Does Wealth Inequality among Universities Pose a Threat to the American Economy? (Part 1)

It’s Good to Be the King

On April 16 of this year, Moody’s Investors Services published a report entitled “Wealth Concentration Will Widen for U.S. Universities.” This report was the subject of articles on the same day in such major media outlets as the Boston Globe, The Wall Street Journal and BloombergBusiness.

The underlying tone of the Moody’s report was fundamentally positive, as was true of the media reports referenced above. Given Moody’s previous grim reports regarding the perceived financial weakness of much of American higher education (see an earlier blog post in this series, Moody’s Blues, Feb. 14, 2013) a positive report on a few enormously wealthy AAA-rated institutions was presumably welcomed by many readers and investors.

But while Moody’s job is to rate the financial strength of individual colleges and universities, I might have expected the media to see the worrisome side of the story – which is, as the Moody’s announcement says, “U.S. universities with the greatest wealth… are positioned to expand their financial advantage relative to the remainder of the sector.” What does Moody’s prediction mean in the long term for higher education? If the rich institutions are getting richer, does it necessarily follow that the poor institutions are getting poorer? So is this report from Moody’s good news or bad news for the American public and the American economy?

It’s Good to Be the King

Mel Brooks’ famous line can also be applied to the royalty of American higher education: the 100 or so colleges and universities with endowments in excess of $1 billion. However, there are class distinctions even within royalty: crown princes outrank earls; viscounts take precedence over barons – and a $36 billion endowment has far greater impact on the financial health of a college or university than does a $1 billion endowment.

Or so The Boston Globe (“Wealth Inequality Grows Among US Universities, Study Finds,” April 16, 2015) would suggest. In a table accompanying the article, the Globe lists 10 private and 10 public universities in descending order, based on the size of their wealth (endowments plus cash). At $42.8 billion, Harvard tops the list of private universities, and at $36.7 billion, the University of Texas tops the public institutions.

But total wealth is a misleading criterion to use in ranking universities. Colleges and universities typically transfer approximately five percent of the value of their endowments into their operating budgets every year. To gauge the effect of these budget transfers, a more meaningful criterion for ranking would be to divide the value of the endowment by the institution’s enrollment, in order to determine endowment dollars per student.

Using that criterion, the University of Texas, a higher education system with nine campuses and a total of 206,896 students, has approximately $175,000 endowment dollars per student, whereas Harvard University, with an enrollment of just 14,600 students, has almost $3 million endowment dollars per student.

A five percent drawdown allows Texas annually to transfer roughly $8,750 from its endowment to its operating budget on a per-student basis (.05 x $175,000), whereas Harvard is able to transfer approximately $150,000 per student (.05 x $3,000,000) from its endowment to its operating budget every year.

The total endowments of these two institutions are somewhat comparable in absolute size, but the impact of Harvard’s endowment is far greater than the impact of Texas’s endowment on the lives of their respective student bodies. “It’s good to be the king” – especially when it comes to endowment dollars per student. Harvard is the king, and Texas is somewhere between a squire and a gentleman.

The 10 richest private universities have wealth totaling $189 billion, for a collective student enrollment of 155,789 – a per-student wealth of $1.2 million, and a per-student endowment drawdown of approximately $60,000 annually. The 10 richest public universities have wealth totaling $121.7 billion, but have a collective student enrollment of 1,666,185 – a per-student wealth of just $73,000, and a per-student drawdown of only $3,650 annually.

In other words, the 10 richest private universities have 16 times more endowment dollars in annual per-student support than do the 10 richest public universities. To rank the richest privates and the richest publics side-by-side by total endowment, with the clear implication that great (and largely comparable) wealth exists in both, as the Globe did in its article, is to convey a very misleading impression to its readers.

But haven’t the rich private universities always been rich? And aren’t the large publics richer than they ever have been? Why is this even a story?

I invite you to check back next week, when we consider Part 2: The Growth of Institutional Wealth.