Ivy League schools have gained a sort of reputation as a system built for
the rich and a pipe dream for the poor.
We're not talking about donating a building so that a school's more likely
to take your son or daughter.
We're talking about deception and fraud.
That scandal was all about fraud.
But go back to what the attorney said at the beginning of his sentence.
We're not talking about donating a building so that a school is more likely
to take your son or daughter.
There's a perfectly legal way to give big to universities.
One place to pool all those funds from alumni, or really anybody who wants
to donate, is in something called an endowment.
There's a lot of money, power and debt in the American higher education
system. I've worked on stories looking out why health care is so
expensive, who gets rich off school lunches and why college in America
just costs so much.
But for this video, I wanted to follow the money through some of the
wealthiest colleges in this country.
There's billions of dollars piling up untaxed, and some people still can't
afford to go to college.
Which got me wondering, where is all of this money going?
When we see charitable donations, the response is that this is just how a
rich person is choosing to spend their money.
It's not just the rich person's money.
There's a significant contribution to their donation paid by the American taxpayer.
These private universities have a lot of power.
Many people want to attend them.
They want their children to attend them.
It is not surprising that statistics show that the donations from alumni
are going up spectacularly as their children reach status as a senior in
high school, and then a drop off after that if they haven't been admitted.
And there's no shortage of six, sometimes nine-figure donations at these
wealthy schools.
Take Harvard, for example.
The Ivy League school has a big endowment.
Not just big, it's huge.
Thirty nine billion dollars.
For context, Facebook has forty one point one billion dollars in what's
essentially cash.
Amazon has $41.2 billion
and Coca-Cola has $16 billion.
And it's not only schools like Harvard, even some public schools have huge
endowments. Altogether, U.S.
colleges have more than $616 billion in endowment assets, but they only
spend about five percent of that every year.
And since most universities are nonprofits or government entities, those
endowments come with a multi-billion dollar tax break.
Neither the public nor the people who regulate endowments or tax them have
a very good idea of what the purpose of them is.
My concern is people seeing these institutions as islands of wealth that
aren't accessible to ordinary people.
A lot of universities will talk about how they don't want to divest
the endowment because that's a political move.
But investment is political.
Perhaps it would be better for society if they were to give this money to
do some poor black college in the South that really needs the money badly.
Whereas Harvard is rather flush.
Wake up and use your endowment in a more responsible way.
And since you aren't doing that, we're going to tax you.
I don't think they should care.
It's Harvard's money.
Which U.S.
college endowment fund is bigger than the GDP of nations like Jordan,
Latvia, Tanzania and others?
Well, of course it's it's Harvard.
These massive university endowments are pretty distinctly American.
There is a little element I'm afraid of mine is bigger than yours is.
I can afford to keep $30 billion in the bank and not spend it because I'm so flush.
But colleges haven't always had so much money put away.
That's because philanthropy just wasn't as popular as it is today.
It wasn't until the 1800s that universities got serious about fundraising.
If you look at Harvard and Yale as good examples, both of them were cut off
from from state funding over religious disputes.
They had to raise money some other way and they went to their rich
alums and got them to give them some grants.
For the most part, wealthy Americans in the 19th century kept their money
in the family.
Then came Andrew Carnegie, one of the richest men to ever live.
In 1889, He wrote an article that challenged Americans to change the way
they looked at wealth.
Saying "the man who dies rich dies disgraced."
Then foundation culture took off, and rich Americans like Rockefeller and
Ford began donating millions, endowing colleges and other nonprofits in
the process.
High up in a tower in midtown Manhattan, are the offices of an unique
organization devoted primarily not to making money, but to giving it
away wisely.
That's the best argument for endowments.
They are a buffer for the operating budget of the university because the
economy goes bad, the alumni stop giving, the government grants dry up.
The problem is that they aren't used that way.
During the Great Depression,
Yale was actually constructing new buildings.
But that was thanks to a few specific donations, Yale's endowment took a
hit and the university cut back.
What we've seen with endowments is when there are economic downturns, the
schools with those endowments tend to reduce spending from the endowment
in order to conserve the endowment resources.
So if there's a downturn in the economy, I wouldn't count on Harvard
University stepping up to enroll more low income students.
