Pitt’s endowment is fair game

I have a piece in The Pitt News arguing that Pitt’s endowment (specifically the $2.6 billion unrestricted “quasi-endowment”) can and should be tapped to avoid massive cuts due to the pandemic.

Happily, we have more than enough resources to avoid these disasters. At last count, Pitt has $2.6 billion in savings available to use however it wants, or however the trustees will approve — the quasi-endowment. Unlike Pitt’s $1.6-billion traditional endowment, which is made up of gifts that donors have contractually restricted to certain uses, the quasi-endowment has no such limitations. Pitt chooses to treat this pool of assets like an endowment, with restricted spending policies focused on maintaining the original amount of money. In reality, Pitt can use this money as it wishes.

But Chancellor Patrick Gallagher recently said he will not support using the quasi-endowment to avoid devastating cuts. He said this is because about two-thirds of the quasi-endowment is designated for student financial aid.

“Using it for offsetting these costs would have a negative impact on money going to students,” Gallagher said. “We think it’s sort of robbing Peter to pay Paul.”

Not to mince words: it is wrong that the Chancellor, who received a $669,738 base salary this year, would use sympathetic students as an excuse not to protect the jobs of the faculty and staff who support those students, often for wages less than one-twentieth of his. But even if we accept his terms, the numbers don’t add up. We can fully cover shortfalls of 10% using quasi-endowment funds with no serious impact on financial aid.

[. . .]

The question is not whether students or employees, Peter or Paul, are more deserving. It is whether a $4.75-million deficit in future years or a slight increase to the quasi-endowment distribution rate is a reasonable price to pay to prevent a $100-million deficit next year.

I tried to keep the focus on the financial impact of spending the endowment and why “student financial aid” is an unconvincing reason not to spend it. So there were some points I wasn’t able to make there that I think are also worthwhile.

To the point that we can find $4.75 million somewhere else in the budget if we don’t want to raise tuition on students, I’d add that we’ve already done that: last year the new provost announced a splashy new plan to match Pell grants for eligible students. That turned out to be a $40 million annual hit to the budget. They did a lot of creative accounting and found ways to pay for that program, including a 1.5%, or $12 million, cut. They also increased the endowment income distribution rate by 0.5% from 4.25% to 4.75% for that portion of the quasi-endowment, to help fund the pell-match program. As I said in the piece, those are exactly the sorts of things we could do now if we wanted to make up any reductions to the endowment distribution caused by spending some of the principal.

Chancellor Gallagher said last week that “nothing is entirely on or off the table,” but in the same meeting he took spending the unrestricted endowment off the table. I focused my Pitt News piece on his comments about financial aid, but more generally it is very strange how stubbornly university administrators refuse to even consider tapping into the resources they have. And its even stranger when we remember that universities like Pitt are a tiny minority that have such deep pockets to allow them to weather major crises. Most colleges and universities have few or no reserves and would desperately welcome any cushion against huge revenue losses. 

It’s common to think of endowments as a “rainy day fund,” where the interest is valuable but the principal is also there as a cushion for hard times. University administrators are vehemently opposed to this common-sense view of endowments, but they have completely failed to communicate their position in a way that the public can accept, and really they barely try. Instead of actually justifying their business model, when asked they use thin talking points like “student financial aid” that are designed to change the subject rather than really explain why these resources can’t possibly be touched, no matter how extreme the consequences. (This excellent piece came out while I was working on my own, and does a huge service in working through these arguments.) 

The main idea, as I take it, is that endowments are supposed to provide guaranteed revenues to ensure the university’s mission well into the long-term future. That’s a nice idea, but if the goal is preserving institutions for the long-term there are clearly going to be circumstances when immediate cuts are going to be much more detrimental to an organization’s long-term health than reduced future returns on investments. 

When you add in that investments are already deeply uncertain, and even more uncertain during this unprecedented crisis, we know that the same $100 million that Pitt might spend to avoid a big cut this year (or about four percent of the total quasi-endowment) could disappear tomorrow. Right now that money has the real, tangible ability to preserve our institution’s basic functions while protecting the most vulnerable members of our community. Next month it could be gone. Endowment managers deal with that sort of risk all the time, so the idea that losing four percent from the principle is something to be avoided at any cost just isn’t plausible. 

The best argument I can find against spending an endowment’s principal in a crisis is that endowments are often invested in illiquid assets that are difficult to sell to raise cash, especially in a widespread crisis where many asset owners are also selling.  The Covid pandemic is not a financial crisis where everyone is trying to sell at the same time. But even if it were, this just raises the question of why university administrators are putting all their assets in illiquid investments? It seems like the depths of irresponsibility to have such deep pockets but not have made any contingency plans for major crises.

If Pitt administrators want us to accept the deeply implausible idea that large pools of assets can’t be touched in a crisis, and that endowments aren’t a rainy day fund, there’s a simple fix: they could create a rainy day fund. What if, instead of $2.6 billion in its quasi-endowment, Pitt had “only” $2 billion, and another $600 million in liquid assets in a special fund that everyone involved understood was there to help weather the next crisis. There would be a lot more willingness to accept that the $2 billion can’t be touched, and we all would be in a much better position right now to be ready to support our students, to jump into the hugely challenging project of figuring out how to educate effectively while social distancing, to double down on world-changing research, and to get to work doing what we’re all here to do—instead of worrying if we’ll be around in September to do it.

Right now we should all be speaking with one voice in support of emergency federal support for higher education across the United States, but this stubborn and obsessive hoarding in endowments undermines our ability as faculty, staff, and students to make the case to our communities that our work contributes to the public good, and to ask state, local, and federal governments, who are themselves struggling to fund a wide range of priorities with limited tax revenues, to continue supporting our work with appropriations, grants, tax breaks, and subsidies. University administrators are doing themselves, and the rest of us, no favors, and the backlash is entirely deserved.