The power of college endowments

Make Me Smart May 7, 2024 Transcript

Note: Marketplace podcasts are meant to be heard, with emphasis, tone and audio elements a transcript can’t capture. Transcripts are generated using a combination of automated software and human transcribers, and may contain errors. Please check the corresponding audio before quoting it.

Kimberly Adams 

Hello everyone, I’m Kimberly Adams. Welcome back to Make Me Smart, where none of us is as smart as all of us.

Amy Scott 

And I’m Amy Scott filling in for Kai Ryssdal. It’s Tuesday, May 7. As you’ve no doubt read a lot about pro-Palestinian student protesters across the country have been pushing for their universities to divest from Israel and the war in Gaza. And at the center of all that are endowment funds, the financial assets that are donated to universities over time and then invested.

Kimberly Adams 

Right. And so, today we’re going to talk about the power of college endowments and dig into how universities manage these funds. So, here to make us smart about this is Charlie Eaton. He’s a sociology professor at the University of California Merced and author of the book “Bankers in the Ivory Tower: The Troubling Rise of Financers.” I always worry about how to say that. Financier is in US Higher Education. Welcome to the show. Hey, Charlie.

Charlie Eaton 

Hey, thanks so much for having me.

Kimberly Adams 

How do you say that word, by the way?

Charlie Eaton 

Financers? You nailed it.

Kimberly Adams 

Awesome. You know, it’s funny. Despite having been in this business for so long, I have this whole litany of words that I’ve only ever read and not actually said out loud, and I always stumble over them. But that’s another topic altogether. But, Charlie, can you give us an idea of how big role endowments play in higher education?

Charlie Eaton 

Yeah, they play an increasing role in higher education, but not the same role at all universities. They particularly play a big role at the top. At the most elite, wealthy, private universities. They now have almost a trillion dollars in assets under management across all endowments, and the biggest endowments, you know, the Harvard’s, the Yale’s, the Princeton’s are valued, you know, in the tens of billions of dollars.

Amy Scott 

Wow. And how do universities use the funds from those endowments? They only take a small portion every year, right? To pay for expenses and the like?

Charlie Eaton 

Yeah, what universities do is spend about 5% of the endowment per year in support of university operations. And so, the big endowments, that means where they’ve gotten so big that they’re actually spending tens of thousands of dollars per student per year. And that’s a big change. I like to use Princeton University as an example, where Princeton, if you go back to the 1970s, they spend around $10,000 per student per year from the endowment, which may sound like a lot to people. It’s more than, say, your average community college spends from all of its revenue sources. But fast forward to today, Princeton’s endowment has grown about tenfold, but it still enrolls roughly the same, you know, not too many more undergraduate students than it did in the 1970s. So today, Princeton spends more than $100,000 per student every year from the endowment to support university operations. So, it’s a big, you know, there’s a lot of resources.

Kimberly Adams 

Yet they’re still charging so much.

Charlie Eaton 

I know. And you know, the thing I like to say is, the thought experiment I like to ask people to do is, imagine if Princeton enrolled twice as many students, so that it wasn’t quite as exclusive. And it only spent $50,000 per year, per student from the endowment. That’s still a lot of money. And Princeton would still probably be a world class university, but it would be serving more people from all walks of life.

Kimberly Adams 

You know, I realized, as I’m listening to you talk that we probably should back up a bit and explain how endowment even work?

Charlie Eaton 

Yeah. So today, the way they work is, they are investment funds. You know, often the endowments have been around for a long time. They’re supported by donations from donors. But over the last 40 years, these big endowments, the way they’ve grown, is that they’ve invested an increasing amount of their funds in private equity and hedge funds. And at the top endowments that they’ve yielded pretty high rates of return, about a 10% annual rate of return, and that compounds over time. That growth from maximizing investment returns is what’s made the wealthiest endowments so big.

Amy Scott 

Now, it’s really hard to find out how endowments are invested, right? These colleges and universities don’t have to disclose much. And I’m wondering how that plays into this push for divestment from Israel and from the defense industry if it’s hard to figure out where that money is going?

