Good morning! Thanks for spending part of your day with Extra Points.
You might have missed the Extra Points that went out on Tuesday morning. It took a closer look at how a drop in oil prices may impact athletic departments all over the country, from huge FBS programs in Texas, to DII programs in Oklahoma, to schools in North Dakota.
That post was for subscribers only. There’ll be another paywalled this week too. If you want to make sure you have access to every Extra Points newsletter and get that warm, fuzzy feeling in your heart, maybe consider upgrading to a paid subscription. They’re $7/mo, or $70/year.
In other housekeeping news, I think my last post on Vox Media went up earlier this week. I worked with my buddy Alex Kirshner over at Banner Society to explore the weirdest offerings at a Northwestern apparel store. I regret not buying that Northwestern/Tennessee hat, honestly.
If you’re an ACC or Virginia Tech fan, you also might be interested in this podcast I did with the folks over at Inside The Tunnel, the 247Sports Virginia Tech site. We talked a little bit about recruiting trajectories in the ACC, how one goes from being a very good program to a great program, and regional scheduling models.
Okay! Enough commercials! I want to talk about something I’ve seen a lot of conversation about over these last few weeks.
What IS a college endowment?
I’ve used endowment size as a quickie figure for explaining how rich a university is, and so has just about everybody who isn’t on the higher education beat. But saying a school has a billion-dollar endowment might mean a lot of different things. Is that just a giant checking account? Is that a reserve fund a school could tap into right about now? Is any of it liquid anyway?
I didn’t know the answers to these questions. So I asked somebody who did.
I reached out to Dan Bauman, a reporter at The Chronicle of Higher Education, a guy who has written extensively about college endowments and university finance, to help give me a quick Endowments For Dummies primer. I learned something, and I think you might too!
The following interview has been lightly edited for length and clarity.
Matt: Okay, so let me start with a very basic question. What exactly is a university endowment? Is this for you know, the equivalent of a 401k? Is it a massive checking account?
Dan: So an endowment is actually a collection of various investment funds set up to support any number of programs. It’s not one bank account somewhere filled with $40 billion.
In practical terms, let's say you were to come into some money at some point and wanted to make a donation to your university. You specifically wanted to support the swim team at Ohio State. You're fine with the football team. You're fine with the mathletes. But you really want to support the swim team. And so you make an endowed gift to the university, specifically to support the swim team. The first endowed gift ever for the swim team.
That becomes one of the funds within the endowment. At the end of fiscal year 2019, Ohio State’s endowment actually contained more than 6,600 unique funds. Ohio State takes that money and invests it. It tries to build up an investment return year after year with the donation you made. Then it takes the investment return and uses it to support the swim team.
The idea of an endowment is that you do not use the actual contribution to support the swim team. You're using those investment returns to support the program in the long-term.
Matt: Are there rules that prohibit schools from taking out X amount of money from their endowment, or from spending some of the principal during a financial crisis?
Dan: There is state law related to endowments, but let’s talk about distinctions between different kinds of funds.
So there are restricted funds, like our example with the swim team. By state law, the investment returns from that money have to go to the swim team.
Then there are unrestricted funds. Investment returns from those funds can be used by a university for any purpose that it wishes. Those returns would be particularly helpful during a moment of crisis.
Back to those rules you mention. There are a couple of scenarios that could lead to unrestricted use of restricted funds. Universities can ask the donors of an endowed gift to reconsider the restrictions placed on the contribution and its subsequent investment returns. Furthermore, we’ve seen universities basically ignore the laws covering restricted endowment funds when they've been on the precipice of permanent closure. But those are two very narrow paths.
If a school isn’t at risk of shutting down, donors will obviously be hesitant to release their gifts from restriction. Back to that pretend endowed donation you made to Ohio State. The whole point of that gift was so the swim team could operate in perpetuity partially or fully from independent financing. If you release that endowed financing so that it can satisfy alternative expenditures, the swim team just has an even bigger hole in the budget to manage. And you’ve given the university an even greater incentive to cut the swim program altogether.
Matt: Do you anticipate that some universities or lobbying groups over the next couple of months might ask their states for increased financial flexibility regarding their endowments? Assuming they have any?
Dan: Even if you potentially are able to suspend state law, you’ll still have issues. A lot of your donor gifts also involve contract law. And I think most universities would probably argue their time would be better spent lobbying for aid from the state or federal government. These universities really view these gifts as long-term investments. Unless they honestly think that this could be the absolute end of the university, they're going to be really hesitant to dip into those funds and risk legal and reputational damage.
Matt: This may be a dumb question. But when you're talking about these endowments being made of a myriad of different long term investment vehicles, are these similar investments that a consumer would have access to if they were looking to make long term investments?
Is Ohio State parking this money essentially in blue-chip stocks? Are these schools putting money into things that I wouldn’t have access to?
Dan: In designing their endowment investment portfolio, Schools have access to pretty much every instrument that's available in the financial markets., From index funds and treasury bonds to hedge funds and venture capital. For instance, The University of Michigan invested in a real estate vehicle that bought up residential properties in Detroit. In that case, you had the U. of Michigan and its endowment evicting people from homes. It really spans the gamut of what's available to universities to put their money in. Typically a university will favor diversity of investment in order to protect themselves from cataclysmic declines.
