Higher Education: The Mission Is Money

In two days, two stories have arisen from the world of higher education with interesting implications for America in general and for the "mission" of colleges and universities in particular.

First, Liz Magill resigned her position as President of the University of Pennsylvania on December 9, 2023 after a frankly DISASTROUS appearance on December 5 in front of a US House committee hearing on threats of violence on campus stemming from the Israeli / Palestinian war. Magill was asked a simple question in the hearing: Would calling for the genocide of Jews violate the school's code of conduct?" Magill was unable to answer the question simply and directly. Her answer? If the speech turns into conduct it can be harassment, yes. It is a context-dependent decision, Congresswoman.

Second, an article by Jeanne Suk Gearson in The New Yorker published December 8, 2023 used a historical lookback at the career and influence of former Supreme Court Justice Sandra Day O'Connor to look at an issue virtually no one has addressed in higher education today – systemic discrimination FOR male students AGAINST female students. "WHAT?" says probably everyone reading the story or this commentary. The facts are simple. The standardized tests, grades and extracurriculars of female applicants to colleges have been ahead of males since the 1980s yet only recently have top universities reflected that APPLICATION skew in actual ADMISSIONS. Many still reflect a near-even 50/50 male/female balance even though across ALL public and private schools, females are roughly 60 percent of the student population. "But what about Title IX?" asks the discerning reader. Title IX, enacted in 1972, aimed to require equal access and support of programs within educational programs receiving funding from the federal government. Like many other things in law, the popular understanding of that requirement does not match the actual legal interpretation over the last fifty years. The law does NOT apply to ADMISSIONS policies, only to students AFTER being accepted.

Is there a common thread to these stories? Absolutely.

Public records indicate that Liz Magill was paid $1.2 million dollars in salary as President of UPenn. Clearly, the competitive market for top university leadership demands a high salary, if you believe UPenn's board. So what did the board and school get for its money? A leader who was unable to think on her feet effectively enough to answer a simple question like does public speech calling for a genocide against a particular group violate the school's code of conduct?. That's not a trick question. That's not a particularly difficult logical question. Here's the sequence of logical steps required to answer the question:

  1. Is actual genocide ever justified against ANY group? Uhhhh, NO.
  2. Is the term genocide being used in the context of quoting another party in a discussion? In this case, NO.
  3. Is the term genocide being used in an ironic or sarcastic or satirical sense? In this case, NO.
  4. Is the reference to genocide being discussed associated with its use in public forums to intimidate those in an opposing group? In this case, likely yes.

ANSWER: Yes, it's a code of conduct violation to publicly call for crimes to be committed against another group under the auspices of this university.

The fact that UPenn's $1.2 milion dollar a year President was UNABLE to leap to that conclusion in 0.2 seconds or was UNWILLING to publicly state that conclusion is proof the school was not getting its money's worth from Liz Magill. Of course, that should not be a surprise because the UPenn board seems to have a horrible record on evaluating so-called leadership. Magill was hired to replace UPenn's prior President Amy Guttman, who retired in 2022 to become America's ambassador to Germany. At the time of her retirement, Gutman was earning about $1.56 million per year yet her exit package paid out $20.3 million, reflecting an additional $1.12 million being paid each year of her eighteen year stint.

Despite Magill's poor performance in front of Congress, THAT was not enough for the UPenn board to act. What DID prompt the board to ask for her resignation was feedback from seemingly every large financial donor telling the board wallets would lock shut unless Magill was removed. With that threat, the board acted and pushed her to "voluntarily resign" her position as President and convinced the board chairman Scott Bok to resign as well. However, Magill will retain her position as a tenured professor at UPenn's law school. So clearly, an inability to articulate simple guidance about the appropriateness of calls for genocide isn't a show stopper for retaining a position responsible for educating future lawyers in the eyes of the university.

The feckless, gutless statements made by leadership of UPenn, MIT and Harvard to that House committee on December 6, 2023 are just the most recent indications of how far American's universities and colleges have strayed from their core mission in pursuit of money and prestige. At this point, the only key distinction to make among many of the country's "top schools" is the extent to which the fixation on money and prestige focuses on sports versus lush campuses and influence in government and business.

