Scarcity Amidst Wealth: The Law, Finance, and Culture of Elite University Endowments in Financial Crisis

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INTRODUCTION--ENDOWMENTS IN CRISIS?

I.   THE THEORY OF UNIVERSITY ENDOWMENTS
     A. Intergenerational Equity
     B. A "'Rainy Day" Fund.

II.  UNIVERSITIES AS "DRUNKEN SAILORS"?
     A. Universities Spent Too Little, Not Too Much
     B. How Much Is Too Much?

III. THE LAW OF UNIVERSITY ENDOWMENTS
     A. The Development of Law and University Endowments: Trustees,
        Corporations, and UMIFA
     B. UMIFA, UPMIFA, and the Financial Crisis
     C. Charitable Trusts and (the Illusion o39 Donor Restrictions
     D. Litigation Risks
        1. Donor suits: the example of Princeton University
        2. UPMIFA and prudential spending
     E. Conclusion

IV. THE FINANCE OF UNIVERSITY ENDOWMENTS
     A. The Yale Model and the Change to Endowment Management
     B. The Yale Model and Liquidity Problems
     C. The Trade-Off Between Forced Sales and Budgetary Disruption
     D. Other Financial Explanations for University Behavior

V. THE CULTURE OF UNIVERSITY ENDOWMENTS
     A. The Sacred Endowment and the Popular Endowment
     B. University Administrators and the "Legacy Costs" of Endowment
        Accumulation
     C. Endowments and Interuniversity Competition
     D. Political Cover for Budget Cuts
     E. Endowment as Core University Mission

CONCLUSION: IMPLICATIONS OF THE CULTURAL ENDOWMENT

APPENDIX A: EXAMPLES OF BUDGET CUTS AT ELITE UNIVERSITIES
     A. Harvard
     B. Yale
     C. Stanford
     D. Princeton
     E. Massachusetts Institute of Technology

APPENDIX B: DATA ON THE SCHOOLS' FINANCES

INTRODUCTION--ENDOWMENTS IN CRISIS?

In late 2007 and early 2008, Senators Max Baucus (D-Montana) and Chuck Grassley (R-Iowa)---Chairman and Ranking Member, respectively, of the Senate Finance Committee (SFC)--called higher education to attention by opening an inquiry into how elite universities manage their multibillion dollar endowments. (1) Commentators during the previous decade had extolled the genius of elite universities' investment management departments, (2) and now the Senators and others began asking the important question: to what end the accumulation of so much wealth? Indeed, the Senators' own questions carried added bite. They asked universities to provide detailed information regarding endowment restrictions, financial aid policies, student demographics, and the average amount that families must pay for students to attend the universities. (3) Additionally, the Senators and others explicitly challenged one of higher education's sacred cows: its favorable tax treatment under [section] 501(c)(3) of the Internal Revenue Code. (4)

Soon, however, the inquiry skidded to a stop. (5) Along with most other participants in the global financial market, (6) university endowments were severely battered by the financial crisis of 2008. (7) The early estimates predicted an average loss of 23% of endowment value in only five months. (8) The political momentum that had grown around Senators Baucus and Grassley seemed to dissipate while many elite universities scrambled to make sense of budgets that had not anticipated the endowment losses. Roughly a year after the SFC's questionnaire dominated news in higher education, (9) the news shifted to focus on university endowments' increasingly dire financial straits and the university budget cutting that soon followed. Even the most elite universities, with the largest endowments, were not immune. Consider the various responses to the financial crisis from the five private American universities with the largest endowments, measured by absolute dollar value--Harvard, Yale, Stanford, Princeton, and MIT. The schools variously have cut budgets up to 15%, (10) laid off hundreds of employees, (11) frozen salaries, (12) halted or delayed construction projects, (13) issued billions of dollars in debt, (14) canceled or downgraded varsity sports teams, (15) and closed libraries, (16) among many other responses. (17) By every account, universities--including the wealthiest in the country--have made significant cuts to almost every area of their budgets. …