By 1977, the U.S.
had nearly $15 billion worth of endowment assets.
Endowments grew very slowly in the 1960s and the 1970s.
Then there was a shift where the most prestigious colleges, the Harvard's,
Yale's, Princeton's and some others started investing more in things like
venture capital stocks and equity markets.
From there, administrations became a lot more intertwined with the finance
world,
their endowments became a lot bigger and the universities became a whole
lot more powerful.
Ok, so some of the endowment does go back to the universities, but exactly
how it's divided up is left up to the administrations and sometimes it's
controversial.
In 2016, the University of Texas system spent millions on a bunch of empty
land with no real plan of what to do with it.
People thought that money could be better spent on education and UT later
backtracked and said it would sell it.
Let's go back to Harvard's endowment.
In 2018, most of the money was put into things like hedge funds, real
estate, stocks and bonds.
That tiny sliver right there, roughly 5 percent, that's $1.8
billion. And that's what went to the university's operating budget.
That means things like professors salaries and financial aid.
And schools are paying a lot more per student these days.
In 1977, the top 1 percent of schools spent less than $10,000 from their
endowment for every student.
In 2012, that number had jumped to more than $80,000.
But that doesn't necessarily translate into more people being able to
attend Harvard.
And some people think they could be doing more to lower the cost of
tuition.
It's inconceivable to me that with all that money you have now, why
are raising tuition?
They have used the funds that they have to support more financial aid for
low income students to make college more affordable for those low income
students that they do enroll.
But again, they enroll so few low income students that those increases in
financial aid are not that meaningful.
When I asked Harvard about this, they said that student aid covered 1 in 5
undergraduates tuition in 2018 because their families made less than
$65,000.
When a person is admitted to Princeton University, no matter how poor their
family was, no matter how hard scrabbled their upbringing was, they've
been admitted to probably the top 2 percent.
They are no longer poor people.
They are rich and advantaged people in prospect.
To give them an education for free that they might otherwise be able to
pay for, to some extent is not redistributing from the rich to the poor,
it's redistributing from the rich to the merely extremely wealthy.
Harvard's website does say that it doesn't use endowments to reduce tuition
because, one, they have to maintain the endowment.
And much of it is restricted or set away for specific projects.
Here's the crux of it.
Schools have billions of dollars and they don't just want that money
sitting in a checking account.
Lots of it is earmarked for specific projects like a scholarship fund or
research in a particular lab on campus.
The rest of the money is invested to grow the endowment even larger, and
that's where things get complicated.
Annual endowment reports from elite colleges like Harvard and Yale grab
headlines every year, and the finance world pays attention.
Large endowments are managed by a committee of investors, often as part of
a university aligned investment corporation.
Schools with smaller endowments might not have the resources to build
their own investment team, so they often outsource the job to money
managers with more expertise.
With billions of dollars floating around, endowments and the universities
behind them have a lot of purchasing power.
Like when they stopped investing in South Africa during apartheid.
Large numbers of American institutions, not just university endowments, to
withdraw or not make investments in companies who do business in South
Africa helped change the regime in South Africa.
And it's surprising and stunning.
I wouldn't have expected it, but I think it did.
The issue of today?
Investments linked to climate change.
...fossil fuels, to its terrible investments...
Harvard and other wealthy colleges have made news for buying up foreign
farmland and supporting fossil fuel companies.
If you look at Harvard's mission statement it's about educating the citizen
leaders of the world. How
we can be a responsible civic leaders while still supporting an industry
that fuels the climate crisis is unclear to me.
Groups like Divest Harvard work by organizing students and community
members to pressure universities to stop investing in things like private
prisons, Puerto Rico debt or the fossil fuel industry.
Harvard hasn't divested from fossil fuels and said it should not use the
endowment to achieve political ends and that the university works to
influence public policies in other ways, like through scholarship and
research.
A lot of universities will talk about how they don't want to divest the
endowment because that's a political move.
But investment is political.
Harvard is full of smart people like other universities.
The point at which they will change their minds, I think, is where so many
people mobilize that to say no would be more damaging to their institution
than to say yes.
I see the groups as being effective.
However, I think it is a much slower and longer play than I would like or
they would like.
Brian Bink is a PhD student on Yale's Advisory Committee on Investor
Responsibility, which is a group designed to help address concerns about
Yale's investments.