The New Yorker story about sexual discrimination FOR males in college admissions is a good example of this fixation on money and prestige. Female high school graduates are amassing significantly better resumes than males in every measure. If elite schools competed for students on merit, females would easily be 60-70 percent of incoming students. Why aren't they? Do admissions officers believe males require affirmative action to enter college? Or are wealthy donors putting their thumb on the scales to block "blind admissions" and continue a pipeline of male graduates to inherit executive positions rather than merit them via academic performance and subsequent performance in business?

What's driving the disparity between academic performance of males and females throughout the primary and secondary educational systems of America? Is the purpose of higher education best served by rejecting the existence of this trend and continuing to admit sub-par applicants? Would higher education better serve itself and the country by blindly admitting on performance and using that consequence to incent future generations of students to buckle down and focus on objective performance?

Those are complex questions, but few leaders in higher education seem to be addressing them. Instead, they are focused on keeping alumni happy and keeping alumni wallets open, whether for a new athletic facility for the football team, higher salaries for the coaching staffs, hiring famous researchers at exorbitant salaries into tenured tracks to spice up the school's intellectual reputation or building the next lecture hall or student activity center in honor of a wealthy donor. In contrast, leaders seem to spend little time addressing longstanding issues affecting the day-to-day academic performance of the school such as obscenely low pay for non-tenured professors and graduate students or correcting a disproportionate focus on "publishing" versus actual classroom teaching.

Anecdotally, one of the best actual teaching professors I had in Electrical Engineering mentioned in an office hours conversation with three or four of us students how frustrating it was to devote so much effort to BEING a good teacher with a Doctorate and the loans from an extra four years of school while making only $24,000 a year. This was around 1988. When I graduated in 1990 with a BSEE and MBA, my first job in Corporate America paid $40,000 a year. Nothing has changed in over thirty years. Entry level professors likely make only forty to sixty percent of "going rates" in their field, especially considering their advanced degrees and the salaries in hot fields in computer science, biotech, etc.

One area in which many wealthy schools have made some progress is in the use of endowment money for student tuition. More than a few schools have essentially adopted a "no-loan" financial aid scheme. Applicants still complete financial aid forms, determinations are still made about what the student and parents can afford as yearly cash payments but the balance of the bill for tuition, room and board is essentially eaten by the university. This scheme eliminates an enormous financial and psychological burden on students, freeing them from worrying about racking up $200,000 in debt by graduation. But this new practice raises more questions.

First, enormous discounts / rebates on tuition raise a fundamental economic question. What is the actual VALUE of the education being provided? This practice makes selecting an education about as scientific as selecting a new truck. If Ford sells a truck with a list price of $78,000 but a special incentive program knocks off $25,000 and the dealer offers you $8000 for a twenty year old beater with 180,000 miles, what are you actually paying for the new truck? Is it worth $78,000? Or $53,000? Or $45,000? The same questions come into play for tuition at an elite school. If tuition is nominally $58,000 per year, but average students pay only $11,500 and the rest is outside scholarships or university wavers, how much is the education "worth?" How much of a $62,300 per year tuition bill is just putting a Lexus GX label on a $42,000 Toyota 4Runner?

More importantly, these new tuition aid plans raise questions about endowments themselves. If the average student at a school with $62,300 in tuition was previously only racking up $60,000 in debt over four years, that equates to a aid package of 4 x ($62,300 - $aid) = $60k so aid must be $47,300 per year per student. The new plan would essentially be burning $47,300 for each student per year from the school's endowment. If each class was 2032 students, that's $47.3k x 2032 x (4 classes) or $384 million dollars per year spent from the endowment. A whopping sum of money, right? Well, not if the endowment is $12.5 billion dollars. $384 million is only 3.07 percent of that endowment. The university could spread the $12.5 billion into certificates of deposit into banks across the country earning 3% interest with ZERO RISK and cover that without requiring a dedicated financial management team.

