Are Endowments Damaging Colleges and Universities?

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Tony Dejak/AP Photo

Over 500 Oberlin alumni contributed to the 1833 Just Transition Fund, a nonprofit that provides pandemic relief to dining and custodial staff laid off by the college last year.

These are perilous times for private, nonprofit, independent higher education, and not just because of changing demographics, ever-climbing tuitions, and pandemic shutdowns. For years, education researchers have charged that institutions are unable to control costs effectively, especially their operating costs. In public discourse, colleges and universities are often characterized as reckless spenders. So when they slash academic budgets or cut staff, nearly everyone shrugs. Higher education has gradually accommodated itself to austerity thinking. But as any critic of neoliberalism can tell you, austerity is really just another way that money and resources are redistributed upward, and outward.

It is rarely, if ever, discussed how endowment fund management is an integral part of the budget problem. As the tax filings of virtually every private college or university show, enormous investment management fees are pouring out of nearly every substantial endowment and into the pockets of fund managers. Most of these fund managers are not university employees, but rather work for industries such as private equity, hedge funds, and other so-called “alternative” investments. According to its tax filings, Oberlin College (my alma mater) paid out a total of $14,872,522 in investment management fees between 2013 and 2017, averaging around $3 million per year. During that same period, Amherst College paid out $186,601,258. At both colleges, investment management fees actually exceeded reported profits from investments several times. Excluding Harvard (which manages its roughly $41 billion endowment internally and has also faced criticism for immensely high overheads), the remaining Ivy League colleges reported paying out $241,653,279 in fees in 2017 alone. That same year, Stanford University paid out $47,901,005, and Johns Hopkins $28,112,000. The list goes on and on.

Nontraditional asset class investing has become so widely fashionable among university endowments that it has taken the form of ideology.

As enormous as such figures are, it is likely that they do not represent the total costs associated with these investments. Tax filings simply do not reveal enough for the overall financial effects of these investment decisions and practices to be comprehensively assessed. But what is known is that the alternative-investment industry is tremendously profitable: In 2020 alone, for example, the top 15 hedge fund managers collectively made over $23 billion.

But we can say that the pattern reflects a widespread institutional practice with endowments, tax-free investments held by nonprofit institutions that provide education as a public good. Increasingly, endowments are invested in expensive, secretive, unregulated, illiquid, risky, and hard-to-value financial instruments—the strategy laid out by David Swensen in his book Pioneering Portfolio Management and nicknamed the “Yale Model.” While acknowledging the greater risks involved, Swensen credits Yale’s returns to this strategy, noting that “developing partnerships with extraordinary people” is the single most important element for its success. What makes these people extraordinary is not specified, but the enormous amounts of money they are paid does fit that description.

Nontraditional asset class investing has become so widely fashionable among university endowments that it has taken the form of ideology. Very few institutions seem to balk at putting alumni and other donations into risky, illiquid investments, something that would have been regarded as foolish and dangerous only a few decades ago.

Oberlin College is among them. According to its Investment Office, 67.9 percent of its $890 million endowment was invested in “alternatives” in 2019 (hedge funds, private credit, private equity, and real assets), a much higher level than many similarly sized endowments. Oberlin’s boilerplate rationale is that “historically, our relatively higher allocations have both increased investment returns and decreased volatility,” just as Swensen promised.

Despite this boasting about its healthy, profitable endowment, Oberlin announced early last year that it would outsource over 100 unionized dining and custodial jobs, in order to save around $2 million annually. That’s less than Oberlin pays out each year in investment management fees. This extreme measure was pushed through despite opposition from students, faculty, alumni, staff, and the broader community. Depriving some of the college’s most vulnerable employees of health benefits and income is bad enough for a historically progressive college in a town with a poverty rate of over 20 percent, but it represents a particular kind of cruelty in the midst of a deadly pandemic.

