The Costs of Hoarding at Elite Universities

by Chris Sturr | March 03, 2009

Interesting article from BusinessWeek about finance in higher ed. Hat-tip to Bob F.

Academic Endowments: The Curse of Hoarded Treasure

Universities are cutting budgets and shortchanging today’s students to risk what’s left of their endowments in financial markets

By Peter Coy

Something seems wrong with the way elite U.S. universities finance themselves. The problem: They’re addicted to multibillion-dollar endowments. When the endowments suddenly shrink, they can seem more like curses than blessings. Harvard University, the richest institution of higher education on the planet, gets about one-third of operating funds from its endowment.

Now that Harvard is expecting a roughly $11 billion endowment decline over the current academic year—30% of the total—the university is in such a financial squeeze that it has frozen faculty salaries and offered early retirement to 1,600 employees. Princeton is even more addicted to its endowment, which provides about 45% of its operating budget. Princeton Provost Christopher Eisgruber warned in February: “We are beginning to live in the ‘new normal’ and we should not expect to go back to how we operated in the last 10 years.”

Is there a better way? There could be. Here’s an idea: Maybe rich universities should act more like companies, which somehow manage to operate without endowments. Universities could raise just as much money from wealthy alumni and other donors as they do now, but they wouldn’t hoard it in a great big piggy bank. They’d spend it as it came in, the way companies spend their revenue on current needs.

Read the rest of the article.

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