Thursday, June 2, 2011

Pooh-Poohing Perpetuity

If you're looking for end-of-year charitable deductions, consider our approach. We chose to give  scholarships directly to students, rather than having our funds held in perpetuity by the endowment.

We invented a new kind of gift: the “endearment”

    When my father, an analytical chemist, died in May of last year, my mother and I decided to honor him by endowing a scholarship fund for economically disadvantaged, academically deserving chemistry majors at the local university. Our intent was to provide a full tuition scholarship each year. We assumed that our substantial donation would continue to generate adequate funding for a full scholarship over time, despite inflation, since the school’s investment professionals were certain to achieve returns that would meet -- or more likely beat -- inflationary trends.
    The way in which endowments actually work made a na├»ve fantasy of that simple, heartfelt dream.
The university would provide to our scholarship recipients only a  fraction of what our money actually earned each year. (The rest of it -- usually most of it, we eventually discovered -- would be “plowed back” into the endowment “for future generations.”) Even during the boom years of the stock market, when the endowment  was realizing double-digit returns, it had been paying out only four percent. It was currently paying just three percent. This, I have since found out, is only slightly less than most endowment payout rates across the country.

   Then we learned that tuition has been rising at the rate of ten percent a year (a ridiculous, unconscionable situation, which deserves a separate article). Thus, our “full scholarship” would be “full” only for the first year, and would decline quite precipitously thereafter as tuition soared and the endowment payout remained a piddling fraction of its real value.
    It wouldn’t be very long before our scholarship would join the hundreds (perhaps thousands) of others at the university that had been proudly and generously established as substantial gifts over the years but had gradually dwindled into inconsequentiality, often not even covering the cost of textbooks, much less of tuition.
    Meanwhile, our initial, sizable donation would forever remain the property of  the university -- sitting there, earning money for the institution’s highly prized, creepily well-tended endowment -- a sort of hothouse flower that gives little back except for the scintillating aroma of wealth.
   (One dean, who is now retired, admitted to me that he was hoping to “cobble together” some old endowments that have lost most of their value in order to create several decent-size scholarships.
    To me, this very honorable man’s pragmatic and well-intentioned solution is nevertheless a sort of desecration, like consolidating graves to accommodate the needs of the present, after everyone who might object has either died or moved far, far away. It constitutes a breach of faith, even though I agree that it is better to do it than not to.)
   We regarded the way in which endowments are managed as an unacceptable betrayal of our intentions. We were determined to help students NOW, who need money NOW, and to do so in a high-impact way, giving them a year free of financial worries that could truly be transformative -- resulting in better grades, priceless research opportunities and a better chance at subsequent financial aid based on merit.
   We created ripples of unease and exasperation throughout the bureaucracy by rejecting as “scandalous” the endowment system -- in which our funds would get lost in an inscrutable, amorphous pool over which we had no control.

   Quite brashly, we created our own instrument, which we lightheartedly christened an “endearment.” Joe came up with the concept, which takes a twist on the amortization idea -- we will be “spending down” our contribution, rather than paying down a debt -- but adds the benefit of accruing interest in the meantime. We calculated a worst-case scenario, and found that we would be able to provide full scholarships for about 15 years, possibly more.
   That sounds fine to us. We will continue to offer the increasingly rare opportunity that a full scholarship provides, and the whole thing will unfold both while we are around to monitor how the money is spent and while we are here to enjoy the great reward of aiding truly needy, deserving young people.
   This approach seems clean, simple, principled and rather elegant to us. The notion that an endowment creates a “gift that keeps on giving” is seductive but disingenuous. Our gift really will “keep on giving,” as our students plunge with even greater freedom and enthusiasm into their studies and then enter the workforce as well-trained chemists, perhaps choosing to create their own scholarships.
    It is clear that the endowment model is geared far more toward enlarging and perpetuating itself than it is toward actually assisting students or advancing the institution‘s overall mission. It feeds insatiably upon generous intentions  -- parceling out meager crumbs to keep the natives placated -- but in reality, it seems transfixed by the pure grandiosity of being rich. Indeed, a number of state legislatures, as well as Congress, have considered requiring greater payouts by university endowments, which have repeatedly been accused of “hoarding“ their wealth.
    “The endowment has become a symbol of status and prestige, similar to the university’s libraries, art museums, and architecture,” Professor Peter Conti-Brown wrote in the 2009 Stanford Law Review.
   “Universities are behaving in a way to grow the endowment rather than using it to support the activities of the university,” Jeffery Brown, professor of finance at the University of Illinois, wrote in a 2010 working paper.  “The point is that if you think endowments exist to smooth over the shocks in bad times, they’re not doing that. ... They’re maintaining the value of the endowment for its own sake.”
    It didn’t take much research for me to learn that concern about the fundamental deceptiveness of university endowments has been simmering for some time. Numerous critics have challenged the validity of their tax-exempt status, charging that endowments produce little societal value relative to the billions of dollars in lost state and federal tax revenue, both from donors’ monies and from endowment earnings.
    Around the country, individual universities are hoarding millions -- and in some cases billions -- of dollars in endowment assets even as tuition increases keep many young people from pursuing a higher education and leaving many others tens of thousands of dollars in debt when they graduate. They continue to raise tuition even as endowments rake in the dough, and when they lose money, they raise it even more and attempt to slash staff wages as well.

