For preventing higher education institutions in America, from being burdened by tuition-dependency and “small” endowments, and for making higher education beneficial to its students.
In November, 2015, Moody’s Investors Service released its latest melancholy forecast for tuition-dependent, private non-profit colleges and universities: “It’s going to be another year of lackluster tuition revenue growth for universities, as the pipeline of students heading to college slows and families remain sensitive to prices, Moody’s Investors Service said in a report Thursday.” We noted early last year how the dour annual reports may have a deleterious effect on decision-making at colleges and universities. We emphasized the potential for institutions to scale back tuition discounting without regard for optimization of revenues or expenditures per student. We could have just as easily focused on fundraising and “large” endowments.
If an institution does not rank among one of the two dozen institutions serving 5% of the U.S. student population, its endowment likely matters very little to its operations. Nonetheless, the holy grail of the “large” endowment to wean colleges and universities off tuition-dependency is dangled in front of Presidents and Boards. Moody’s Investors Service recommends, “Schools with stellar bond ratings can finance discounts through philanthropic gifts and endowment income while maintaining strong net tuition revenue growth.” Across the nation, many institutions like Davis & Elkins College now dedicate their Presidents and their alumni operations largely to the task of fundraising. Even Deans apparently exhaust up to 50% of their time for fundraising rather than academic programming and student success.
Do the fundraising campaigns, which have become part and parcel of the daily administration of private colleges and universities, transform budgetary conditions and reduce tuition-dependency as billed? Or, are the projectors of “large” endowments grossly mistaken in their calculations?
For argument’s sake, consider a non-profit, private and tuition-dependent institution of $100,000,000 in revenue and expenditures per year. Imagine if every employee and creditor of this institution, in an act of inestimable generosity, decided to forego their salaries and billings for an entire year provided the institution dumped its revenues into its endowment to be used for student tuition discounts in future years. In other words, instead of $100,000,000 expenditures, the institution banked $100,000,000 for its endowment with no overhead or costs for fundraising (even the fundraisers work for free!). How transformative would be the $100,000,000 endowment for student tuition discounting at the institution?
Following the guidance from the American Council of Education, the new funds will likely be untapped for several years due to the endowment strategies and spending rules in place in higher education. Likely, a “‘smoothing’ rule determines spending based on the multi-year value of an endowment” so the $100,000,000 gift of employees and creditors will impact endowment spending incrementally. Assuming a four-year smoothing rule, four years must pass before the endowment may be used fully to discount student tuition. Then, again according to endowment strategy and spending rules, most institutions “spend endowment earnings each year equal to about 4 to 5 percent of the value of their endowment.” Thus, after four years, the $100,000,000 endowment will yield approximately $4 million to $5 million in revenue to the college and university, clearly an impressive sum.
Nonetheless, in the four years following the sacrifices of the employees and creditors, the institution’s operations continue as usual. Expenditures increase at the average rate of 2% to 3% per year and the net price of attendance increases at the average rate of 4% per year. Overall, before the new endowment money matures, the annual expenditures of the college grows to more than $110 million dollars. Student net cost of attendance will have increased by nearly 17%, or $17 million dollars, if the institution’s revenue is 100% dependent on tuition and auxiliary services to students (room and board, etc.). In other words, the “large” $100,000,000 endowment covers two years of subsequent inflation for salary and services at the institution or only one year of subsequent inflation for students’ net cost of attendance at the institution.
Clearly, the institution will not be transformed by its enlarged endowment.
Nonetheless, the multi-year $100+ million fundraising campaign has become a staple of tuition-dependent college and university administration. Unlike our imaginary scenario, however, institutions shell out millions of dollars annually for fundraising and marketing services to fulfill endowment campaigns. If goals are met and the endowment yields $4 to $5 million per year in spending benefits to the college, after factoring in the costs of managing a fundraising campaign of that size, it likely takes ten or more years to break even after the start of a campaign. By then, we can project, the institution likely launches a new $100 million fundraising campaign and the cycle begins anew. Between fundraising campaigns, as colleges increase tuition to offset the inflationary costs of operation, the student loan debt at graduation will continue to balloon, and soon exceed the current average of $30,000 per graduate.
The great advantage of our strategy at Historia|Research is that we encourage institutions to make direct investments in their institutional research infrastructure in order to continuously improve strategic planning and institutional effectiveness in higher education. The returns on investment for more efficient operations (e.g., unit cost savings) and greater student success (e.g., freshman retention) go directly to the institution’s bottom line the same year in which they are realized. Sustained improvements accrue more and more benefits as students complete their college experience over four or five years.
We are mindful, nonetheless, that tuition-dependent, private non-profit colleges and universities must reasonably satisfy the expectations of credit and bond rating agencies. As we wish not to be liable to the least objection, we offer the following humble proposal to fund private, non-profit college and university endowments and put a permanent end to the blight of tuition-dependency in higher education.
