Charles Grassley, Republican from Iowa, is not one of my favorite
senators, and neither frankly is Max Baucus, Democrat from Montana.
A while back they came up with the idea that some colleges and
universities were too rich and that they should in some way share their
wealth with less well-endowed institutions. Now, Grassley and
Baucus are not exactly populists. Still, the notion appealed to
them and to other legislators. So congressional committees held
open hearings and all kinds of cockamamie notions were put forward. Some proposed that the flush educational doweries pay taxes. Others
suggested that the richer schools be made to spend a certain (larger)
percentage of their inheritances, as if an academic budget with standing
obligations were like the expenses of a foundation that has no fixed
liabilities. All, I suppose, to even the playing field, as if any
playing field is even and as if legislatively mandated evenness would
produce favorable results.
When the Massachusetts Educational Financing Authority was poised to go
bankrupt--a very serious matter, don't get me wrong--Governor Deval
Patrick, a very serious man, faced with 40,000 students short on coming
tuition, proposed that Harvard, the Massachusetts Institute of Technology
and even the sparsely enough state-supported University of Massachusetts
put some of their spare cash into the M.E.F.A. as investments. No
later than on the morrow, as I recall, the Boston Globe, with the
goofiest editorial page I read, published its support for this go nowhere
idea. (The New York Times, which has financial troubles of
its own, is trying to shed the Globe from its burdened back. Jack Welch, the former C.E.O. of General Electric appears to want to
buy. Let's see how goofy the other side can be.) The
Massachusetts legislature was considering proposals of various degrees of
malevolence and idiocy to tax schools that showed endowments of over $1
billion. But that was then and now is now.
At this writing neither Harvard not M.I.T. has any spare cash. And
neither do Stanford, Yale, Princeton, University of Texas, University of
Michigan, Emory, Georgetown, Johns Hopkins, Williams, Amherst, Virginia,
Smith, Cornell, Pennsylvania, Columbia. Not quite as pinched as the
poor institutions. But squeezed nonetheless. Squeezed very
tightly, in fact. Probably with no where to go but sideways unless
I am too optimistic, in which case they will be down some more. And
so the quick-fix legislators have retreated, perhaps beaten for the
moment but not humbled.
In a way, of course, the super-wealthy institutions, like the
super-wealthy individuals, who did inordinately well during the long
upswing have been punished inordinately, too. Say, if the endowment
of institution "A " (no, it's not Harvard; it's no particular
place) went up by 20% a year through very savvy investments and very
successful fundraising its financial holdings had, after five years, a
quantitatively and qualitatively different character. It spent more
and put more money into long-term and often non-liquid private
investments. Now, the value of its big old cushion has fallen by
30% in its public equities and God only knows how much it has plummeted
in its hard-to-value and now almost impossible to sell...For example, a
holding in New Zealand pine forests. (Yes, this is Harvard.)
Well, you can see how vexed and how troubled very very rich institutions
and individuals may be.
Super rich educational institutions, like super rich families and
individuals, have also put their money with what are called "hedge
funds," although some of these don't hedge at all, that is, they
don't borrow. Many of these funds take in investors that are called
"funds of funds," which invest in many such vehicles. The
f-of-fs have rules that they can never have more than, say, 10% in one
fund. What's the upshot of this?
One of these vehicles does very well and others do horridly. The
good performer shoots up to well above what the f-of-f permits. So
the latter must bring this investment down and may keep, thank you, its
holdings in the poor performers, which are usually in no position to
repatriate any investments at all. These are the
quandaries of money managers, good and bad.
One might ask whether the successful money managers for the colleges and
universities who got paid relative to their performance--to many millions
of dollars--now, given that many of their investments actually collapsed,
owe anything to their employers. It is certainly a legitimate
question, not only a legitimate financial question but a legitimate moral
question. But I'm not going there.
Still, there are many burdensome consequences of the financial calamity
for universities and colleges. To put it simply: many of them can
no longer afford last year's budget. And maybe even the budget of the
year before. Surely their future plans have to be considered,
whether the future is next month or a scheme that was supposed to last a
decade and more.
There are different approaches to immediate relief. Some
institutions will simply have to cut expenditures. There's no way
out, and no way out for many. Even wage freezes may not suffice, so
budgets will undergo what may seem like Draconian surgery. It's a
particular shame that this comes at a moment just after the moment when
the educational elite had become to ponder, even to act on the reality
that middle class, even upper middle class students were being
financially barred from the highest quality undergraduate schools. The wealthiest of them basically announced that those who come from
families that earn below a certain (relatively high) income would no
longer be responsible for tuition costs. I hope these subsidies are
not threatened. But they may be, and schools that intended to
embark on such programs may now defer.
Cuts across the board for those which simply can't spend what they had
been spending is certainly the first reflex in these vexatious
times. Leon Botstein writes in Inside Higher Education
online, however, that there's something else that might be done,
and that is to re-examine what colleges and universities are already
doing and, under stress, do something a little different. But Leon,
who is the president of Bard College (of which I am a trustee), is an
especially daring chief executive and his college is a small one.
Richard Levin can't undertake a review of what and how Yale does things
with recommendations for change in, say, six months. For that
matter, I don't know how Yale and Rick are facing the financial crisis,
or even if there is much of such a crisis in New Haven.
One element in the predicament is a legislative legacy of Representative
Claude Pepper, before that a senator and called for good reasons
"red hot pepper." Colleges and universities are not
permitted to have age-related mandatory retirement rules. So, if
you walk around Harvard Yard or any college campus, you are likely to
encounter nearly senescent and stumbling professors walking from
classrooms to faculty club. I could mention three outrageous
instances of such intellectual haughtiness. But I won't, although
many university academics who are still teaching understand they
shouldn't be. Then there's the phenomenon of reneging on
retirements. My TIAA is down. Why don't I teach a few years
more on my rich Harvard salary and deepen my pension? I know a
morally haughty professor of law at Harvard who has suddenly jettisoned
his emeritus status and gone back to full time at the lectern.
Well, what about younger legal scholars who aspire to HLS? Let them wait. This was already a problem throughout the
university system before the financial crisis. It is a much greater
one now.