| March 31, 2011

Are massive endowments a productive use of Higher Ed’s resources?

Oklahoma’s college presidents and higher-education bureaucrats are always asking for more money (no surprise there; that’s what governments do). But Professor Vance Fried pointed out something this week that often goes unnoticed: “The wealth of American colleges is massive.”

Dr. Fried, a lawyer and a CPA, is the Riata Professor of Entrepreneurship at Oklahoma State University. He has written for OCPA in the past, and is the author of a new book called Better/Cheaper College: An Entrepreneur's Guide to Rescuing the Higher Education Industry. In a new article called “The Endowment Trap,” Dr. Fried discusses the massive endowment funds of many colleges and universities.

For example, the University of Oklahoma has an endowment of nearly a billion dollars. Oklahoma State University’s endowment is nearly half a billion dollars. “These substantial holdings of financial assets (stocks, bonds, etc.) make non-profit colleges and universities very different from for-profit businesses,” Dr. Fried observes. “Except for the financial industry, for-profit companies rarely own a significant amount of financial assets. They maintain enough for working capital needs and hold financial assets short- to medium-term with an eye to reinvestment in productive assets or for return to shareholders.

“Non-profit colleges, however, hold substantial funds in an ‘endowment’ with no intention of ever spending any of the principal. In fact, they often do not spend all the income their endowment generates in order to protect the endowment’s purchasing power against inflation.”

Dr. Fried asks a simple question that perhaps many people have never considered: “Why should a school create a fund that it never intends to spend?” After all, “schools aren’t trust companies; they are educational institutions. …

“These colleges are like poor little rich kids fixated upon their wealth. Although rich, they constantly complain about not having enough money to cover their needs. Although rich, they constantly try to get more money out of their students and society at large. They continue to build their endowments even though each dollar added to endowment represents a dollar that could have gone to providing an education to current students, researching today’s great problems, or to reducing tuition. …

“The task of preserving financial wealth for future generations is for a trust company, not a college. Colleges and universities best serve future generations by devoting their resources to their educational mission in the present.”

Dr. Fried makes the case—and again, I urge you to read the whole thing—that “excess endowments are a non-productive use of society’s limited resources. If a college has excess assets, then it should figure out how to put them to a productive use over the next twenty years. Spend them on research to cure cancer, or start a partner college in Africa, or give full-ride scholarships to low-income students, or build a small cathedral. Or be really radical and cut tuition.

“In the late twentieth century, organization scholars like Oliver Williamson and Michael Jensen found that a large amount of excess resources (organizational slack) leads to low productivity in any type of organization. That excess reduced internal discipline. Money gets spent without good justification, managers feather their nests at the organization’s expense, and weak-performing employees are tolerated.”

Oklahoma voters can sense the organizational slack. Here’s hoping Dr. Fried’s article will spur some discussion on how to increase productivity.

Loading Next