A non-profit institution of higher education with a $100,000,000 annual budget requires a restricted endowment approaching $2.5 billion to operate in the black annually (at a conservative 4% spending rate). Very few institutions, public or private, have an endowment as large as is necessary to build a system of higher education free from the tyranny of tuition. To the contrary, the American Council of Education, in its report linked above, reports 54% of private, non-profit colleges and universities have endowments of $10 million or less — one-tenth of our imaginary scenario. Forbes magazine goes a step further and grades the financial fitness of 925 private non-profit institutions, assigning more than half (nearly 550) grades of C or D. In order to wipe out the scourge of tuition-dependency in the private, non-profit sector of higher education, several hundred institutions require $1 billion or more added to their endowments immediately.
A daunting task, to be sure, but not an impossible one. Forbes magazine also kindly provides a list of multi-billionaires in the United States. According to the National Center for Education Statistics (2012 baseline), private and public institutions of higher education likely had a total estimated $500 billion in endowed assets in 2015. On the other hand, the nation’s multi-billionaires, the 348 individuals with $2 billion or more, had nearly $3 trillion of wealth to their names in 2015. Why do endowment fundraisers pick the pockets of college graduates who earn an average salary of $120,000 per year when trillions of dollars can be had from a few hundred individuals on the Forbes billionaire list? Two trillion dollars of endowed assets will yield $80 billion dollars in tuition discounts to undergraduates attending private, non-profit colleges and universities. With federal and state grants in support, a private college education may be made free or, at least, loan-free for millions of American college students with those monies.
Putting the woebegone, private non-profit institutions and the august members the Forbes multi-billionaire list in the same room is a matter of institutional effectiveness, pure and simple.
We by no means suggest the Forbes multi-billionaire list should have their wealth forcibly redistributed to colleges and universities to advance the civic, technological and financial interests of the nation. We propose, rather, every year for the next six years, to hold an auction to sell naming rights and a seat on the Board of Trustees to every private, nonprofit institution on the Forbes list of financially unfit colleges and universities. The minimum bid for each institution will be $1,000,000,000 in fungible endowed assets restricted for student tuition. The multi-billionaires will be able to outbid each other for the rights to add their name and take a seat on the Board of the prestigious institutions, thus insuring that the institutions with the best names and most need receive the proper value for the Board seats and the permanent association with a multi-billionaire.
As we do not wish to cause undue hardship on the nation’s multi-billionaires, no person ranking below Jerry Yang, #949 at $2 billion, will be accepted into the auction. For the 348 Americans whose wealth ranks at or above #949, $2 billion, attendance at the auction will be required and a minimum charitable donation of $1 billion expected. Multi-billionaires who are more thrifty or have their wealth locked in non-fungible assets, may flee the annual auctions by a petition of exemption to his or her peers and in a statement to the nation explaining his or her destitution. In the first year, the auctions will begin with the 348 institutions with the lowest financial fitness as calculated by Forbes in an effort to salvage very worthy institutions and reveal the true lovers of higher education reform in the United States.
In subsequent years, only those multi-billionaires whose wealth remains above $2 billion will be re-invited. Thus, in year two, the 224 individuals ranking at or above Oprah Winfrey’s position at #603, $3 billion, will attend an auction of the next 224 financially unfit institutions on Forbes list. In year three, the 143 individuals ranking at or above #418, $4 billion will attend, and so on. In the sixth year of the auctions, the 67 individuals who rank at or above Ralph Lauren, #193 or $7 billion, will bring the total number of possible auctions to approximately 975. Adjustments may be necessary each year to account for changes in the Forbes list of multi-billionaires, but six rounds of auctions should prove sufficient to endow fully the 925 institutions on Forbes list of financially unfit institutions. Over six years, an estimated $1.5 trillion will be re-allocated from a few hundred individuals to private, non-profit institutions that provide postsecondary education to nearly three million of our nation’s young men and women.
An entire sector of nonprofit higher education may become tuition-independent, well-endowed and free to its students before our nation runs out of multi-billionaires.
In return, the nation’s multi-billionaires will be able to secure their legacy of philanthropy by securing naming rights to the colleges they chose to endow. For instance, what college-bound child would not consider applying to Bill Gates’s Sacred Heart University (#405) or Michael Bloomberg’s Crown College (#819). The Savannah College of Art and Design (#846) Directed by George Lucas and David Geffen Presents The Milwaukee Institute of Art & Design (#757) will attract and educate promising young film directors and producers. A few multi-billionaires may use the opportunity to polish their reputations, such as the Donald Sterling’s Sterling College (#703) or, to show bygones-are-bygones among loved ones, like Warren Buffett’s Holy Family University (#737). Still others may want to double down on their provincialism, Robert Kraft’s New England College (#805) or Paul Allen’s Seattle University (#665). The pairings of multi-billionaires to tuition-dependent private, nonprofit institutions are literally almost endless and afford the multi-billionaires the market freedom to endow the higher education institution best-suited to their legacy.