Charlie Eaton 

Yeah, and you know, the rules are a little bit different if you’re a public university versus a private university. But at the wealthy private universities, there’s very few requirements for universities to disclose how their funds are invested. And, there’s a sort of dynamic where private equity and hedge funds are commonly pretty secretive about how they invest and what they invest in and in what amounts. And that’s because what they’re trying to do is beat the market. And they’re trying to use private information, and their private investment strategies to outperform the stock market. And so, they don’t want folks to know exactly what they’re invested in because they don’t want people to know their strategies. They’re trying to beat the market. And so, private universities when they invest with private equity and hedge funds, and today about 60% or 70%, of endowment assets at top universities are invested with those kinds of funds. There’s a kind of a joint culture of secrecy between endowments and the fund managers in private equity and hedge funds.

Kimberly Adams 

So, how possible is it for these universities to do what the students are asking? To divest from the defense industry, from investments in companies and initiatives tied to the Israeli Government?

Charlie Eaton 

You know, I think the hard part is for a university to decide what its values are and how they apply to which companies you want to invest in. The technical part of, of actually implementing those policies is not as hard. One option that universities have is to invest more of their endowment with more passively managed funds, like index funds. And there’s a whole, you know, growing community of fund managers who use ESG, environmental social and governance criteria and principles for managing investments, not just maximizing return. And you know, there’s several hundred of those fund managers, who, for example, use a screen to screen out defense contractors and weapons manufacturers. So, that’s one option. There are not as many, but there are also private equity and hedge fund managers who incorporate ethical and values, based considerations for their investments. And if you are Columbia University, and you’ve got billions to invest, you’re going to be able to find a fund manager who will work with you to apply your values together with your need to grow the endowment. But the hard part before that is deciding well, how do we decide what we want to invest in?

Amy Scott 

I’m wondering, though, does ethical investing or values aligned investing depending on what you say those values are. Is that automatically less profitable? Or can you still make money and invest with your conscience?

Charlie Eaton 

You still can make money. Absolutely. And you know, one of the use cases for this is fossil fuel divestment. So, in my university system, the University of California, we have over $150 billion in assets under management across all our endowments and our pension funds. And in 2020, we’ve completely divested from fossil fuels. We sold off over a billion dollars in fossil fuel assets that year.

Amy Scott 

Because of students pushing for that, right?

Charlie Eaton 

Students, faculty, and communities. And our endowment is still fine. It’s still healthy. Columbia University has also divested from fossil fuels and its endowment is still healthy and doing fine. So, you can take into consideration you know, values and principles other than just maximizing returns and still grow your endowment.

Kimberly Adams 

But is that really a model that you can use here, when it’s an issue that I feel like it has a much different tenor than, you know, the science about climate change, or even the way that, you know, students protested against apartheid in South Africa. There’s the sort of social idea of what was right and wrong here was pretty well established by the time the student protests had gotten going. And do you think this is the same? Or is this a different circumstance?

Charlie Eaton 

Yeah, no. I think you’re getting at something in that there was a level of consensus reached about climate change before these policies were implemented that I don’t think we see on the Israeli Palestinian conflict. And so, you know, that’s the hard part. It’s forging the consensus about your values, and how your values apply to a given a given military conflict. A given political or social issue. But I think it shows that universities, it behooves them to think through what their values are, and how they apply to their endowment investments. The reason being, you know, with endowments growing so large, they connect universities to evermore far-flung corners of the global economy. And that means that, you know, even if it’s not the Israeli Palestinian conflict or climate change, there’s going to continue to be issues where there is contention about if it’s ethical or not to invest the endowment in given companies or given assets around the globe. And so, getting some clarity about what your values are and how to guide them. And also, to think affirmatively about what do you want to invest in based on your values, not just what do you want to divest from.

Amy Scott 

Alright, Charlie Eaton teaches sociology at the University of California Merced and wrote the book, “Bankers in the Ivory Tower.” Thank you so much.

