Endowments and Universities

Like an awful lot of people, starting but hardly ending with Chad Hermann (who adds a second note here), I was startled by the recent disclosure that both Pitt and Carnegie Mellon invested large chunks of money with people who turned out to be, in effect, thieves.

Investing foolishness is investing foolishness whether it happens on campus or off, and I have no insight into the processes that led to these deals.

It is likely wrong, however, to point the finger of blame exclusively at university money managers and their consultants. Universities were under extraordinary financial pressures long before the events of the last year. At both state and federal levels, long-term trends point to declines in public financial support for research universities in particular. Outside higher education, it's often difficult to know what taxpayer support buys the taxpayer, because most people equate the mission of the university solely with educating undergraduates. Universities do a lot more than that (Pitt and CMU both run world-class research programs, and there is a lot of first-rate research at other universities in the region), but on the whole universities do a miserable job of explaining to the public what they do and why that is a good thing, on balance.

If the endowment funds are that critical to the mission, then that is yet another reason to be careful with them -- but universities can't raise the money they need if they simply stick it in the endowment equivalent of passbook savings accounts. Note, however, that a lot of the anger about misuse of endowment funds could be avoided if public financial support for higher education were more substantial to begin with. That's not a cost-free or uncontroversial solution. The point is that there is a larger context for what happened here.

It is equally wrong to suppose that this sort of thing wouldn't happen if universities were run more like businesses. There are well-managed universities (really) and there are badly managed universities, and managing big chunks of a university like a business can be a very smart thing. But managing the entirety of a university like a business is foolish. (If you care about some academic work, I can send you a paper that I've written that talks about the history of these things, but the takeaway point is that universities were never designed to operate like businesses and wouldn't produce the research-related benefits that they produce (which are substantial; see above) if they were. There is a great quotation from the first Ghostbusters movie -- "I've worked in the private sector. They expect results!" -- that makes this point better than I ever could.)

By the same token, it's just about impossible to say that universities do or should exist entirely on the not-for-profit side of the line. Since World War II, research universities (and especially what used to be called "Research I" universities, and Pitt and CMU are both in that class) have been part of a structural bargain with the federal government and private industry. The government would fund basic research in universities; private industry would not invest in basic research but instead would develop and commercialize that work. During the 1970s, it seemed that the university-to-industry transfer process wasn't working quite as well as originally intended, so federal law was changed in 1980 to accelerate it. The fact that universities have become more commercial and patent-hungry isn't an accident; it's part of the institutional structure that was constructed during the last 50 years. That means that universities are in the business of business in part, but only in part, and by design.

Over the last 20 years, the feds have pulled back a bit on their end of the bargain, creating much of the financial pressures described above. But the feds aren't out of the research business entirely, and Pitt (for example) is a major beneficiary of NSF and NIH funding.

Again, none of this excuses poor or lazy due diligence when hiring consultants or placing endowment funds. It does put the problem in a broader context. When it comes to finding the money that they need, universities today are in something of a damned if you do, damned if you don't position. And they are no less susceptible to thieving scam artists than any of the rest of us.