FAYETTEVILLE : Endowments examined
Posted on Monday, March 17, 2008
FAYETTEVILLE — Donors have placed permanent spending restrictions on 98. 6 percent of the University of Arkansas ’ $ 877 million in endowment funds, the school has reported to the U. S. Senate Finance Committee.
Of the portion subject to permanent limitations, 43. 1 percent is restricted for undergraduate financial aid and 0. 2 percent is restricted for need-based scholarships.
Led by Sens. Max Baucus, DMont., and Charles E. Grassley, R-Iowa, the Senate committee in late January asked 136 of the country’s wealthiest public and private universities and colleges to provide detailed information on their endowments.
The UA-Fayetteville campus was the only Arkansas school to fall into the committee’s net, which targeted its inquiry to schools with at least $ 500 million in endowment funds.
Baucus, the committee chairman, announced the investigation Jan. 24, saying its members wanted to better understand how colleges use endowments.
The senators cited tuition rates that have been rising faster than inflation and a new study showing “explosive” college endowment growth.
“It’s fair to ask whether a college kid should have to wash dishes in the dining hall to pay his tuition when his college has a billion dollars in the bank,” Grassley, the committee’s ranking Republican member, said at the time.
The senators described the inquiry as a chance for colleges to detail how they’re monetarily helping students. They said the information will help Congress make informed decisions on a potential payout requirement for endowments.
UA-Fayetteville’s chancellor-elect, Dave Gearhart, and the campus’s finance chief supplied a 14-page response to the senators ’ three-page questionnaire. The UA document uses text and graphics to illustrate the intricate composition of the campus’s endowment. “We’re, obviously, respectful of any United States senator that asks for information,” Gearhart said. But he added that the UA System and its land-grant Fayetteville campus have safeguards in place to ensure the endowments are invested and spent wisely, including the UA board of trustees and a foundation board. “Personally, I don’t feel that these are things that should be the province of the Senate,” Gearhart said. “I would just say that the oversight is already there.”
TELLING THEIR SIDE Gearhart and some education officials outside Arkansas agreed there is diversity in the makeup, size and use of college endowments. One-size-fits-all spending regulations wouldn’t work, they said.
Almost all agreed with the committee that the inquiry gives colleges a chance to tell their stories before Congress devises spending mandates.
“Congress often acts precipitously,” said Terry W. Hartle, senior vice president for the American Council on Education. “It’s always better when congressional committees ask for extensive information first, because it indicates they really want to understand this issue.”
The Washington, D. C.-based American Council on Education employs staff members with expertise in several higher education areas.
Jennifer Poulakidas, with the National Association of State Universities and Land-Grant Colleges, said she believes that the inquiry “certainly seems appropriate for the committee to make,” and that her group’s 215 members — which include UAFayetteville — have put energy into compiling responses.
“Our primary concern is that Congress not specify how the money is spent, especially knowing that a portion of our money is restricted,” she said. More than 80 percent of the endowments among the group’s member schools and systems are restricted by donors through what amounts to contractual agreements, she added.
The 136 colleges asked to provide information to Congress are a fraction of the roughly 4, 500 four- and two-year institutions in the country, said Hartle, who specializes in higher education finance. Many institutions that fell outside the Senate inquiry’s scope have endowments of less than $ 20 million, he said, and a single payout-rate limit for all campuses wouldn’t yield significant dollars for student aid.
Even large campuses, such as those in the University of Texas System, could be hampered by a congressional mandate, Hartle said. Spending is constitutionally restricted for $ 9 billion of that system’s $ 15. 6 billion endowment, so none of the $ 9 billion can be spent on student aid or operating expenses.
Another $ 900 million is dedicated to tobacco settlement earnings, and the list of restrictions goes on.
“Would you tell them to override the state constitution ?” said Hartle. In some other states, the schools’ legislatures or state boards set tuition, he added.
“There’s an idea that an endowment is a big money market account — it’s not.” SPENDING DISAGREEMENTS
Schools or their university systems often try to spend only a portion of their endowments’ interest earnings, plowing the rest into principal to guard against inflation or to override downturns in the market, Hartle, UA officials and others said.
“The philosophy that no one disagrees with is, if somebody gives us money to do something today and they want it to be used for this purpose forever, you have to compensate for inflation,” said UA-Fayetteville’s Don Pederson, vice chancellor for finance and administration.
When a Senate committee hearing last September turned from the topic of hedge funds to university endowments, testimony from an adjunct fellow with the Center for College Affordability and Productivity was critical of college costs and said the public was not benefiting enough from large college endowments, according to online publication insidehighered. com.
The fellow, Lynne Munson, said tuition increases since 1980 were akin to $ 9. 15-a-gallon gasoline or $ 15 milk.
But the College Affordability center’s director, Richard Vedder, said last week that his opinion differs from Munson’s.
“The potential for endowment spending is really kind of modest,” he said. “Some people think this is the solution to the problems that schools face. I just don’t see that. It might make a marginal difference.”
He added that he believes universities have been conservative in their endowment spending in recent years, despite their donor restrictions.
“In many cases, it would have been better for society and future generations if they spent a little bit more,” Vedder said.
Pederson coordinated UAFayetteville’s response to the senators’ inquiry.
He defined payout as the amount of endowment interest the campus spends annually for university expenses and the costs of administering its endowments, which are actually many accounts housed at different UA foundations.
The report to the Senate committee further described the payout as a percentage of a 36-month rolling average of the market value of the endowments for all UA System campuses that house their endowments within the University of Arkansas Foundation Inc.
UA-Fayetteville houses some of its endowment accounts there, but it also has at least one other foundation of its own. In the past, the system foundation has allowed UA-Fayetteville and other campuses to increase their spending rates to help finance large capital campaigns.
In the last decade, the actual and targeted payout rate for the Fayetteville campus has ranged from 5 percent in the fiscal years ending in 2006 and 2007, to 6. 4 percent in years 1999 and 2000, according to the report given the Senate committee.
That left UA with no need to answer one of the senators ’ questions, which asked colleges to explain how a payout rate below 5 percent meets the student body’s “current” needs.
UA’s top 10 major endowment expenditures last year included construction, scholarships, faculty and staff support, equipment, research, fundraising and recruiting, it reported to the Senate committee.
A Baucus aide said Friday that the committee accommodated colleges that couldn’t make a Feb. 21 deadline to respond to the inquiry. Last week, only 75 of the colleges had returned questionnaires, but by Friday, more than 100 of the 136 schools had complied.
Unlike government, “endowments are not focused on the here and now,” Hartle said.
“The basic principle of endowments is inter-generational equity,” he said. “The classic definition of inter-generational equity is protecting the interests of the future against the claims of the present.
“ The money is supposed to be there to ensure you have a stronger university in the future than you do now.”
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