from the effects of the COVID crisis. And the point I’m making in the piece is that these universities are immensely wealthy institutions, and that a prime purpose of the amount of the immense amount of wealth that they have piled up over the last few generations is to cushion the blow for their most vulnerable workers in this kind of a situation, as opposed to falling back more or less automatically on this kind of austerity rhetoric where they say, well, we have to tighten our belts. I don’t see why they have to tighten their belts at all these circumstances, given that they generate immense surpluses over their normal operating expenses every single year, almost every single year with the, with the consequence being that their endowments have grown gigantically, and they’re the overall net worth of these institutions has also grown enormously over the course of the last generation.

Dan:     It’s almost as if, as a parallel, if you thought of an individual person that had $20 billion and this year, they had an unexpected expense of $1 billion. It just wouldn’t really make sense for that person to say, “well, I only have 19 billion left at the end of this year, so I will be unacceptably poor.”

Paul:     Yeah, it is very much like that. And when you look at the financial trajectory of these institutions, even a sort of worst-case scenario in terms of the effect of the pandemic, it would leave them – if they were not to engage in these austerity tactics – with the same kind of paper worth of that they had two or three years ago at a time when obviously they were still incredibly wealthy sorts of places. Which is why I end the piece with this quote from John Maynard Keynes, who pointed out 90 years ago that there’s a kind of almost a pathological character to the desire to pile up wealth for its own sake. And that as society moves towards a sort of post scarcity future, people will recognize, he predicted, that that kind of mental state is actually deplorable. We shouldn’t be in a state of mind where we put a tremendous amount of value, or really any value at all, on piling up money for its own sake. You know, that money ought to be spent for the things that ought to be spent on, but as a society, we’ve become obsessed with wealth-hoarding, and the elite educational institutions merely reflect that larger trend, in which wealth-hoarding and a kind of money madness has become endemic.

Dan:     Yes. I noticed that you referenced Keynes and quoted the love of money as a possession. I know that you’ve been looking at this issue for some time, and of course, I’m curious, are you able to point to a turning point or a cause for this shift in the way universities have thought about their wealth?

Paul: As far as a turning point goes, I wouldn’t be real exact on that. I would just make a kind of generalized observation, which is that about 40 years ago. I think we began to see a real cultural shift in this regard. If you look at the way that universities and the people working at universities talked about money in the 1970s, prior to then they talked about money in a way that was significantly different from the way they’ve been talking about it for the last four decades or so. There wasn’t this obsession with the notion that wealth maximization, which is something that makes sense in the context of a profit-maximizing corporate entity, was the way that these public-good kinds of institutions, that is, nonprofit tax-free entities, ought to behave, that they shouldn’t be just focused on trying to maximize the revenue that they can generate. That really began to shift about 40 years ago. And I think that was probably caused ultimately by a kind of culture-wide shift in that regard, in which what I think of as a kind of new gilded age has become culturally dominant in the United States and elsewhere, of course to the point where the kind of money madness that Keynes was critiquing has become valorized; that is, people celebrate it. We celebrate that a particular individual can be worth $130 billion, which is really kind of mind-boggling if you were to consider what that means. Let me just give you an example of how difficult it is to convey, I think to people what the kinds of sums that we’re talking about actually mean. This is a mental experiment that I actually did with my students this past semester that got some rather interesting results. If you were standing in front of an ATM machine, and that ATM machine was putting out $1 bills every second continually, how long would you have to stand in front of that ATM machine to get a million dollars out of it? Well, the answer is eleven and a half days. That’s how long it would take standing in front of that ATM to spit out a million dollars. Now, ask yourself the following question: How long would it take if you were to have the same amount of money that Jeff Bezos has? Well, the answer to that is approximately 4,000 years. You’d have to sit in front of that ATM for eleven and a half days to have a million dollars, which most people would consider a pretty significant amount of money, but you’d have to stand in front of it for 4,000 years to have Jeff Bezos’s money. We’re just not very good at being able to grasp what these kinds of exponential proportions actually involve. And I think one symptom of that is that our elite universities both have become incredibly wealthy and yet seem almost paranoid about the notion that their wealth might somehow decline even slightly for a relatively short period of time. And all of this seems to me to be very dysfunctional and actually pathological.

