In a recent post looking at Kenneth Ricci's $100 million gift to the University of Notre Dame, I argued that gifts like Ricci's reward schools that have failed to control tuition costs, and that while more financial aid is nice, it doesn't help students who are expected to pay full freight—roughly $300,000 at Notre Dame—or something close to it.
Then I read Matt Taibbi's recent piece in Rolling Stone, titled "The Great College Loan Swindle." In an article chock full of alarming facts and anecdotes, this nugget regarding the University of Wisconsin (UW) stood out:
UW raised tuition by 5.5 percent six years in a row after 2007. The school blamed stresses from the financial crisis and decreased state aid. But when pressed during a state committee hearing in 2013 about the university's finances, UW system president Kevin Reilly admitted they held $648 million in reserve, including $414 million in tuition payments. This was excess hidey-hole cash the school was sitting on, separate and distinct from, say, an endowment fund.
I wonder how that revelation sits with Jerome Chazen and his wife Simona, Scott Cook and Signe Ostby, and Bob and Dottie King. The three couples are all big donors to the school.
Taibbi notes, "universities, especially public institutions, have successfully defended rising tuition in recent years by blaming the hikes on reduced support from states." But it turns out there's much more to the story.
Nor is this practice limited to UW. While Wisconsin's surplus was 25 percent of its operating budget, Minnesota's was 29 percent, and Illinois maintained a healthy 34 percent reserve. Private schools also hoard cash even as they increase tuition. "They're all doing it," said Alan Collinge of Student Loan Justice.
And so, Taibbi writes, "while universities sit on their stockpiles of cash and the loan industry generates record profits, the pain of living in debilitating debt for many lasts into retirement."
A Financial Tool to "Moderate" Costs
A recent piece in the Washington Post provides a helpful analysis of universities' use of hidden reserve funds. The University of California system, for example, holds about $14.7 billion in "working capital reserves" separate from its endowments.
Nathan Brostrom, UC's chief financial offer, said the reserves enable the school to fund maintenance and student housing projects, seismic upgrades for buildings, and shore up its retirement fund. In other words, the types of bland priorities—save for a few exceptions—that rarely draw donor attention.
Hidden reserves, it's said, exist to "ride out the fiscal ups and downs inherent in the public sector and generate as much revenue as possible for high-priority projects."
Not so fast. It turns out that some schools have used cash reserves to protect students from tuition hikes. The Post piece notes that UC’s in-state tuition has been frozen for several years and that the University of Illinois system, sitting on $2.1 billion in reserve liquidity after covering a $300 million deficit, held tuition flat for freshmen entering in fall 2015 and fall 2016.
Meanwhile, Bill Sullivan, Purdue's chief financial officer and treasurer, citing the school's high level of cash on hand, said:
We’re entering the fourth year of zero tuition increase for all students and will continue our freeze for at least another year through 2017-18. In fact, our total cost of attendance is lower than it was three years ago, because we’ve also been able to moderate the cost of room, board and textbooks. As far as we know, we are the only ones who are doing this.
Let's summarize, shall we?
Over four years ago, Wisconsin legislators were "outraged" to discover the system's hidden cash fund. Similarly, last year, Virginia lawmakers held a session demanding to know why the UVA stockpiled a $2.2 billion reserve funds while simultaneously boosting tuition.
At the same time, UC, Illinois, and Purdue have shown that such funds can help freeze tuition and lower the total cost of attendance.
Legislators are demanding accountability and action. Why aren't donors?
Letting Donors Off The Hook
While Taibbi's culprits are both numerous and predictable—banks, the federal government and universities—he doesn't mention donors. He can be forgiven for this omission.
Donors, unlike some of the other involved parties, aren't actively and consciously gaming the system. They're not socking hundreds of millions of dollars away while simultaneously begging for money to fund scholarships or the construction of a new building. They have no financial skin in the game.
But by cutting massive checks, no questions asked, they're contributing to the swindle.
The last month alone saw donors doling out gifts to universities totaling $150 million (University of Illinois), $70 million (Wake Forest University), $228 million (University of Hawaii), $75 million (University of Chicago), and, for good measure, $219 million (University of Maryland).
None of these gifts require the recipient institution to cut or freeze tuition or increase it in line with inflation. None of the donors asked schools to dip into their hidden reserves and provide students with financial relief. Nor, for that matter, do the related press releases mention if donors, like outraged members of Wisconsin's Employment Relations committee, even asked the schools about the existence of hidden reserves.
It doesn't add up.
After all, alumni donors have hundreds of millions of dollars to give away for a reason. They made their fortunes in the private business world demanding efficiency, rooting out waste, cutting costs and providing an affordable and valuable product. If an executive within Directional Aviation Capital was amassing a "hidden" slush fund, its boss, Kenneth Ricci, would surely know about it. And quash it. And fire the executive.
What's more, there is an insatiable demand for the large gifts that mega-donors can provide. In theory, these folks have a lot of leverage.
Earlier this month, the University of Illinois received its largest-ever donation, a $150 million gift from Larry Gies, the chief executive of the Chicago private equity firm Madison Industries, and his wife, Beth. Commenting on the gift, Urbana-Champaign Chancellor Robert J. Jones said, "More and more, you're going to see philanthropy as a greater part of the financial model for public universities as it's always been a part of the financial model for private universities."
Jones is correct. Philanthropy is increasingly critical to the university funding model. The donors call the shots. Their influence will only grow over time.
So why don't demand greater transparency, accountability and efficiency in light of runaway tuition and the "Great College Loan Swindle?"
Theories run the gamut. Some probably don't want to venture into a minefield at the very moment they're looking to show some love to their alma mater. Others like their names on shiny new buildings and aren't thinking beyond that. Most, I'd argue, legitimately believe their donation for STEM diversity or scholarships or a study abroad program will, in the long run, be so impactful that it's not worth worrying much about the inefficiencies of the institution they're supporting.
Lastly, many may agree with Mary Nucciarone, an assistant director of financial aid at Notre Dame, who reminds parents that shelling out over a quarter-million dollars for their child's education is a "choice."
But what Nucciarone fails to mention—and what Taibbi vividly illustrates—is that in many cases, this choice is made under false or manipulative pretenses:
Kids who walk into financial aid offices are often not told what signing their names on the various aid forms will mean down the line. A lot of kids don't even understand the concept of interest or amortization tables—they think if they're borrowing $8,000, they're paying back $8,000.
Will Someone, Somewhere, Step Up?
In Waiting for Godot, Vladimir and his pal Estragon wait for the arrival of someone named Godot who never arrives. The same thing seems to be happening in higher education philanthropy.
Sure, we hear the occasional nonprofit or funder tackling student debt. The Lumina Foundation has been a stand-out grantmaker in this space—albeit a lonely one. Of course, some political leaders like Bernie Sanders have a lot to say about student loan debt. But we can't recall ever hearing a major individual philanthropist who gives to higher ed institutions utter a peep on this issue.
I'm still waiting for a donor—a mega-donor, someone with clout and bottomless pockets and unprecedented leverage, someone like Kenneth Griffin or Phil Knight or Kenneth Ricci or John Paulson—to say to a school, "Sure, you'll get my money, but it comes with a catch. You have to cut or freeze tuition. Other schools are doing it. Why won't you?"