A rebuttal to Trump in support of college endowments

Donald Trump jumped on the college-endowment-bashing bandwagon at a campaign stop in Pennsylvania last week, claiming, among other things, that institutions “just store the money, keep it and invest it” while they should be spending the money “on students, for tuition, for student life and for student housing. That’s what it’s supposed to be for.”

His comments come on the heels of renewed scrutiny of endowments from politicians and pundits in the last few years. Earlier this year, Congressional committees asked 56 private institutions — including my own, Pomona College — for more information on their endowments and a separate Congressional subcommittee hearing was held earlier this month.



{mosads}In one sense, the attention is welcome because I believe college endowments are good and necessary investment vehicles that benefit students and the broader public. My concern is that some of the plans floated by pundits and politicians would upend the finances of many of the top colleges and universities in the nation to no lasting benefit. 



The idea that colleges are hoarding — even as many institutions report flat or slightly down returns this past fiscal year — is taking hold without a clear understanding of the role endowments play in creating intergenerational equity and providing financial aid. Colleges and universities are institutions meant to carry on for the long-term, and forcing them to essentially spend down their endowments now would harm future generations of students.

Take my own college. Our endowment allows Pomona to provide need-blind admissions, meeting 100 percent of students’ demonstrated need. Providing financial aid to more than half of our students is an expense we couldn’t afford without a well-invested endowment set for the long term.



Even if it were somehow desirable to simply spend the money now, we would quickly run into the reality that endowments are not piggy banks that colleges can dip into as needed. Endowments are typically composed of multiple funds, not one fund, built by donations large and small, from alumni, corporations and foundations.

Most of these gifts come with strings — lots of them — and funds can’t simply be shifted from one purpose to another. Donations designated for scholarships, research centers, professorships/chairs and other activities are “restricted” — they can only be spent for those specified purposes



In his campaign speech last week, Trump also suggested that colleges are spending too much money managing their endowments. The reality is that most college endowments are modest—and so are most institutions’ investments in management.

Recent criticism has focused on colleges that are fortunate enough to be able to turn to more “expensive” private equity. Well-performing endowments such as Pomona, Yale, Stanford and others are able to invest with top-tier managers who have generated above-market returns, even after fees.

At Pomona, as at colleges with similar approaches, we pay substantially more to these managers than we would to invest in a mutual fund or ETF. But the additional return net of fees makes them an excellent investment. The substantially higher returns we’ve seen over time have allowed us to spend more for financial aid, faculty support and other key expenses, providing greater resources to benefit students.



The proposals floated by pundits often carry a threat of revoking the tax-exempt status of university endowments. But endowments are included in that exemption because they directly support and sustain teaching, research and public service. Limiting deductibility or changing the tax-exempt status of endowments also would greatly reduce, and even eliminate, many charitable contributions. It’s hard to see how discouraging private contributions to higher education would help anyone.

There’s one more obvious reason that colleges have to show caution in their endowment spending: Markets go up and down. To ensure financial stability, universities need the flexibility to adjust payout rates. Mandating specific percentage rates would hold budgets hostage to market volatility. But when markets drop, we still must provide aid and resources for our students. A spend-it-all-now mindset is just what we don’t need.

David Oxtoby is president of Pomona College in Claremont, California and a past president of the Harvard Board of Overseers.

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