Many schools with big endowments have something like it in one form or
another. For Yale, the standard
that we have is that in order to divest from company, we must see that the
company is committing grievous, unethical behavior that creates grievous
social harm to others.
That is a very high bar.
We have to be able to prove that they are reaching that bar.
An ongoing discussion and I like to bring up is, are the standards that we
are given the right standards to be operating under? Yale's
ACIR doesn't actually get to make the final call on whether or not to
divest.
The entire process takes months, sometimes even years.
The people who do have the final say on how to use the endowment sit on
this board.
Perhaps the most famous endowment investor is David Swenson.
He's the highest paid employee at Yale, which isn't uncommon for endowment
managers. Swenson's investing strategies have become known as the gold
standard for endowments.
In the 1990s,
you started getting a big rise in the wealth of the richest Americans, many
of whom are alumni of the most prestigious schools.
Swenson's signature strategy at Yale is all about investing in more
alternative investments, like real estate, venture capital and natural
resources instead of traditional ones like stocks, bonds and cash.
Most people are kind of in the middle, right?
They're, neither aggressively active nor completely passive.
But in the middle you lose because you end up paying high fees for
mediocre active results.
Endowment investors from schools like Harvard and Princeton have followed
Swenson's lead.
Like when Harvard bought up a bunch of farmland to secure the rights to
the water underneath it.
And there is a relationship between board members who work in the
alternative investment space and how much universities actually invest in
those alternative assets.
It's tapered off since 2008, but as Charlie writes, that's because all of
the elite schools were investing roughly 60 percent of their endowments in
alternative assets.
On the one hand, it makes sense, if you're going to put someone in charge
of millions or billions of dollars, you probably want them to have
experience in the industry.
But Charlie's research points out how interlace the world of endowments
and private equity are becoming.
The financialization of the charitable sector is
a real problem that we have.
The financial markets have taken on a life of their own.
And now a lot of the stuff that they do is just about playing with money
in ways to make money for people who are playing with the money, having
nothing to do with the purpose for which you supposedly exist.
It's fairly easy to see how board members are connected to hedge funds.
In a lot of cases, their titles are listed right in their bios.
But it's not so easy to figure out if they're doing business together.
Like when reporters uncovered university investments in Puerto Rican debt.
One major player in that story was a hedge fund called Baupost Group,
which owned almost $1 billion in Puerto Rican debt under a subsidiary
called Decagon Holdings.
In 2017, Baupost told The Intercept they regularly make investments
through subsidiary holding entities.
And here's the thing, Harvard, Yale and Princeton all have big investments
in Baupost, but it's hard to find those too.
And it's a good example of how there's just not a lot of transparency in
the world of endowments.
It's a little easier to look at public school filings because they have to
disclose more of their finances.
Like if you look at UT's audit from 2017.
With private schools, it's a little trickier.
For example, I read that Harvard had this $1.9
billion investment with Baupost Group.
So I searched through Harvard's 990s for Baupost, came up with a couple
hits, but nothing for that big investment.
Instead, I searched for Baupost's address and that's how I found the
$1.9 billion investment under a company name called HB Institutional.
I searched through Yale's 990, they have one called YB Institutional, and
I had to double check that with Baupost's ADV filings.
There's kind of a pattern going on here, Princeton has a fund called PB
Institutional that was also listed under Baupost's address.
All that's to say, it's a lot of work just to trace back one single
investment to a hedge fund.
And it's not just Baupost.
It's hard to identify any of the top funds in these 990s.
Since it was so hard to find them, I just reached out and asked the
universities to disclose them, but they wouldn't.
Harvard didn't comment on why the HB Institutional Fund doesn't have
Baupost in the name, but a Baupost spokesperson said while the HB, YB, and
PB institutional funds cited don't include the firm's name, Baupost is
publicly disclosed as the manager of those funds on its form ADV.
And that the overwhelming majority of its endowment clients are invested
in partnerships which do name the firm.
You can make a lot of money by managing endowments for universities. You can make big big money.
On average, hedge funds charge a 1.4
percent fee on the assets they manage, even if they lose money.
Plus about a 17 percent incentive fee on all the money they do make.
We reached out, but Baupost wouldn't tell us how much it's making from
each client.
