In April, University of Michigan President Mark Schlissel announced the school was projected to lose $400 million to $1 billion due to the COVID-19 pandemic. In response, the administration implemented furloughs, executive pay cuts, and limited non-essential spending. On June 22, the school announced its plans for the fall semester, including in-person and remote classes.
Three days later, UM’s board of regents considered a proposal to raise tuition by 1.9% for the 2020-2021 school year and implement a $50 COVID-19-related “student fee.”
Under the plan, only UM’s most affluent students would see their tuition rise. “The people that we’re calling upon to pay an extra $400 or so, or $300, actually aren’t the ones who are being affected by this awful economy,” said Schlissel, in what can generously be described as a failure to read the room. On Schlissel’s watch, UM wrapped a record-shattering $5.28 billion fundraising campaign, while its endowment ballooned to $12.4 billion. In 2018, regents awarded Schlissel a $50,000 raise, bringing his salary to $900,000.
UM regents have also increased tuition and fees by 42% over the last 10 years as the school grappled with steep cuts in public funding.
Regent Mark Bernstein said the increase was necessary to drum up $12.8 million for students receiving financial aid. Calling the proposal “tone deaf,” Regent Denise Ilitch said UM should temporarily change its 4.5% endowment distribution rate “to accommodate the pandemic crisis we are in at the moment.” Students agreed. “The fact that the university isn’t willing to use the endowment is absurd because we are in the midst of an extremely unprecedented time,” junior Annie Mintun told the Michigan Daily.
The UM board initially rejected the tuition increase on June 25. Four days later, however, they reconvened and approved the increase without public comment, in potential violation of Michigan law. In an email to Inside Philanthropy, Rick Fitzgerald, UM’s director of public affairs and internal communications, said the university’s endowment distribution rate “remains at 4.5%.”
The situation at UM is emblematic of a larger debate over endowment distribution at universities, which runs parallel to a similar debate happening in the foundation world about how protective institutions should be of their assets in times of intense immediate financial need. Institutions like UM are holding annual distribution rates flat to ensure the endowment’s preservation for future generations, while others have approved temporary distribution increases to mitigate the impacts of a once-in-a-lifetime crisis.
Below, I’ve listed the main reasons universities have chosen to keep endowment distribution rates flat during the pandemic, along with corresponding counter-arguments about why they should raise it.
As we’ll see, the debate goes beyond percentages and semantics. It speaks to some profound challenges facing higher education overall, and growing accusations of wealth hoarding by affluent universities, where regents and donors have presided over escalating tuition and student loan debt that has topped $1.6 billion.
Establishing a Baseline
To be clear, asking a university to “use the endowment” doesn’t mean regents will arbitrarily dip into a rainy day fund. A university’s endowment actually consists of hundreds, if not thousands, of smaller funds set up by donors, many of which have restrictions on how they can be used.
The American Council on Education (ACE) explains why regents pick a spend rate between 4 and 5% of the value of their endowments: “If the institution achieves a total return of 7 to 8%, and can expect inflation of 2 to 3%, it can reinvest the 1 to 2% it does not spend to cover inflationary increases in costs.”
This 4.5% figure enables universities to withstand economic fluctuations, ensure a stable income stream, and preserve its purchasing power so that, for example, a fund supporting a professorship today can do so 30 years from now. (Foundations, on the other hand, are legally required to pay out at least 5% of their assets annually.)
This debate around upping endowment spending is limited to a relatively small number of institutions—those with substantial endowments. According to ACE, of the nation’s approximately 4,000 public and private nonprofit colleges and universities, only 657—or about 16%—had endowments over $50 million. Only 62 institutions—1.6% of all colleges and universities—had endowments exceeding $1 billion. Of these, 46 were private and 16 were public, like UM.
Here are three reasons why some universities haven’t increased annual endowment distribution to combat the effects of the coronavirus pandemic, and counterarguments that they should consider doing so.
1. Funds are Restricted
“Since U-M has a relatively large endowment, why doesn’t it use the endowment to replace the millions of dollars in state support that have been lost?” asks UM’s endowment FAQ page. The answer: “The endowment is actually a collection of more than 11,700 separate endowments, most of which have been donated to provide support for specific purposes such as scholarships, educational programs or professorships.” About 22% of UM’s endowment is restricted to direct student financial aid, for example.
Harvard and Cornell also publicly cited donor restrictions as a major obstacle for “using the endowment” during the pandemic. But this argument leaves out a key reality: Trustees can still boost the distribution rates of restricted funds without violating donor intent.
