Academic Endowments: The Curse of Hoarded Treasure

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Writer Anthony Bianco cited examples of lavish spending on facilities such as Whitman College, a student residence at Princeton University funded by former eBay (EBAY) CEO (and Princeton alum) Meg Whitman. Each student room has triple-glazed mahogany casement windows made of leaded glass, Bianco wrote. The dining hall boasts a 35-foot ceiling gabled in oak and a "state of the art servery." The Ivies, along with Stanford University and other well-heeled schools, were able to snatch top faculty from public universities, creating a brain drain and engendering ill will. Now, of course, they're back to watching pennies—a wrenching change.

The system Favors future students

By force of circumstance, some richer schools may be coming around to the virtues of spending the money as it comes in instead of socking it away. They have always solicited donations for the "general fund," but this could become a higher priority. Cornell University President David Skorton, at a lunch meeting with reporters on Feb. 27, said that when he tried to hit up one generous graduate recently for $1 million to endow a scholarship, the alum said that all he could commit to was giving $50,000 per year for the next four years. That's equal to the income that $1 million would throw off at a 5% return. Not a bad alternative to an endowment gift, really, especially if it's renewed.

Yale Law Professor Henry Hansmann anticipated the current questioning of endowments nearly 20 years ago in an article called "Why Do Universities Have Endowments?" that appeared in the January 1990 issue of the Journal of Legal Studies. The article runs through 14 justifications for endowments and raises questions about all of them. For example, it's often said that endowments help future generations of students, and that's true. But Hansmann points out that by saving donations rather than spending them now, universities are giving advantages to future students at the expense of current ones.

If we assume that living standards continue to rise, that amounts to taking from the poor to give to the rich. Hansmann is also skeptical of the idea that universities need to smooth out their spending by putting the occasional, very large gift into the endowment fund rather than spending it all at once. He writes that while it might make sense to bank a big gift and spend it over a multi-year period, there's no need to book it as permanent, untouchable capital.

The Mission: Service, not treasure

Human foibles may be a better explanation for the accumulation of huge endowments, Hansmann seems to conclude. On the supply side of funding, he writes, "many donors restrict their gifts for use as endowment, not to advance education and knowledge, but to purchase a bit of personal immortality."

On the demand side, boards of trustees may solicit funds for endowment rather than current spending simply because they like the idea of presiding over a big pile of money: "It may be that, consciously or unconsciously," he writes, "university trustees tend to focus on the size of the university's retained earnings (that is, its endowment) as a measure of the success of the management of the institution." That amounts to collecting money for money's sake. Adds Hansmann: "One sometimes has the sense that universities compete among themselves to have the largest endowment."

Memo to the board of trustees: You're supposed to be running a service business here, not piling up treasure.

Coy is BusinessWeek's Economics editor.