Kimberly Adams 

Thanks, Charlie.

Charlie Eaton 

Thanks so much. Great to talk with you.

Kimberly Adams

Likewise.

Amy Scott 

Great to talk with you.

Kimberly Adams 

It was so interesting. I realized sort of like five minutes into that conversation. Like, I don’t even know how these things work, and that definitely made me smarter.

Amy Scott

Me too.

Kimberly Adams

What he said at the end there about how universities are having to think a lot more proactively about what they stand for, as opposed to only reacting to what they stand against. It’s very similar to what happened to big corporations during the Black Lives Matter movement. When suddenly, rather than, you know, sort of saying, “Oh, we don’t like racism. We don’t like discrimination.” People were asking companies temporarily, as it were, to actually proactively say, “No, we are going to actively be anti-racist. We are actively going to try to redress the ills of the past.” And it feels like this is a version of that coming for universities, and I can’t help but tie those two things together. These are students who came of age in that movement of demanding more from institutions. And I’m so curious to see how this is going to continue to play out.

Amy Scott 

Yeah, but also, I mean, there’s such a rich tradition of protests on campuses. I mean, I’m old enough to remember the anti-apartheid divestment movement in the 80s. I grew up in a college town and drove by the probably not encampments at that point. But signs and protests and tents. And it will be interesting to see how this plays out, especially because the school year is almost over. Students are going home, and what will that mean, going forward?

Kimberly Adams 

Will they take those protests to local state houses or to local businesses? Like I’m headed to St. Louis pretty soon, which is a big headquarters, not headquarters, but they’ve got a lot of Boeing facilities in that area. But one thing I wonder, and since you can remember those protests in the 80s. I feel like and I’ve read a couple of thing pieces on this at this point that there wasn’t such a narrative of student protests being dangerous, as some people are interpreting these as today.

Amy Scott 

Yeah, I don’t know. But those of us who are older who remember Kent State and students getting gunned down.

Kimberly Adams

Yeah, that’s exactly what I was thinking.

Amy Scott

I don’t know. I think that’s a really good question. But certainly, the climate around this is very fearful.

Kimberly Adams 

Yeah, in one of the interviews I’ve done recently, someone pointed out that you didn’t have so many politicians weighing in in the past and actually inserting themselves into these things, especially very polarizing politicians sort of amplifying the extreme rhetoric on either side. And that is contributing to how this is escalating in a way probably beyond what the students are actually asking for, which is divestment and other things. But we want to know what you all think about how universities manage their endowment funds, how they’re managing these protests, and sort of this tie between money and education when it comes to endowments. We’re at 508-827-6278, also known as 508-U-B-SMART, and we will be right back.

Amy Scott 

Okay, time for some news. Kimberly, what are you reading today?

Kimberly Adams 

So, since we were very focused on what the youths are doing today, I was noticing this article in CNBC. The headline, “Abortion bans drive away up to half of young talent, according to a new CNBC/Generation Lab youth survey.” And so, they found that “almost two-thirds of younger workers would ‘probably not’ or ‘definitely not’ live in a state that banned abortion.” And it’s they quoted some Generation Lab saying that these this has “gigantic implications for just about every large company in America” because “in the past two years, more than 20 states have either banned or restricted access to abortion.” And I remember Stephanie Hughes, and I think you as well, did quite a bit of coverage after Dobbs about what was happening with sort of universities after the Dobbs decision, and where students would be willing to go and study medicine depending on what the abortion laws were in a state. And I think we’re starting to also see that trickle down into how people, especially graduating students, are deciding where they want to make a life for themselves in terms of what rights they will and will not have. And it will be interesting if it takes. Like will we start to see companies at some point pushing back against some of these policies because it makes it harder for them to recruit talent? And I wonder what the lag time is between, you know, struggling to recruit, if they are indeed struggling to recruit, or if this is just what someone says, and you know, if you’re offering enough money, maybe somebody won’t care because then you can afford to leave the state if you need a procedure. But will it be a meaningful drain on economic development in some of these places that have restricted abortion? Curious.