While deploying more of the fund’s accrued value for the university’s use “doesn’t add flexibility to how these funds can be used,” it can still “provide temporary relief to the university’s general fund budget,” says David Rosowsky, who served as provost and senior vice president at the University of Vermont from 2013-2019. Rosowsky encourages schools to “use funds from endowed scholarships first, before using general funds (e.g., tuition revenue) to support scholarships.”
Better yet, many donors who made restricted gifts are still very much alive. Buck Goldstein, an economics professor at the University of North Carolina at Chapel Hill has encouraged colleges to ask donors to opt into a program where constraints on endowments and contributions would be suspended during the pandemic. Institutions in California and Massachusetts have gone a step further. The Chronicle of Higher Education’s Goldie Blumenstyk reported that representatives “sought dispensations from their state attorneys general to lift restrictions on gifts whose original donors or descendants are deceased.”
Moreover, some portion of most university endowments consists of unrestricted funds. In June, Stanford’s board of regents approved a 3% increase in payout from endowment funds that support student financial aid. “To deal with this budget challenge,” the school said, “the regents took the unusual step of approving the withdrawal of up to $150 million from unrestricted endowment.”
As for UM, Eastern Michigan University Accounting Professor Howard Bunsis calculates the school has $6.7 billion in unrestricted endowment assets.
2. It Would Be Short-Sighted
Another reason regents won’t increase the distribution of restricted and unrestricted funds is that by doing so, they will “reduce the size of their reserve and the future income that their investments will be able to generate,” says ACE. “This, in turn, reduces the stream of steady, reliable income that will be available to make future commitments and enhance the quality of their programs.”
Writing for Inside Higher Ed, Princeton Ph.D. candidate Benjamin Bernard provides the following case study. Princeton graduate students petitioned the school to draw from unrestricted, liquid endowment funds to pay for a year of stipends. Bernard estimated that Princeton would have to withdraw $100 million to meet these demands. If Princeton instead kept that money in its endowment, “that sum could grow, compounded at a conservative 5 percent over a century, to a whopping $13 billion in the year 2120,” Bernard wrote.
That scenario is based on assumptions of steady growth and low inflation. However, Bernard goes on to note that this “assumption no longer seems self-evident,” nor, for that matter, is it safe to conclude that “the academy as we know it” will even exist 120 years from now. “By investing in graduate education now,” he concludes, “universities like Princeton will keep producing knowledge and fulfilling their long-term mission.”
Furthermore, the numbers suggest that universities can likely afford to dig deeper in the moment. Princeton plans to temporarily increase its endowment spending rate from 5 to 6%, a figure President Christopher Eisgruber called “not sustainable.” In May, Northwestern University President Morton Schapiro announced its distribution rate would be temporarily increased from 5.2 to 6%.
UM, as noted, distributes 4.5% of the endowment annually, matching the sector average set by universities expecting a 7 to 8% return. However, UM’s endowment has grown at an average annual rate of 13% since 1981, besting Harvard and Princeton at 8.75% and 9.2%, respectively.
Paul F. Campos, a law professor at the University of Colorado, thinks schools like UM should up their payout rates to as high as 8%. The extra revenue could be used “to avoid furloughs and layoffs of their most economically vulnerable workers, including contingent faculty, staff members and independent contractors who perform crucial yet typically low-paid labor,” he argued in a New York Times op-ed.
Charlie Eaton, an assistant professor of sociology at the University of California, Merced, believes that additional endowment distribution will even save lives. “Many universities operate academic medical centers that need to remain open at full capacity. Endowment funds also should be used to maintain other essential workers such as janitorial staff who will be needed more than ever to sanitize campus buildings if schools are to reopen safely in the fall.”
3. It Would Erode the School’s Prestige
UM student Amytess Girgis floated another reason why regents won’t up endowment distribution: It would erode the school’s prestige. “Being a top public university is a double-edged sword,” Girgis told the Michigan Daily. “You have the resources to actually support your community, and also, you become paralyzed because you have accumulated the wealth and power and prestige of a D1 institution that you’re too scared to take bold action when you need to.”
Girgis echoes a thesis posited by the Wharton School’s Peter Conti-Brown in the aftermath of the Great Recession. “Universities use their endowments as a symbol of prestige and a point of competition between peer institutions,” he wrote. As a result, “universities will strive to avoid endowment liquidation to the fullest extent possible, even in times of crisis.”
While few regents would go on the record saying as much, part of their job is to burnish the school’s prestige. For years, small colleges embraced the idea of “prestige pricing,” raising tuition on the notion that parents view a college that costs more as being more elite. Regents signed off on a gold-plated tuition-busting residential experience to attract in-demand students. And administrators have been known to worry that by lowering tuition, a university would tell prospective students it had “lost confidence in our product.”
