University spending could be mandated

Elise Foley

As endowments at Northwestern and other universities grow at record rates, some members of Congress are questioning how universities spend money.

Under a bill passed through committee last week, government officials would monitor how colleges spend their endowments. Some senators are proposing that universities be required to spend at least 5 percent of their endowment each year. While NU currently spends more than 5 percent of its endowment yearly, University President Henry Bienen said NU still could be negatively affected if the bill is passed.

NU is the 12th-wealthiest university in the country, based on its 2006 endowment. The endowment grew by 22 percent between 2005 and 2006, and currently stands at more than $5 billion. This increase was second-highest in the country for 2006, just behind Massachusetts Institute of Technology.

Building endowment

Since Bienen became president in 1995, NU’s endowment has grown from about $1.3 billion to more than $5 billion.

In his first State of the University address in 1995, Bienen said although NU was “in good financial shape,” building the endowment was one of his top priorities.

This effort was successful – a fundraising campaign early in his tenure raised about $1.5 billion, and the university now raises “twice as much” money as it did before the campaign, Bienen said.

“When you do a big capital campaign like that, it has a secondary effect, aside from raising a lot of money in the campaign,” Bienen said. “It boosts everybody’s sights up and you get yourself organized better.”

Inflation accounts for some increase in the endowment, but most growth can be attributed to an influx of money from donors, which has been invested successfully by NU’s staff of fund managers. Some outside sources like money from Lyrica, a drug developed by an NU professor and sold to Pfizer for $1 billion in 2006, have provided a “pop” in investments, Bienen said.

“We didn’t use it for programmatic things – here today, gone tomorrow – we didn’t use it for buildings,” he said. “We put it into the endowment and the last couple of years, as the money started to flow, the markets have been very, very good.”

The endowment’s success has allowed for more spending at NU. Vice President and Chief Investment Officer William McLean said spending increased by about 8 percent this year due to successful investments.

“As the endowment has had strong growth the last five years, more money gets spent on things like tuition, financial aid, scholarships and construction,” he said.

Tuition can still increase as the endowment grows because tuition funds most of the university’s budget, while the endowment makes up about 20 percent, McLean said. NU’s tuition rose from $33,408 to $35,064 for the 2007-08 school year.

the Future

Inspired by reports of rising tuition, some members of Congress argue that universities should be required to spend more of their endowments to offset the costs of education.

The regulations regarding endowment are part of the U.S. Committee on Education and Labor’s College Opportunity and Affordability Act of 2007, which passed unanimously in committee Thursday. A section of the bill would require the Secretary of Education to study the balance, growth and spending of endowments and encourages colleges to “rein in price increases,” according to a government press release.

Members of the Senate Finance Committee aim to take this a step further. Since September, ranking committee member Sen. Chuck Grassley (R-Iowa) has been campaigning to standardize a 5 percent annual minimum for endowment spending at colleges with large endowments.

Grassley said in an Oct. 29 press release that funds from “ballooning endowments” should be used to stop tuition from becoming more expensive.

“I’d like to see America’s elite institutions do more to make college more affordable for everyone,” he said.

Bienen said requiring universities to spend specific portions of their endowment is not the answer to rising tuition. Endowment spending is determined by a complex formula and varies based on inflation and the markets, he said.

“A (non-profit) foundation could turn a spigot off and on. … A foundation can say, ‘OK, we’re going to slow up spending, we don’t have to take new projects,'” he said. “A university can’t say that. Most of our costs are recurring costs. We just have to spend lots of money.”

Most colleges spend about 4 or 5 percent of their endowment, and schools that spend more usually have smaller endowments and more spending pressures, Bienen said. Though NU already spends more than would be mandated by the bill, Bienen said he still opposes the measure.

“If I had a freshman in Economics 101 here making those arguments, I would have hung myself,” he said. “They were really terrible arguments to make on the floor of Congress. I mean, I would have sent them right into remedial.”

If implemented, the university would have to revisit its spending policies, especially in tougher economic times, McLean said.

“It’s a bad thing to spend that much money off your endowment, I think, for the future,” Bienen said.

Reach Elise Foley at [email protected]