Comment by gruez
6 days ago
This article lists out why it's not good of an idea as you think.
>Universities’ endowments are not as much help as their billion-dollar valuations would suggest. For a start, much of the money is reserved for a particular purpose, funding a specific professorship or research centre, say. Legal covenants often prevent it from being diverted for other purposes. In any case, the income from an endowment is typically used to fund a big share of a university’s operating costs. Eat into the principal and you eat into that revenue stream.
>What is more, eating into the principal is difficult. Many endowments, in search of higher income, have invested heavily in illiquid assets, such as private equity, property and venture capital. That is a reasonable strategy for institutions that plan to be around for centuries, but makes it far harder to sell assets to cover a sudden budgetary shortfall. And with markets in turmoil, prices of liquid assets such as stocks and government bonds have gyrated in recent days. Endowments that “decapitalise” now would risk crystallising big losses.
More worrying is the fact that the federal government can inflict even more harm aside from cutting off federal funding:
>the Trump administration has many other ways to inflict financial pain on universities apart from withholding research funding. It could make it harder for students to tap the government’s financial-aid programmes. It could issue fewer visas to foreign students, who tend to pay full tuition. With Congress’s help, it could amend tax laws in ways that would hurt universities.
if a $50,000,000,000 endowment can not be used to smooth things over in times of need or turbulence then the endowment managers need to make changes.
You can not possibly convince me that Harvard’s endowment doesn’t trivially have one year of liquidity in it.
I’m sure it’s not structured to handle a 7% annual draw down for the next 30 years. But it’s got plenty of time to restructure if needed.
The point is, it's eating your seed corn.
Spending a billion of it is not just spending a billion. It's spending the many billions it was meant to provide, in interest, over the next decades.
It's extraordinarily expensive to spend it directly, as opposed to spending the income it generates.
You can certainly do it, in a true emergency. But you certainly don't want to make a habit of it.
> The point is, it's eating your seed corn.
I've seen arguments of this general shape and form many times about this, and yes, this is true. In general, Harvard should not spend down it's endowment when it has other sources of revenue.
I think the issue here is that this _is_ an emergency. Harvard should consider that Federal money gone for the near future and spend and plan to spend as if they will not have it. There is no point in them continuing to exist as an institution if they accede to these absurd demands.
> You can certainly do it, in a true emergency.
This seems to qualify for many people though. Less pain than complying in many minds I am sure.
>You can certainly do it, in a true emergency. But you certainly don't want to make a habit of it.
Harvard's endowment returned 9.6% last year, growing the total by $2.5 billion. In the previous year, the endowment returned 2.9%, though the total endowment decreased as the gain was offset by contributions to operating expenses. [0]
In other words, Harvard already operates somewhat from their endowment, and can realize net endowment gains in spite of that.
[0] https://www.harvardmagazine.com/2024/10/financial-report-fis...
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> the many billions it was meant to provide, in interest
THATS WHAT WHAT THE FIFTY BILLION IS
It’s a war chest that has been carefully cultivated over decades. The fifty billion is the result of a hundred years of investment and management.
If it can’t be spent now then when the fuck exactly can it be spent? In 200 years you’d still be saying “this is the seed corn for tomorrow!!”
I’m not saying burn it down to zero. But the whole fucking point of an endowment is to provide stability during trying times. If you can’t use the interest that has been accumulated now then when the fuck can you??
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> The point is, it's eating your seed corn.
How much is “enough” money to hoard in an endowment though? We hear lots of arguments about how the concept of a billionaire is itself obscene, why can’t we apply to same logic to institutions? E.g. much like people say “billionaires shouldn’t exist”, perhaps endowments over some similarly arbitrary value shouldn’t exist either.
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> it's eating your seed corn
Paraphrasing J. P. Morgan, the man, in the midst of the Panic of 1907 reassuring a banker concerned about dipping into reserves to pay out depositors: "what are reserves for if not times like these."
Eat the seed corn. Fight. Then raise unencumbered donations from the billionaires whose balls haven't fallen off. If Harvard plays this correctly, they could become one of the flag bearers of the legal and financial resistance to Trump.
To some degree it already has been. After the economic genius Larry Summers paid for the Allston campus expansion with some dodgy loans that blew up in their faces during the 2008-9 financial crisis, there was some attempt to reform the endowment, back off some risky investments, and build up more of a free-cash emergency fund. This actually paid off during the Covid lockdowns, which the university was able to weather without too much disruption.
The other oddity of Harvard's endowment is that each school at the university basically has it's own fund--so that for instance, the Business school and the Law school don't have to worry about money the same way that FAS (the main undergraduate school) does.
Not to mention all those legal covenants have another party to them - they're not written in stone. I'm sure a good number of them would be willing to considering loosening legal restrictions if it would really help.
Endowments have come from people over the entire history of the institution. The vast majority of the endowers are likely deceased and won't be able to agree to change the terms of their endowment.
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They made a big fuss a few years ago about what I read imo as over investing in foreign farm land, esp south America and Africa. Which seems to have completely flopped, if not yet realized.
At this point, you really do have to question whether each university hire was merit based or not, including the fund managers.
I don't know that making a bad investment makes them terrible fund managers, just as making a good one would not make them brilliant. Don't you need a string of data points?
If you are going to claim that they were not hired on merit, and that they are bad investment managers, you'll need to provide a lot more evidence on both points, rather than a "just asking questions" post on HN. Otherwise, it's just snark and not in keeping with HN's ethos.
>...much of the money is reserved for a particular purpose
I would assume that a tax on an endowment would be like a capital gains tax, i.e., taxed on the investment growth. Is the growth 'reserved for a particular purpose'?
It's reserved because the donation was earmarked for a specific purpose (eg. a business program or whatever), not because they reserved 30% on tax owing.
>Is the growth 'reserved for a particular purpose'?
It's probably safe to assume donors are competent enough that such glaring loopholes don't exist. After all, the concept of endowments being used as long term savings, rather than spent immediately, isn't exactly a new concept. Failing to take this into account would mean any earmarks are void after a few decades.
It’s never a guarantee when it comes to government funding. It can come and go at any time. Take the politics out of it, Harvard has been operating at risk with this funding source for some time.