Oberlin contracted the dining jobs out to AVI Foodsystems, Inc., which eventually reached an agreement with the union to preserve wages and benefits. But on July 2, late in the day and right before a holiday weekend, Oberlin unilaterally announced that it was outsourcing the custodial services to Scioto, a company privately owned by the Rauenhorst family trusts. Scioto only rehired one of more than 50 custodial workers; the rest, a majority of whom are in their fifties and sixties, with over 600 combined years of service to the college, were fired outright. Scioto’s job listings indicate lower pay, few if any benefits, and often no guarantees of stable, full-time employment.

Those close to the negotiations say that the college made no attempt to bargain in good faith with the union, a local of the United Auto Workers, despite the fact that it was willing to make numerous concessions. The college’s decision over the summer to extend health care benefits until the summer of 2021 to any former employees not otherwise covered only came after considerable union and alumni pressure.

How did Oberlin College, whose progressive history is a national treasure and source of pride for many alums, stray so far from its values that it is now union-busting and contributing to its hometown’s already considerable poverty rate? And why is it that austerity measures such as these are increasingly foisted upon faculty and staff at colleges and universities nationwide, when their endowments should be sufficient to safeguard jobs and benefits during times of extreme financial stress and difficulty? Why have endowments, meant to insulate institutions from difficult times, instead become a source of profound vulnerability and needless pillage?

One College’s Crisis

During the financial crisis of 2008, I was tracking state pension investments, which were comparatively free of the regulations governing other taxpayer-funded state funds. At the time, a number of state pension funds were increasingly investing in derivatives and various other alternative investments, many linked to the housing bubble. When the crisis hit, it became clear that the managers of these funds did not have a remotely adequate sense of the risks involved. When the bottom dropped out, private financial institutions were propped up with public taxpayer money, with practically no assistance for people who ended up losing their homes, and with the general negative economic effects disproportionately affecting people of color.

After the crisis, I began to look into endowments, and noticed that many were also investing substantial percentages of their assets in risky and illiquid financial instruments, making them highly vulnerable to the “unexpected.” As an alum, I followed Oberlin’s endowment more closely than most.

Oberlin was already beset by a number of crises before current president Carmen Twillie Ambar’s arrival: two major lawsuits as well as a 2015 scandal involving the chair of the Endowment Investment Committee, Thomas Kutzen, who was charged by the SEC with fraudulently inflating the value of his hedge fund. Ambar also inherited a structural deficit common to many colleges and universities. Despite its impressive $890 million endowment, the college was in apparent distress, even before the pandemic hit.

When pressed, the administration and trustees just insisted upon the necessity of their plans. There was no accountability at the top, simply imposed austerity. Austerity is always a labor issue, because it affects the circumstances and dignity of work. In America, where health insurance is often tied to work, it is also a social-justice issue.

Given Oberlin’s progressive history, its decision to cut unionized jobs was unsurprisingly met with vigorous opposition. Students, staff, and union members demonstrated. One faculty member went so far as to chart the rate of the endowment’s return over time compared to a standard index fund, finding that the endowment seemed to be doing significantly worse.

A synergy between secretive endowments and the changing character of university and college administrations vibrates at the heart of this episode.

A group of alums, myself included, formed an ad hoc committee called Alumni for a Sustainable Oberlin Endowment. On March 12 last year, we sent a letter to the administration and the trustees, signed by over 60 alumni who were willing to commit to withholding donations in protest. In addition to requesting that the administration halt the firings, we also requested designated contacts who could answer questions about the endowment. Most crucially, we offered to undertake a confidential, independent evaluation of the endowment. Our offer, if accepted, would have helped restore trust and confidence that the administration and the trustees were doing the best they could in a difficult situation.

Our letter briefly opened up a communication channel. The trustees did not respond substantively to our requests, but did inform us of an emergency fund established to help students stranded by the pandemic. To Oberlin’s credit, this was much more than many colleges and universities did, and we exempted that fund from our donation boycott. Our offer of an independent valuation of the endowment, however, was never acknowledged, although it still stands. Again, Oberlin pays out more each year in investment management fees than it hopes to save by the job cuts.