In 2016, Congress asked universities with endowments how much they were
paying their money managers.
A lot of them didn't respond.
But Stanford gave a range that's consistent with industry standards.
If you break it down and look at how well hedge funds compare to
traditional assets that don't require fees, oftentimes universities would
have just been better off putting their money in the S&P 500.
Were you surprised that the performance was that bad?
Thank you, Kelly.
Indeed we were.
A lot of people would say, OK, they would have done better in the S&P 500.
They would've done way better in the S&P 500.
Harvard wouldn't disclose its fee structure, but a UT system spokesperson
said UT is an advocate of the 1 or 30 rule, meaning they pay either a 1
percent management fee or a 30 percent incentive fee.
And that 73 percent of UT's hedge funds use this rule.
Let's turn to how it's taxed or not taxed.
Since universities are either government institutions or non-profits,
they get out of paying some taxes.
Even if they do have a few billion in the bank.
And the people who give to universities, even the billionaires, get a tax
break for their charitable donations.
So say a high income person makes a $100,000 donation to a college.
They can take that $100,000 off their taxable income.
And since their income tax rate is about 30 percent, they essentially save
themselves $30,000.
After the college admissions scandal, Senator Wyden said he plans to
propose a bill that would do away with tax breaks for people whose kids
are currently applying to college.
In response to Senator Wyden's proposal, UT said it's common practice for
donors to contribute generously to their alma maters or where their
children attend college.
But that addressing the integrity in the admissions process shouldn't
jeopardize philanthropic revenue streams.
And it's not the first time the tax exempt status has been under fire.
In 2017,
nestled in the Tax Cuts and Jobs Act was a little provision that made Ivy
League schools uneasy.
A 1.4
percent tax was added for net endowment income at private universities
that meet certain criteria.
That'll hit roughly 30 colleges across the country, including Harvard,
Yale and Princeton.
It's hoping to tell universities, wake up and
use your endowment in a more responsible way. And since you
aren't doing that, we're going to tax you.
This whole thing has been more controversial than you might think.
Some people say it's just Republicans picking on what they see as liberal
colleges.
These universities have tried to restrict free thought.
I think other politicians during the tax reform debate were trying to get
their hands on some revenue and, they don't like what's happening at
universities, in terms of the liberal progressive bias.
The tax is expected to raise $1.8
billion over the next 10 years.
I don't really see the justification for it.
It's hard to look at the endowments tax and not to see an attempt to tap a
source of revenue from a group of organizations that it's easy to criticize.
And that's not I think how we should be doing tax policy.
I don't think it does anything to address the cost of college throughout
U.S. society.
I mean, Republicans are very eager to point out in debates about
individual income taxes
corporate income taxes that it's not society's money.
It's an individual household's money and it's a corporations money.
Well, you know, it's Harvard's money.
I called Senator Chuck Grassley to see what he thought the tax would
accomplish. He talked a lot about schools needing to do more to help kids go to college.
But it was kind of hard to pin down exactly what that would look like.
When I pushed him on it, he said schools should spend at least 5 percent
of their endowments every year.
Same rules as other nonprofits.
But universities are already spending about 5 percent of their endowments
every year, though not necessarily to help lower the cost of tuition.
In March 2018, a group of university presidents, including those from
Harvard, Yale, Princeton and Stanford, signed a letter urging Congress to repeal or amend the endowment tax.
I know they are lobbying Congress now to do away with that tax. And if they want us to do away with it,
showing us that they're using their endowment money more responsibly for helping kids to go to college,
instead of using higher tuition from higher income families to subsidize lower income families.
Neither the public nor the people who
regulate endowments or tax them have a very good idea of what the purpose
of them is, and as a result, we don't get very good policy.
So there's the issue of climate change, inequality in higher education, who
should get taxed, but what about the future of education altogether?
Will endowments still be the best way to make sure higher education has money to grow?
Technology will change for higher education.
There'll be other ways of delivering higher education that are better than
residential Ivy covered halls of wisdom.
You'll just have a little screen in your office or a chip in your head or
who knows where how it's done.
Those endowments will then be used to perpetuate these great institutions
of higher education for a quarter of a century beyond their useful
lifespan. I'd like the universities to assure me that's not going to happen.