Amy Scott 

Yeah, that’s really interesting, and that’s why you see companies offering to pay for travel for abortion care if they live in a state that does not allow it. And as you said, I think financial expediency will probably determine whether people can really vote with their feet or not, but certainly something companies want to be paying attention to. As with other issues, I did some reporting on companies having trouble recruiting in states that were cracking down on LGBTQ protections and rights. It’s just harder to bring people who care about those issues to your state if they don’t feel welcomed.

Kimberly Adams 

Yeah, yeah. We should link in the show notes to some of your coverage of that because you did do a lot of really great reporting on, you know, how some of these anti LGBTQ rights laws were affecting businesses and recruitment, which I highly recommend people listen to.

Amy Scott 

Well, thank you. So, sticking with those youths. I saw this piece in the Wall Street Journal. Gen Z is carrying more credit card debt than previous generations did at the same stage in life. This is from the credit bureau TransUnion, which says the app average balance for a 22- to 24-year-old was just over $2,800 in the last quarter of 2023. But that same age group a decade earlier had an average balance of $2,248. So, about $500 more. That is adjusted for inflation in case you’re wondering, which I was. And that’s, you know, a lot for people just starting out in the workforce. Gen Z is also more likely to have at least one credit card than Millennials were 10 years ago. And the story cites several reasons. Inflation and food and housing. Of course, rent is a big one. A lot more student loan debt. And wages for recent college grads have been pretty flat over the past few years, according to the New York Fed. I’m thinking about my own credit card debt when I was a youngster in my 20s. It took me a long time to pay it off and had consequences for what I could afford, you know, to do in life. So, those consequences, I think, can be long term.

Kimberly Adams 

Yeah. I’ve been watching with some interest, sort of credit card delinquencies and consumer debt, because even the retail numbers seem to be telling us over and over again, that nothing will stop the American consumer. But credit card delinquencies and debt are another picture because it’s telling us what kind of lives we’re living while we’re spending like this. And I actually have seen a little bit of a drop off in some of the delinquencies, but it’s coming at the same time that there’s a tiny bit of pullback in consumer spending, and a lot of the retailers that target lower income people. We’re talking about the Walmart’s, the Dollar Trees, the McDonald’s, and things like that, which is not a retailer. But you know what I mean, are saying that they’re starting to see the consumer pull back. And granted, the great consumer pullback has been predicted since last fall. But I think we are starting to see it in some of the lower income bands, even if higher income people are a bit more resilient to it. But I think it is coming as people have come to terms with these higher prices, they’ve spent down all their all their savings. They’re like this is the new reality. How am I going to adjust my lifestyle to this? But I think that this younger generation, just anecdotally, not from research is a bit more savvy when it comes to managing their debt. Like they’ll take a trip on a credit card and live their best life. But they know what that means. And they’ll live, you know, a different kind of lifestyle when they get home, so that they can do the things that they want to do. I just think they’re a bit more savvy than we maybe give them credit for when it comes to managing their money. But we’ll see. Alright, that’s it for all the news. Let’s do the mailbag.

Mailbag

Hi Kai and Kimberly. This is Godfrey from San Francisco. Jessie from Charleston, South Carolina. And I have a follow up question. It has me thinking and feeling a lot of things

Kimberly Adams 

Last week, I talked about how Halle Berry shouted, “I’m in menopause!” at the Capitol when she was advocating for more funding for menopause research. And we got this note.

Erin

This is Erin calling from Middleton, Wisconsin. And I want to thank you, Kimberly, for bringing up the information about menopause. As a Gen X mother of a Gen Z teenage daughter, I feel like we’re finally at a breakthrough of destigmatizing periods. I know that my daughter and all of her peers talk very openly about it. And I feel like as moms of these kids, we are taking their cues and saying hey, we’ve had it. It’s time that we talk about this because it affects half the world’s population.

Amy Scott

Amen.