As we waited in vain for a response to our requests, I discovered some politically symptomatic ironies. Chris Canavan, trustee chair and principal advocate of the proposed cuts, also chairs a public foundation called the Fund for Global Human Rights, whose lead slogans are: “Equipping Activists. Mobilizing Movements. Improving Lives.” Among other projects, the fund addresses issues like food security in Honduras. Perhaps resources from this fund might be made available to the workers let go at Oberlin, which already has such a high rate of poverty?

Despite considerable opposition, the college administration and trustees unilaterally went ahead with their original plan and outsourced the jobs. They provided no evidence that cutting jobs and benefits was the only way forward, they allowed no one to look at the books and come to an independent conclusion, and they did not reveal how they calculated the anticipated savings. They simply asserted that their course was the only correct one, something no one else was in an informed position to judge.

In response, over 500 alumni contributed to the 1833 Just Transition Fund, a nonprofit that a group of us established to provide pandemic relief to those who were not rehired by either outsourcer. We were able to provide at least $3,000 to each, surely something but hardly enough to make up for what these people had lost.

A synergy between secretive endowments and the changing character of university and college administrations vibrates at the heart of this episode. In addition to exposing institutions to considerable financial risks and costs, the secrecy of alternative investments has meant that even well-meaning administrators and trustees—people who truly value education, research, and scholarship—are provoked to act in ways that erode a sense of community and shared endeavor. This secrecy has encouraged autocratic behaviors at the expense of the institutions and communities they should serve and safeguard, all while the pandemic has made the urgency of cooperation and acting in good faith ever clearer.

Profits and Values: The Erosion of Higher Education From Within

The situation at Oberlin mirrors the reality of alternative investments and our financial market–dominated economy. As researcher Ludovic Phalippou of the Oxford Saïd Business School has demonstrated with respect to private equity funds, investors habitually pay enormous amounts for financial instruments that did no better in their returns than index funds and were considerably more expensive, just as the faculty researcher at Oberlin concluded. Another recent study found that hedge funds, another alternative investment, typically net investors a mere 36 cents for every dollar earned; most of the money goes to the managers. These investments aren’t protecting the futures of private colleges and universities; they’re just providing seed money for a tragically unequal economic system.

Given the noxious and anti-democratic role of money within our political system, both parties are undeniably caught up within the mechanisms of a heavily financialized economy that has transformed our society from a democracy into an entrenched oligarchy. Institutions of higher education have been helping that process along, though practically nobody involved may even be aware of it.

Surely, the vast majority of alumni who donate to their alma mater’s endowment do so in support of the institution’s fundamental educational mission. But some of that alumni money is enriching fund managers within an already scandalously wealthy industry, in a country already riven by enormous income inequality. Worse, this virtually unregulated and secretive industry contributes to that inequality by depressing wages, disempowering workers, and destroying more jobs than publicly traded companies do.

Endowment management and oversight is usually restricted to specific subcommittees. Faculty, staff, alumni, and students are routinely rebuffed when making inquiries. No one outside of those directly involved with the particular investment vehicles at stake is in any position to evaluate or independently assess any claims about what endowments are invested in, what they are worth, how well or poorly they are performing or being managed, and whether or not there are any conflicts of interest. Although nonprofit colleges and universities are all audited, which would seem to confer at least some legitimacy on the figures provided by trustees, managers, and administration, auditor awareness of valuation complexity and how best to test management’s values can vary considerably. Indeed, it is standard practice for auditors simply to note that values can be profoundly affected if situations change (as they often seem to do).

Private colleges and universities are being used to support and enrich a private investment industry whose sole purpose is extracting extraordinary profits for itself.

So-called “alternative” investments were essentially created to get around regulations and reporting requirements that govern public equities such as stocks and bonds, as well as pooled investment vehicles such as mutual and index funds. If a few leaked examples are any indication, they are governed by confidential, long-term contracts that seem to guarantee profits for fund managers, regardless of the performance of the underlying assets.