An impressive endowment is arguably the most awe-inspiring “symbol of prestige” of them all. But to some critics, it’s an irresponsible display of wealth hoarding.
In 2015, University of San Diego Law Professor Victor Fleischer argued that universities should be held to an 8% payout. “Instead of holding down tuition or expanding faculty research, endowments are hoarding money,” he said, while noting that private equity fund managers received more money in management fees than students on an annual basis at Harvard, Yale, the University of Texas, Stanford and Princeton.
Five years later, in the midst of a pandemic, UC Merced’s Campos picked up on Fleischer’s argument. “For a generation now,” he said, “while many institutions of higher education have struggled to pay their bills, America’s richest universities—like so many of our richest institutions and individuals—have been obsessed with hoarding their ever-more staggering fortunes.”
UM Regents Go There
After UM’s regents rejected a tuition increase on June 25, students created a petition demanding a tuition cut. Within a day, they generated 2,700 signatures. Girgis told the Michigan Daily she didn’t expect the regents would try to raise tuition again. She was wrong.
On June 29, regents passed the 1.9% tuition increase and temporary $50-per-term COVID-19 fee. Regent Bernstein noted that 90% of families of in-state students, those with household incomes of up to $125,000, won’t see the increase. Regent Shauna Ryder Diggs, who opposed the increase, said, “I feel that students who don’t qualify for student aid will be caught in the middle.”
The budget includes $12.8 million to cover the entire cost of the tuition increase for in-state students receiving need-based aid. Schlissel, who cut his own salary by 10% to approximately $68,000 per month through the end of this calendar year, said the university will use $400 million from its endowment for FY 2020-21, “even though the value of the endowment will undoubtedly diminish.”
UM’s press release noted that distributions from the endowment “have increased every year for more than a decade.” It sounds impressive until you realize that this is to be expected, since the endowment itself typically grew year-over-year. The press release didn’t mention whether UM went a step further and increased its annual endowment distribution rate.
After I posed the question to UM’s public affairs office, Fitzgerald directed me to UM’s endowment FAQ page laying out why the school, like many others, kept its distribution rate at 4.5%.
Where’s Philanthropy When You Really Need It?
I also asked Fitzgerald if UM’s development team approached donors to generate the $12.8 million for need-based aid. “Financial aid is always a part of the university’s general fund budget,” Fitzgerald said. “UM donors already contributed to raising a record $1.2 billion for student support during the most recent fund drive, completed in December 2018.”
This support came after the state legislature eliminated several financial aid programs in 2010, totaling an estimated $150.4 million in financial aid cuts. Financial aid to the state’s public institutions decreased by 96.8% from $675 per full-time equivalent student in 2001 to only $22 per student in 2019. Were it not for donors, UM tuition would be $6,000 higher each year, Fitzgerald said.
To be sure, UM students would be in far worse shape were it not for philanthropy. Wealthy alumni are presumably experiencing less economic hardship than most of the families absorbing the tuition hike, so asking them to lift fund restrictions or provide support for emergency student aid is not unreasonable, nor is increasing endowment distribution during an unprecedented crisis.
Like a lot of schools, UM is in a tough spot, and its inability or unwillingness to pursue these options may turn out to be prudent for the long term. But in the here and now, it reinforces why the public is increasingly suspicious of big philanthropy, the affluent institutions that benefit from it, and higher education’s growing reliance on wealthy donors. Critics are calling out donors for hoarding wealth during the pandemic. And as Aspen Leadership Group’s Don Hasseltine recently told me, most of the “top-of-pyramid” donors that universities are leaning on “don’t have a clue, other than a belief in social justice, about the experience a first-generation student has and the difficulty in paying for college.”
I suspect many UM students will be confused and even angered by regents hiking tuition after constant reminders of the school's astonishing fundraising successes. For years, UM regents and administrators celebrated the prestige generated by its fundraising machine, like when Berkshire Hathaway’s Charlie Munger donated $110 million toward a new graduate school residence, or when real estate mogul Stephen Ross donated $200 million toward business school renovations and athletic center upgrades. When UM became the first public university to raise $5 billion, Schlissel held a press conference and declared, “It’s the most successful campaign in our history and in the history of public higher education.”
Then a global pandemic hit. Far less affluent state schools like Central, Oakland, Western Michigan, Wayne State, Michigan State and Saginaw Valley State universities announced tuition freezes. UM regents, on the other hand, tabled additional executive salary cuts, hiked tuition, and passed the bill on to families with two breadwinners earning $63,000 apiece—all without public comment.
“It’s said that a budget is a statement of an institution’s values,” said Girgis in the Michigan Daily article, “and the fact that the university seeks to place the burden of COVID-19 adjustments on students speaks volumes.”