Mac Engel: Why universities cut budgets rather than tap from their massive endowments

©Fort Worth Star-Telegram

General view of the University of Texas Tower on the University of Texas campus on September 21, 2013 in Austin, Texas. - Ronald Martinez/Getty Images North America/TNS

FORT WORTH, Texas — While colleges and universities slash budgets in the face of historic losses, a common echo on every campus rings, “Use the endowment!”

Stanford University, with the nation’s fourth-highest endowment at $26.4 billion, cut 11 sports from its athletic department.

TCU, with an endowment of $1.7 billion, has scaled back benefits for employees, and high-ranking coaches and administrators have taken pay cuts.

The University of Texas system’s endowment is the second-richest in the U.S., and its schools have narrowed budgets via pay freezes and some layoffs.

Why are the colleges and universities that have hundreds of millions, to billions, in endowments cutting rather than using those funds to maintain it all through COVID?

Because if they do, it will mean this pandemic is worse than it already is.

With the aid of a retired university administrator, and a relative who works in the finance industry, enjoy the following:

———

How an endowment lives is semi-complicated, and how they breathe is one of the many flaws that exist not only in college athletics but in higher education that COVID has exposed.

Withdrawing $200 million from an endowment to cover the shortfalls that exist at schools, and their athletic departments, is not a trip to the ATM to take out $20 to buy lunch.

By law, any school or organization that has an endowment can spend it whenever they want.

By practice, and some law, any school or organization that has an endowment cannot spend it on whatever they want. There are designations, and potential consequences.

Most of the money that exists in these obscenely large endowments comes from donations, and wealthy individuals who contribute. A portion of the endowment may come from the school that owns a property, such as oil and gas rights, or leasing land.

The oil and gas rights owned by the University of Texas and Texas A&M systems routinely put those institutions in the top 10 of endowments every year; UT’s endowment is just over $30 billion, and A&M’s is $13.5 billion.

Because of the plummeting price of oil and gas, as well as a drop in school-related revenues, the A&M system is reporting a loss of $147 million; the UT system estimates losses of around $131 million.

Schools prefer not to touch the endowments beyond what they plan to subtract from them every year. By growing the endowment annually, the school can withdraw the interest generated from their investment portfolio’s income and appreciation to cover almost all of its expenses, from scholarships to salaries, to research projects, to athletics, to standard cost of living increases.

When a person makes a financial donation to their school of choice, typically the gift is designated for a specific purpose. That purpose could be the biology department, the women’s tennis team, or money to pay for flowers.

For instance, TCU receives an annual contribution from one donor to cover the costs of the “beautification of its campus.” According to one source, it’s a seven-plus figure donation.

If an administrator allocates that “flower money” to cover other costs, even to address an emergency, and the plants die off, it could potentially threaten the relationship with the donor.

Such a move could be considered grounds for a lawsuit by the donor to reclaim the gifted money. So the flowers will always bloom in the spring, regardless if other parts of the campus die.

The donor who gives to the business school expects their money to be used on the business school, not the library.

There is always the chance that the administrators would have to answer to the authorities if the school is not using the endowment money for the purposes of the school itself.

A university may have a “rainy day” fund, but that would typically be separate from the endowment itself.

No school has a rainy day fund to cover the loss of revenue on this level, as a result of a global pandemic. There is no precedent for this; accordingly, no university would plan for it and put away the type of money necessary to carry on as usual.

———

The operation of a university endowment often functions more like a trust fund with the unwritten mandate to support the health, education, maintenance and support of an extended family tree of living descendants.

The operation of a university can often function as more hedge fund, and private equity; the university portfolio would include investments, athletic entertainment, patent development, government contracting, real estate management, merchandising, etc.

And, of course, for giggles they also dabble in education, too.

Here is the fun part: many of the businesses that would be included in a university’s endowment portfolio are exempt from income and property taxes.

Caught in this web of semi-sophisticated finance is a growing list of scared executive assistants, professors, assistant professors, coaches, and administrative employees of Private Equity University.

Their respective universities sit on hundreds of millions, or even billions, of dollars which remains untouched.

The managers of Private Equity University are terrified if they tap into that endowment will result in lawsuits, and ultimately the crash of the school itself.

———

©2020 Fort Worth Star-Telegram