There are so many universities in the country and no shortage of strategies employed by them. And these institutions judge success in any number of ways. Some just want to eke out better gains than their rivals. Others try to beat the market. And others just try to beat a certain target. They’ll use everything from blue-chips to something more exotic.
Matt: So one of the finance stories that people in my universe are talking about right now is the potential impact of declining oil prices on universities in places like Texas or Oklahoma or North Dakota, specifically with their athletic departments. There's this assumption, for example, that a lot of the people that donate money to Texas A&M football are involved in the oil industry. And that's why you can pay Jimbo Fisher the GDP of a Caribbean country.
But oil futures are looking at 20 bucks a barrel for the next two months, so maybe they wouldn't be able to do that. Do you think that assumption is reasonable? And is it possible that a university endowment fund from a university that is heavily involved in the oil industry would be at risk of more exposure right now?
Dan: Changes in commodity prices or economic performance can affect private universities in two ways: donations, and then the endowment. For public institutions, add the tax base in there too.
In terms of donations to universities and colleges, including from people within the oil industry, analysts are concerned.
It's going to be extremely tough for universities going forward just to fundraise. Especially if you’re trying to fundraise from ol’ faithfuls to your institution, like folks in oil, or in hotels, or in travel. You name it.
As you point out, some institutions are better associated with particular commodities or services than others. And so on top of declines in sales tax revenue directly resulting from stay-at-home orders, places like Texas may see additional declines in tax revenue because oil fields are shuttered. The same is true of the tourism that pays for public higher education in places like Hawaii or Nevada. And these challenges are never borne equally. Public regionals will endure much harsher budget cuts and are in greater danger of closure than their flagship counterparts.
We’ve already seen, over the last 50 years, divestment by state governments in public higher education. That’s because it’s one of the few discretionary options that state governments have available when they are trying to balance their budgets. Last year, more than a decade after the Great Recession, only nine states were funding public higher education at pre-2008 levels. So further cuts could be destructive to a lot of institutions.
The fact that endowments are long-term investment vehicles means they are usually the most insulated from short-term swings in the market. Fingers crossed, we return to some semblance of normal eventually. When that happens, a critical mass of people will hit the road in their cars again. That will, in turn, lead to a return in demand for crude, which will, in turn, lead to a recovery in endowment value. The fact that an endowment isn’t supposed to act as a break-glass emergency fund means a university can play the long game with its funds and investments.
Matt: I have one more question. I've seen some commentators, and even the Secretary of Education, point to some private schools with huge endowments and say like, you know, why are these schools laying off sanitation workers, or laying off people that work in food services, their endowments are eleventy gajillion dollars, clearly, they're rich!
Throughout this conversation, you’ve sort of mentioned that maybe total endowment isn’t the best metric to use here since a lot of that could be restricted or might not be liquid. Is there a Different metric that people should use, that might be less misleading when we talk about the general health or flexibility of an institution?
Dan: Sure. And just to be clear, there is a really good conversation to be had about the use of available endowment money during a crisis, particularly as it relates to those institutions with massive endowments. Wealthy institutions will argue they bear greater opportunity costs by spending money from their endowment now, because it won't be able to return further investment gains a decade from now. With 10 years of compounding investment returns, wealthy universities argue they will be able to finance even more life-changing scholarships and programs at their institutions later than they do currently.
The same argument could be made for the human cost of a layoff. Pre-pandemic, if you had been laid off from your institution, the employment market was tight enough, you probably wouldn’t have too much trouble finding another job.
Now, it’s bleak. Great Depression bleak. Bankruptcies and foreclosures will go up. That stuff follows people. It ruins credit histories and leads to higher interest rates. Heck, people can be denied credit or denied jobs because that is on their record. And so a steady paycheck from a university or college employer probably means a lot more now than it would have a year ago or ten years from now. Like I said, there’s a good utilitarian discussion to be had on the issue.
There are certain metrics that better capture the flexibility an institution has, like the amount of cash it has on hand. Substantial cash reserves theoretically mean that even at a time when no revenue is coming in, a university can still pay its bills. That cash on hand gives an institution a ton of flexibility.
The more complicated answer is that no single metric can guarantee long-lasting survival or imminent doom, particularly at this incredibly uncertain time. It’s a bit like a doctor trying to make an accurate diagnosis. A blood pressure reading alone wouldn’t be enough. The doctor would want to know whether you smoke; how much you exercise; what your family history is. To best understand an institution’s financial health, the same in-depth approach is needed.
They're just all sorts of variables and factors that make it difficult to extrapolate out from a single data point.
And so that is what I would caution against. That extrapolation from a single data point.
Thanks again to Dan, and thank you all for your readership and support of Extra Points. If you have article ideas, questions, comments, hot takes, manifestos and more, please send those to MattBrownOhio@gmail.com, or to @MattBrownEP on Twitter dot com. Or just leave a comment! That’s allowed too.