   Even those within academe have criticized endowments’ “miserly” payouts and warned that the public will view universities as “greedy,” ultimately leading to reduced giving.
   “One of the most important stewardship steps in an endowment is to spend that endowment every year,” the SUNY executive director of the University of Buffalo Foundation wrote earlier this year. “Don’t allow it to accumulate. There’s less value in seeing it accumulate than there is in seeing it spent every year in a prudent sort of way consistent with donors’ intent.”
    Donald Frey, a former Northwestern University professor who died in March, agreed. “Universities should implement a policy of spending all real returns -- encouraged if necessary by government,” he wrote in the business journal Challenge.
   Indeed, that was the policy which was generally in effect until the 1960s, when universities decided to leap into the risky realm of Wall Street speculation rather than investing their monies in secure, reliable instruments. Payouts have declined ever since, even as rates of return have soared. The generally accepted payout rate today is a mere five percent. High-flying university endowments embraced risky investment strategies that contributed to the stock market's collapse in 2008, says a report from the Tellus Institute, but there seems to be no momentum toward reform.

   As one might expect, where so much money is in play, there have been numerous scandals regarding investment managers’ income -- which is often in the millions of dollars. Moreover, many cozy ties have been exposed between money managers and university trustees as well as between trustees and the corporations in which the endowments invest.
   The great allure of endowment, of course, is the radiant vision of perpetuity that it engenders, the promise of a kind of immortality. The money I donate for scholarships will live on, in my name, from here to Eternity.  As I have described, the discrepancy between rising tuition costs and penurious endowment payouts makes a lie out of that implied promise -- a lie that I would not have discovered if it weren‘t for my investigative-reporter approach to virtually everything I do. The typical donor has no way of knowing that his proudly named gift will soon dissolve into oblivion.
   But even if the discrepancy weren’t there, I personally would have a problem with the concept of perpetuity, although I am as enamored as anyone else with the majesty of the word. In today’s world, where everything is changing so rapidly, and so many things are in peril -- including our national security, our way of life and even the survival of the planet -- I am unable to think in terms of “forever.” I don’t have a strong belief in five years from now, much less in perpetuity.