Because of the immense secrecy surrounding alternatives, even ostensibly straightforward initiatives such as fossil fuel divestment campaigns can yield incomplete results. Public equities in that industry can be sold off, but the underlying assets within alternatives are completely hidden from view. At a time when the humanities in particular have come under increasing pressure to “prove” their value, when hiring and salary freezes are being widely instituted, and some colleges and universities (including Oberlin) are even halting employee pension contributions, the lack of basic transparency about the financial condition of endowments, along with an increasingly top-down corporate attitude that’s become characteristic of the commodification of education itself, just doesn’t cut it.

François Furstenburg, professor of history at Johns Hopkins, was correct when he called attention to an enormous crisis of university governance emerging in the midst of the fiscal strains brought about by the pandemic. And he was also right to note the dangers of conflicts of interest and self-dealing, observing that “over nine years [Johns Hopkins] paid more than $88 million in fees to an investment firm whose founder formerly served as chair of the university’s board.” Some conflicts can be ferreted out by examining tax filings, but others will surely remain hidden. The wall of confidentiality, obscurity, and privilege that surrounds most endowments today is changing the character and culture of private higher education in this country for the worse.

The inescapable conclusion is that our private colleges and universities are being used to support and enrich a private investment industry whose sole purpose is extracting extraordinary profits for itself, and which has no fundamental interest in either the value or the demanding work of education, research, and scholarship. When institutions with substantial endowments nevertheless plead financial hardship and proclaim the need for cost-cutting measures, clearly something has gone badly, systemically wrong. Endowments, after all, are supposed to help institutions weather periods of financial difficulty. Instead, they have become a principal source of financial difficulty, and this fact endangers the fundamental educational mission of our private colleges and universities.

Changing Course

Our highly financialized economy is advancing a process of deep and abiding social, political, and economic disenfranchisement. Enormous fortunes have been made in the finance industry, all while ever more Americans are merely one paycheck away from poverty, and many already plunged into it by missed ones. As we have seen in recent weeks, seemingly random fluctuations in financial assets, and rampant speculation on asset inflation, have become a central preoccupation of wealth in America. A real economy can barely be seen through the speculative fog of financial engineering surrounding any half-baked proposition with a chance to rise in “value.” Hedge funds and other alternative asset managers have driven this reckless chase for returns, which has become completely disconnected from the value and worth of everyday Americans.

Such extremes indicate a very unhealthy society, which treats people as expendable and of no real account in many ways, for all sorts of reasons related to race, gender, class, and even general health. Oberlin College can afford to put millions in the hands of investment managers, enabling the wild gyrations of our financial markets, but claims incapacity when it comes to protecting the most vulnerable within its workforce.

I hope, and trust, that administrators and trustees across the country see the problems I’ve described here, and will work to address them. But I also suspect that there are those who have benefited in various ways from the current state of affairs, and will not cede ground without a fight. The myriad costs of this state of affairs are very real, and Oberlin’s imposed austerity is hardly unique. For example: Despite its $29 billion endowment, the administration at Stanford threatened to close its famed press if it couldn’t become “self-sustaining.”

Our private institutions of higher education are endangered by a powerful and corrupting combination of money and secrecy, which has led to pillage. But accountability is not a one-way street, and colleges and universities must be made answerable for their management of endowments. Institutions could renounce the Yale Model and invest in standard index funds, which yield similar or better returns and are far less expensive. They could also commit to sustainable endowment policies with clear guidelines about conflicts of interest, in order to reassure alumni and other donors that their contributions are not lining the pockets of investment managers. Faculty and other stakeholders can pressure administration and trustees to become more open and transparent about the financial condition of their endowments and how they are invested. Task forces could be formed to assess and challenge imposed austerity measures, against the trend of top-down managerialism and administrative fiat.

There are any number of paths forward. But the extreme conditions of the pandemic have clearly revealed the need to change course.