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State of Higher Ed: Ladner's Fall, And Endowments

I've been getting caught up with some nice MLK day "holiday reading" this weekend concerning the history of the fall of American University's president and how it's spurred a fresh look at university spending across the board.

Maybe it's simply my focus on football all these years that made me miss the spectacular fall of former American University president Ben Ladner. Mr. Ladner did a lot of good things for AU in his nine-year reign, like increasing the academic profile of the school and multiplying their tiny university endowment by nearly ten, from $29 million to $271 million in 2005. Unfortunately that allowed Mr. Ladner to engage in a high-rolling lifestyle that included jet-setting around Europe, complete with personal drivers and limos, a personal chef making $88,000 a year and making regular five-figure trips to destinations such as the US Virgin Islands, UAE and Nigeria - all paid for by AU and the endowment that he grew. It's pretty remarkable that his total compensation package well surpassed Ivy League presidents, which he considered his "contemporaries".

The story, spelled out in the link above, is simply mind-blowing and gets juicier the more closely you read it. Ladner didn't allow student or faculty members on the AU's board of trustees, and packed the board with cronies -- including David Carmen in 2001 who made his name doing opposition research for the Republican National Committee for Presidents Reagan and G. H. W. Bush. The lobbyist Carmen not only allegedly didn't contribute to AU, he also allegedly used his position on AU's board to get clients for his lobbying firm and appeared to try to block any auditing of Ladner's lavish spending lifestyle. This fact - and the fact that in 1997 Ladner snuck a compensation package through only a partial board - made Rep. Charles Grassley (R-Iowa) launch an investigation of university president's pay, calling for more board responsibility and oversight and asking for more disclosure of this information from the IRS.

This Enron-ish portrait of a higher education board in turmoil does illustrate that what The Chronicle of Higher Education seems to have concluded as well: that running a major university is a lot more like being a COO than the vision of a college president that, say, Dean Wormer's vision of college presidency in Animal House. The number one "sign of success" on the Chronicle's 2005 survey was a "balanced budget" and that many presidents "have an obsession, day in and day out, with things related to finance."

That seems really at odds, however, with the inconvenient fact that many endowments are busting at the seams with their gains. Looking at the raw numbers from 2006, 62 different schools now boast an endowment of $1 billion dollars or more (with Lehigh just outside the magical $1 billion mark at $939,473. AU's endowment grew to $319,000, a 17.7% increase). Of those 62 institutions, only 12 didn't manage more than double-digit percentage gains in 2006 (with Tufts managing a whopping 43.8% increase). The best line comes from the article above from Higher Ed: "Harvard and Yale top the list with endowments so massive, $28 billion and $18 billion respectively, that they exceed the general operating funds for the states in which they reside."

The article also shares another very interesting point: these endowment numbers are starting to stagger over the endowments of other not-for-profit endowments. Granted, the numbers they quote do get a bit over-the-top (after all, the Gates Foundation endowment is still bigger than Harvard's) but is is quite telling that the Metropolitan Museum of Art's $2 billion endowment is less than that of 26 different higher institutions of learning.

Why is this important? Large not-for-profits operate under certain tax rules - they are required legally to spend at least 5% of their endowment value annually. But universities don't have spending rules - and accordingly, across all institutions they spend on average 4.2% of their endowments. Furthermore, if you want to find out, say, what Lehigh spends it's endowment on, you can't find that out: the only place that collects such information is the National Association of College and University Business Officers, and they don't release the information on an institution-wide basis.

Another very interesting fact is the fact that this endowment money is tax-free. When someone donates money to a college, that is considered a tax-free donation since the money is considered a gift to further education. And when that money is distributed from an endowment to benefit the school, the school also is not taxed. (No wonder Mr. Ladner expensed everything to AU - to him, his presidency was a tax shelter for his jaunts to Rome.)

Even spending on athletics programs are not taxed, meaning that universities are basically being allowed to spend on athletics tax-free. This could also be interpreted as being at odds with the ways not-for-profits are legislated to operate: any expenses on items that are "not related to the mission of the organization" are taxed. (Of course, athletics programs are part of the mission of educating students, so you can make a case for them being tax-free.)

With all this tax-free money, and at least in part "inspired" by Ladner's follies, Grassley and other representatives have undertaken an investigation on how colleges are paying their presidents and how they're spending their endowments. What may follow is a bill to give more power to trustees in general on university boards and possibly a requirement for endowments to spend at least 5% of their endowment every year, the same way not-for-profits are required to do.

This may be in part which explains Harvard's (and through the power of peer pressure, Yale's) moves to spend more of their endowment money on their students in advance of the prevailing winds of legislation. With Harvard and Yale at No. 1 and No. 2 on the endowment lists, their largess may simply to head off the unpleasant legislation that is still brewing.

Enter into the picture the subject I tackled last week in university diversity and football, where activists are lamenting that many colleges - especially private ones - lack diversity, with athletics comprising the lion's share of university diversity. The activists quoted chose to use the "stick" approach in punishing (in essence) private schools with mandates to have the athletics department be required to represent the racial makeup of the school, where I suggested a better way to increase minority involvement in private schools: increase scholarship money for everything from football to cello. (And diversity is clearly still on university presidents' minds: 77% of them said there is "still an important place for affirmative action in college admissions", while sometimes still appearing to demonize football, whose teams are the most diverse student group on many, many college campuses.)

One columnist from Higher Ed seems to agree with me - and the opening of endowments to fund need-based scholarships could truly be the answer. Here's the proposals:

1. Increase the federal tax deductions for gifts to endow need-based scholarships to 110 percent. Let donors write off large gifts as fast as their income permits, rather than over three years.

2. Reinstate the deductions for gifts of IRAs donated to endow need-based scholarships.

3. Require tax-exempt institutions to file a federal EIS — Educational Impact Statement — explaining the educational impact of their tax benefits. This links to the welcome, overdue IRS revision of the 990 Form, the tax form that colleges and non-profit groups must file each year.

Additionally, the writer also says that "Idea (3) will help ensure that institutions spend the money, from new scholarships or robust endowments, on aid to students, rather than golf nets. Nothing now limits the use of increased endowment spending or of tax-deducted donations."

More need-based aid should help increase diversity in all colleges, not just Patriot League schools - and seems like the right thing to be focused on with this endowment money should colleges be "forced" to spend it. Sponsoring new scholarships in everything from football to cello to improve university diversity makes education reach more people than ever, helps make Lehigh a more diverse place, and as a side benefit means that Lehigh now maybe convinces the occasional football recruit to play for a real football championship rather than an Ivy league title or an impossible BCS dream. What's not to like?

Of course, football scholarships would be the only way to compete with the Ivy League in this "brave new world". Lehigh would be forced to spend $4.5 million to spend each year compared to Harvard's $1.5 billion (yes, billion). But of course, when there's millions of scholarship dollars to get cellists as well, how can anyone complain?


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