  I particularly don’t believe in perpetuity when it comes to higher education. This system is, I believe, as unsustainable in its present form as is the health-care system. It has erected over the years a massive superstructure of administrative and ancillary functions, grand buildings and sweeping, exquisitely manicured terrain, that loom -- quite stupidly, in my opinion -- over the simple and beautiful interchange between a teacher and his students that is the purported raison d’etre of the institution. Technology poses a daunting and exciting challenge to bloated brick-and-mortar institutions as students increasingly have access to excellent lectures and supporting materials online.
    The campus as we know it is becoming more and more irrelevant, both for that reason and because few students today can afford to have any sort of “campus life.” They attend their required lectures -- text messaging and surfing the web constantly, I’m told -- and then flee as fast as they can, to fulfill their work or family obligations. Of the thousands of dollars we contributed this year to pay the tuition for two chemistry students, much if not most of it was not actually spent on instilling knowledge. Hundreds went directly to the athletics department, which I find especially galling.
   This vast and mindlessly expanding ivory-tower empire cannot endure if we are ever again to offer higher education that is affordable to the average person. Each year, the price becomes more outrageous. Each year, our model for delivering knowledge becomes less viable and more anachronistic. Each year, the status quo endangers our national security and our economic supremacy as our educational system loses ground to one country after another.
   Fundamental change is essential. Thus, I do not believe in perpetuity. Even The Forum for the Future of Higher Education’s Master Class, in  its report on “The Purposes and Uses of Endowment,” advocates that, “The promise of ‘in perpetuity‘ for endowment gifts should be reconsidered,” charging that the model is fundamentally dishonest due to the pace of change in higher education and society at large. The forum suggests that donors be encouraged “to make their gifts expendable — not in a single year, but perhaps over a 10-year period.”
    Needless to say, endowments are not without merit. They do a lot of good -- just not nearly as much as their donors and intended beneficiaries deserve.
    Our scholarships are different in three other respects. First, they are based on documented financial need as well as merit. We were dismayed to learn that virtually all other scholarships are based on merit alone. It seemed absurd to us to give money to someone who doesn't need it when there are so many who do.
    We were also inspired by a scholarship program established by the esteemed professor of chemistry Ronald Ragsdale to require that our scholars engage in supervised laboratory research and produce a publication worthy research paper.
    Our scholars will also be doing community service in exchange for their full scholarships. They will become ambassadors for the math and science departments, speaking to public-school students about the excitement and gratification of pursuing careers in these fields. Our country has fallen so far behind others in these essential disciplines that we feel it is urgent to entice young people to begin early in acquiring interest and an academic foundation.
    We have already awarded four scholarships.One was to a delightful young woman who is majoring in psychology and biological chemistry. Her goal is to become a doctor or child psychiatrist. The scholarship freed her to spend time doing unpaid research on occupational medicine and diabetes. Her research poster on the effect  diabetes has on the cardiovascular system was featured at a science awards fair. She made the dean's list and received a job offer to work in a lab studying proteins associated with tuberculosis in New Mexico. She has decided to spend the summer studying for the MCAT instead, but the offer in itself was a testament to her excellence as a chemistry student.
    Another recipient, who is the first person in his family to go to college, has been able to devote time to researching how nature can be used to develop organic semiconductors that will advance both technology and environmental stewardship. He is one of five graduating seniors who received an Honors Degree in Chemistry, and he was also named an Outstanding Teaching Fellow for his great work as a teaching assistant.
    Our third recipient received two honors this past spring, one for outstanding academic work and another that recognizes students who "create a warm climate among students and faculty" in the department. She has also volunteered as an "ambassador" for the department, doing the very kind of outreach work that we made a part of our program. We received generous contributions from Brad and Mary Andreason and Kennecott, which helped make her tuition waiver possible.
    Our fourth scholar, whose funding will start in the fall, is majoring in chemical physics, mathematics and nuclear engineering: Is it possible to have chosen three more challenging subjects? This summer he is working in the department chairman's lab as as a researcher in electrochemistry.
    We have received wonderful reports about the character, academic merit and financial need of these students, and we have become very fond of them.
   Our scholarship will not have eternal life, but it will have a quality of life that the endowment would have denied it. The glowing, gracious letters we have received from the students we are sponsoring  leave us with no doubt that our financial sacrifice is worth every penny. We are overjoyed by the opportunities they have been able to pursue as a result of our support and feel privileged to be a part of their lives. I only wish that my father could know what we are doing in his name.

(an edited version of this article appeared in the Chronicle Review section of the April 3, 2011 issue of The Chronicle of Higher Education)

UPDATE December 8, 2013:  We have continued to sponsor two Kronstadt Scholars every year (rather than the originally intended one) with full-tuition funding. This has been made possible by the humbling personal generosity of Mary and Brad Andreason -- my sister-in-law, and her husband -- and by his employer, Rio Tinto. The last I heard, the Kronstadt Scholarships were the only full-tuition aid available in the department.
     It's ironic that I am only now learning -- through our Scholars'  wonderful descriptions of their projects -- how fascinating and wide-ranging the field of chemistry is. My father did try to interest me in his work, but I just didn't get it. Sorry, Daddy. At last, I am coming to appreciate the vast beauty of this discipline, and it's exciting to know that we are helping to send these brilliant young adults into the world with all their expertise and aspirations to improve the world.