So what else are multi-billion dollar endowments doing for universities? The purpose of an endowment is to provide a "nut" that can be invested to provide a safe, reliable cash stream in perpetuity for operating expenses of the university. Managing the finances of a university boils down to these factors:

  • What is the yearly draw required to fund ongoing operations?
  • What kinds of financial returns can be consistently, SAFELY obtained in financial markets?
  • What kind of inflation / discount factor will apply against those returns

For an endowment to be self-sustaining, the yearly draw from the endowment must be produced by the gain on the endowment. At the beginning of each year, the available funds to invest are equal to the starting endowment minus the yearly draw, [ E – D]. That amount will grow proportional to (1 + g) where g is the gain in investments (7% = 0.07). That amount will shrink back to current dollars proportional to 1 / (1 + i) where i is inflation (3% = 0.03). If real-dollar gains are equal to the yearly draw, the equation becomes:

Net gain = [ E – D] * (1+g)/(1+i)
D = [ E – D] * (1+g)/(1+i)

If the goal is that the net gain exactly equal the yearly draw, an endowment of $12.5 billion and a draw of $500 million would require $12 billion to earn $500 million or a 4.167% real return to operate in perpetuity. So a nominal gain of 7.35% with inflation of 3% would be (1+0.072)/(1.03) = 1.042.

The financial questions administrators must continually weigh listed above are relatively easy to answer. But the lack of any guarantees for returns and uncertainty over inflation over decades means the key questions administrators must continually address involve "the mission." More specifically,

  • How long is this institution expected / obligated to exist?
  • Academically, what is the maximum size and breadth of organization this team is capable of effectively managing?
  • Does that maximum size and breadth still satisfy the defined mission of the organization?
  • Financially, is this organization capable of attracting and retaining people with the financial acumen and ethics required to devise and operate the financial controls required to safely manage BILLIONS of dollars?

That raises the real concern. Why are so many elite colleges sitting on such astronomical endowments? Covering student tuition in full or raising faculty pay to improve the quality of education delivered to the classroom would be a rounding error on the yearly financial performance summary of the school's investment team. Imagine you are on the board of a longstanding corporation with the following profile:

  • the firm has $475,600,000 in yearly revenue selling decorative plaques
  • the "cost of goods sold" includes $384,000,000 in customer rebates
  • the firm employs 4400 workers, averaging $142,000 in salary per year ($624 million total)
  • the firm requires $20,000,000 yearly in capital upgrades to plant and equipment
  • the firm has a treasury sitting on $12.5 billion dollars
  • the net burn per year is roughly $552,400,000 dollars
  • with $12.5 billion, the firm only has to earn a net return of 4.8% to operate in perpetuity.

The statistics above aren't entirely made up. They represent a top twenty private university. So if this university isn't just earning three or four percent on its endowment but six or seven, what happens to its mission as the free cash available in perpetuity GROWS over time? Who is in charge of altering the mission statement as more things become do-able? Who evaluates if THAT particular university should be the one doing something new? If the institution CANNOT find a way to effectively lead a larger mission, what should it do with a growing endowment? What should it tell would-be donors? As a famous scene in Seinfeld once stated so succinctly… People don't turn down money. It's what separates us from the animals.

Administrators at most universities seem bent on growing endowments and growing operations regardless of any understanding of the organization's mission. If the growth isn't tied to the mission, it cannot be tied to anything desirable. It must be tied to one or a combination of things:

  • a desire to control an ever-larger endowment for career reasons
  • a desire to control an ever-larger operation for career reasons
  • a desire to continually enlarge an endowment to support an ever-larger draw to provide a larger margin of error in operating the organization and hide inefficiencies that should be rooted out

There IS a common thread between a horrible PR performance in front of Congress and surprising insights into admissions policies that continue to favor males over more qualified females. Both are the latest examples of leaders in crucial roles who have replaced the true mission of higher education – improving the philosophical, scientific, professional and civic capital of the country – with a focus on preserving money and their control and influence over money.

WTH

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Why was that so hard to articulate? After her gaff, the next University President asked also said it depended on the “context”.

But what sort of a country do we live in?

We have “thought leaders” that openly seek to provoke attacks on public officials, like judges and prosecutors. One proudly waves the banner of “retribution”. One luminary in the debate the other evening said words to the effect “if I see an illegal coming across the border, and I think he might have fentanyl in his backpack, I’ll shoot him dead”.

We live in an increasingly brutish and violent country.

Steve

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