In addition, to break the high drama of philanthropy during the auction, we imagine there will be some lighter, comical moments of entertainment. Imagine H. Ross Perot, Sr.’s face when Pat Choate leans over to inform him Notre Dame College (#876) is not this Notre Dame college. Other multi-billionaires will snicker after Carl Icahn acquires the rights to D’Youville College (#91) — Carl, I-Canned-You-Ville College — or after the emcee announces Phil Knight Rider University (#817). Credit and bond rating agencies will debate whether Peter Thiel’s Benedictine University (#449) or Charles Koch’s Roosevelt University (#771) prove to be workable matches. On the other hand, Rupert Murdoch Our Lady of the Lake University (#433) may bring pleasure to the mind’s eye. Lastly, we can picture the look on Meg Whitman’s face when she is stuck with Urbana University (#925), the worst ranking college on the Forbes list, as if Hewlett-Packard Enterprises does not give her migraines already.
It is quite possible, after the private nonprofit sector has been freed from the bondage of tuition dependency, the fifty or so multi-billionaires with $9 billion of wealth and more will have enough remaining to endow the fifty public university systems as well. A poor sap like Eric Schmidt (#137, $9 billion) of course will have to accept a token state like Idaho or Wyoming. On the other hand, the two Larrys, Ellison (33, $72.7 billion) and Page (#19, $29.7 billion) might well get into a bidding war over the naming rights to the pearl of U.S. higher education, the University of California System. The Oracle of Omaha (#2, $72.7 billion) could easily acquire the naming rights to the University of Nebraska System and have enough wealth left over to poach the University of Oklahoma system from his neighbor, Harold Hamm. Not to be outdone by his fellow Harvard dropout Mark Zuckerberg (#16, $33.4 billion), the world’s richest man, Bill Gates, may well want to gain the naming rights in Massachusetts to honor of his wife: The University of Melinda System.
In any case, after the private nonprofit sector auctions are completed, an additional $500 billion in endowment funds may be available for allocations from the wealthiest fifty or so Americans to the endowments of the public university systems. By the end of the auctions, around fifty multi-billionaires will be able to notch a handful of private institutions and a public university system on their philanthropic bedposts, securing their own private sandbox for disruptive innovation and learning analytics.
But, we have too long digressed and must return to our subject. The advantages of this proposal are obvious and many, as well as of the highest importance.
First, as we observed, the scourge of tuition dependency at private, nonprofit higher education institutions will be ended in the United States. No longer will the nation be overrun with the literature and advertisements of tuition-dependent colleges and universities fishing for first-time, full-time freshmen every fall.
Secondly, an undergraduate education from the nation’s premier private, nonprofit colleges and universities will be free or nearly free.
Thirdly, the deep gratitude felt by young Americans for a free college education will end the recent unrest on college campuses. Moreover, as students will not be treated as customers anymore, colleges and universities will no longer be responsive to student demands as if their college budgets depended on it.
Fourthly, the student loan crisis will gradually subside as college education becomes more affordable for those who demonstrate college preparedness. The six year implementation plan astutely allows the financial industry to deliberately redirect its loan programs from lifelong debt peonage for college graduates to more worthy loan practices like home ownership and small business startup loans to college graduates.
Fifthly, and here we speculate a little, the U.S. higher education system will be inextricably bound to Wall Street interests and the capitalist financial system. Colleges will have a deep financial interest in the learning outcomes of their graduates whose productivity and entrepreneurialism (rather than taxes) will keep college endowments and budgets growing ever larger.
Sixthly, we would be remiss if we did not note the erosion of wealth inequality in the United States through the scheme of college endowment auctions to multi-billionaires. The practice of college endowment auctions may continue in future years to insure that the nation’s wealth is continually re-invested in the college education of the nation’s best and brightest citizens who have a lifetime of opportunity and inventiveness ahead of them.
Many other advantages we might enumerate if time permitted. On the other hand, we can think of not one objection.
We profess, in the sincerity of our hearts, we have not the least financial interest in endeavoring to promote this necessary work other than to afford college administrators the free time to focus on academic programming and institutional effectiveness, as opposed to fundraising. Having no further motive other than the public good of our country, we submit our proposal to advance private nonprofit higher education institutions in America, to provide for a free college education to our young citizens, to relieve disadvantaged students of the burden of life-long college loan debt, and to give some pleasure to our nation’s multi-billionaires.