Dan:     Well, you know, I wondered if part of that paranoia might not be just a small part. The fact is that over time, the sums of money have, I think, driven a lot of marketing regarding the colleges. So there’s a great deal of attention paid to how much money they raise and even to the returns on their investments, that is schools are actually ranked against each other in terms of their return on investment. And so I think that it’s possible over time, that it simply creates an additional way for the school to market itself, by focusing on these large sums of money that people automatically assume, “well, that must be a very successful school if they’re attracting that kind of money.” So they’re able to publicize the fact that they got the money, then they’re able to publicize what they did with the money, then they’re able to publicize the return they got on the money. And so it may be that it’s useful in a marketing sense.

Paul:     Oh yes, I think that’s right. I think also that the effect here of the of the rankings of colleges and universities. The most famous of those, of course, the US News rankings, has been extremely insidious because part of the US News formula is actually one that measures educational quality by giving a school credit for the amount of money that it spends overall. In other words, it uses total amount of money spent as a proxy for educational quality, which when you think about it is incredibly perverse. I mean, you could have two institutions that are otherwise identical in terms of the amount of learning that’s going on there; the amount of knowledge that’s being produced by the institutions of the economic outcomes for their graduates. But if one of those schools spends more money generating those outputs then another school, the school that is spending more money, in other words, the school that is being more inefficient in regard to generating what it ought to be generating is going to be ranked higher in the US News rankings, because the US News rankings use spending as a proxy for quality. So I think one of the really nefarious things that has been going on over the course of the last generation is that the ranking system has given schools all kinds of incentives to get more money and to spend more money, without regard to whether that getting and spending is actually beneficial from either a pedagogical or a scholarly point of view. And I don’t think it’s a coincidence that the money madness that has overwhelmed American higher education has taken place about precisely the same time that these rankings have become a significant part of the educational scene. As you probably know, 40 years ago, there were no rankings of colleges and universities. Very occasionally somebody would publish a purported ranking of this, that, or the other, but there were no annual rankings. There was no focus at that time on the notion that this school was supposedly better than that school, and all the kinds of perverse competitive impulses that this entire ranking system has generated. So I think that’s a big part of the of the equation here.

Dan:     Professor Campos, as a final line of inquiry, you acknowledged in your article that it’s true that universities do not have unlimited discretion regarding how to use their endowments; that much of the money is subject to legal restrictions of various kinds. So how would university foundations overcome those restrictions to provide additional assistance for the university of the type you’re describing?

Paul:     Those restrictions are real, but as a practical matter, they don’t make any difference in this kind of a situation, because a large percentage of the money in university endowments is not legally restricted, or I should say the only legal restrictions have to do with the fiduciary obligations, which is a lawyer’s term for the prudent care of those endowments that the university decision-makers have to engage in. It would not be in any way, legally problematic for these very elite universities to say, “we’re going to spend an extra 2% or 3% of our endowment this year to deal with an exigent financial crisis.” They can definitely do that legally. There’s nothing to stop them from doing it. It’s true that they can’t do absolutely anything they want with their endowments, which of course is appropriate. But they have plenty of flexibility to address this kind of a crisis through extra temporary spending through their endowments, and university administrators who claim otherwise are being disingenuous.

Dan:     My guest has been Professor Paul Campos, a professor at the University of Colorado Law School. His most recent books include Don’t Go to Law School Unless…, and The Obesity Myth. He writes frequently for both academic and popular publications. He’s been here with us talking about his op-ed piece in The New York Times “Rich Colleges Can Afford to Spend More,” and you can also read his other writings on his blog at LawyersGunsandMoney.com. Professor Campos, thanks for being with us.

Paul:     Thanks for having me.