Why haven't we spoken about Peter Conti-Brown's "Scarcity Amidst Wealth: The Law, Finance, and Culture of Elite University Endowments in Financial Crisis," which appeared in the March 2011 issue of the Stanford Law Review?
From Conti-Brown's abstract:
The financial crisis of 2008 left elite university endowments with 30% less value, leading these universities to respond with dramatic budgetary restructuring. While endowments had received probing national and Congressional attention in the months prior to the crisis, that attention has largely given way to the conventional wisdom that universities are no longer able to meet their budgetary needs because of these endowment losses. This wisdom has taken hold despite the fact that elite universities still sit atop multi-billion dollar endowments designed, at least in theory, to provide a cushion in times of financial distress.
This Article explores this apparent puzzle by looking at the legal and financial restrictions placed on endowment spending. The Article finds that, arguments to the contrary notwithstanding, the law does not meaningfully restrict elite universities in their spending largely because the law does not apply to unrestricted funds that compose almost half of elite universities’ endowments. A stronger explanation is financial: elite university investment in illiquid assets means that universities cannot cash out endowments to stabilize their budgets because of an inability to access those investments. I argue, though, that that explanation is still inadequate: illiquid investments likely account for a minority of a university’s endowment, and some elite universities have tapped these illiquid funds at “bottom-of-the-market” prices. The Article articulates a different theory of endowment value: universities use their endowments as a symbol of prestige and a point of competition between peer institutions. This cultural value of university endowments means that universities will strive to avoid endowment liquidation to the fullest extent possible, even in times of crisis.
I was interested in the pre-crash criticism of university endowment spending. It struck me as an attack on charitable organizations in which a relatively well-off segment of the population wanted to be made even better off at the expense of the universities' long-term financial health. That criticism pretty much disappeared in the wake of the crash, because (it seemed to me as an observer on the side-lines) schools were no longer seen as sitting on huge piles of money that they refused to spend. The rainy days they'd been saving for had arrived -- and now, unfortunately, they were restricted in dipping into endowment because they could not easily do so. But perhaps after I've had a chance to digest Conti-Brown's paper I'll think somewhat differently about this.
I was not aware of this article but it apparently confirms my suspicions about elite university endowments. Thanks for noting it; I will check it out.
Posted by: Lev | June 01, 2011 at 06:27 PM