Kimberly Adams 

That is such a good point. Like, yes, these younger kids are having conversations that we would never, and it is kind of shaming us into being like, you know what, yes, if they can talk openly about periods, and what it’s doing to your bodies and like the pain. Like, I’ve only I think in the last couple of years, felt comfortable saying to supervisors, like I’m sorry. I’m having a terrible day because I’m in extreme pain because of cramps. And like just saying that out loud at work, like yes, I’m suffering and I’m here at work. And of course, you know, I don’t get any negative response to it. But a generation ago, no one would ever. You just suffer, right? And I think we are definitely taking these cues from the younger generations. And yeah, I imagine that is why I love this connection between watching what her daughter is doing and that influencing what the adults are doing. That’s a really good point.

Amy Scott 

Yeah, and our understanding of this, speaking of menopause is so much worse than it would be had it been studied and talked about out loud for the last several decades. So, we’re really glad to see that changing. Alright, one more. Yesterday, Kimberly shared the very sad news that we have to say goodbye to her cat, Jasper. And we got some very sweet messages about it, including this email from Prudence in South Africa: Farewell to Jasper, I’ve loved seeing him in the Friday Economics on Tap. We love you, Jasper, and I know he’ll be a healthier kitty in the next life. Thank you for that, Prudence.

Kimberly Adams 

Yes. And thank you for everybody who sent notes on social media and all the other things.

Amy Scott 

All right. Before we go, we’re going to leave you with this week’s answer to the Make Me Smart question, which is what’s something you thought you knew, but later found out you were wrong about? In celebration of Mother’s Day this weekend, today’s answer comes from Mallory Lewis, the puppeteer and children’s entertainer who performs with the character her mother Shari Lewis created, Lambchop.

Mallory Lewis

Hi there. I’m Mallory Lewis. And I am Lamb Chop. And we’re the daughters, Shari Lewis. And I think the one thing that I thought I was right about, but it turns out I was wrong was I used to think my mother wasn’t always right. When in fact, Shari was always right. Her favorite saying was, it’s amazing how lucky hardworking people are. And I am leaning into that because you know what, even though I didn’t think so, my mom was always right. Goodbye.

Kimberly Adams 

I love that. And Happy Mother’s Day to you, Amy. I know it’s coming up, and you are an amazing mom. It’s so funny.

Amy Scott 

I don’t know if I’m ready to concede that my mom was always right. Maybe I’ll get there one day.

Kimberly Adams 

It’ so funny sometimes. And this is a little behind the scenes. Amy’s like “Kimberly, I don’t understand how you get everything done that you get done.” And I’m like, I have no children. That is the only excuse.

Amy Scott

You’re also extremely hardworking.

Kimberly Adams 

And so are you, but you do it with children. It’s amazing. We can just say that we’re both doing our best out here in this world. I love that note and please you all make sure you’re sending us answers to the Make Me Smart question. What’s something you thought you knew that you later found out you are wrong about? But that is it for us today. And if you haven’t already, please sign up for the Make Me Smart newsletter. This week, we are going to dig into one specific aspect of former President Donald Trump’s ongoing criminal trial, in particular the thousands of dollars in fines he’s racking up and racking up and present continuous, he’s still doing it, or breaking gag orders in the newsletter. We are going to be getting smarter on fees and fines more generally, how effective they are at stopping rule breakers, and why they don’t always scale with income here in the United States. So, please sign up and you can read our past issues at marketplace.org/smarter. Make Me Smart is produced by Courtney Bergsieker. Ellen Rolfes writes our newsletter. Today’s program was engineered by Jay Siebold. You can tell it by the sneak in. With mixing by Mingxin Qiguan. And our intern is Thalia Menchaca.

Amy Scott 

Ben Tolliday and Daniel Ramirez composed our theme music. Our senior producer is Marissa Cabrera. Bridget Bodnar is the director of podcasts. Francesca Levy is the executive director of Digital and On-Demand. And Marketplace’s Vice President and General Manager is Neal Scarbrough.

Kimberly Adams 

One of these days we have to actually ask Francesca what her real title is.