Where Does the Money Go? The Victors for Michigan Campaign and the University’s Dirty Secret

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Today, the University officially kicks off its newest fundraising campaign, Victors for Michigan, aiming to raise the ambitious sum of $4 billion through private donations. Two of the campaign’s stated goals are to “guarantee that a diverse group of the world’s brightest students will be able to study at Michigan,” and to “serve the public good by collaborating on bold new ideas to solve the world’s most challenging problems.” But can we really trust an administration that is increasingly run by wealthy business interests to make the university more diverse and more affordable? Why would these financial interests want to “serve the public good”? What do they even mean when they say that?

Despite the recent publicity stir, Victors for Michigan has been accepting donations for about a year now. The recent contributions by real estate magnate, Steven Ross and Berkshire Hathaway Vice Chairman, Charles Munger, respectively, are part of the campaign. If we analyze how the funds from these two donations are being used, we can gain a better understanding of what the real goals of the campaign might be. Ross’s highly publicized $200 million donation went entirely to two places: the football team and the business school. Sports are great: they provide students with an opportunity to relax and relate to each other. At the same time, Michigan has one of the only football programs in the country that turns a profit and the team is already very well funded. Surely the money would have been applied more productively if it were used to lower tuition or fund scholarships.

If the goal of the campaign is truly to “serve the public good” then why accept a donation to the already well-funded business school? Isn’t it the business class that has destroyed the environment, corrupted our democracy and created massive levels of inequality? If the goal is to serve the public good, Ross’s donation could have gone to faculty, students and programs studying social justice and environmental sustainability, among many other areas in need of funding. Ross—who is the campaign’s chair—clearly isn’t committed to its “goals.”

If Ross’s donation is problematic, Munger’s is baffling. A billionaire oligarch, Charles Munger recently gave $110 million to build an unneeded—and unwanted—graduate student dorm based on laughable blueprints that would stuff seven people into every apartment. If you are a graduate student, or if you know anyone who is, then you know that most are adults who do not want to live in dorm-style apartments. Beyond that, the predicted price tag of a room would be $1000; this is 77% of what a GSI earns in a year teaching at the University. Even more outrageous is the fact that the university is taking out $85 million in bonds to finish the project and borrowing against undergraduate tuition. All of this so Munger can have his name on a building. How does spending $185 million on this ridiculous project promote the public good or make the University more affordable?

In the end, the university’s rationale for the campaign relies heavily on a narrative of state defunding. For example, as a Detroit News article relates, “President Mary Sue Coleman called the campaign ‘audacious’ and said no gift is too small since universities need philanthropy with states no longer able to support them to the degree they must for schools to be globally competitive.” This narrative seems difficult to square with the actual role of the endowment in funding university operations. The endowment contributes only 4.5% (of its total holdings) to the general operation funds of university each year. The principal stays invested. Thus, if we look at the breakdown of revenue sources at the university in 2010 the endowment contributed only $253 million. Student tuition however generated over $1 billion, while state funding totaled $315 million.

The endowment clearly has very little to do with making up for lost state funding. Its purpose lies elsewhere. And that elsewhere is in the university’s move to behave more and more like a hedge fund, mobilizing donated capital to secure new revenue streams. It does this by taking advantage of its tax-exempt status to build up a hoard of money that it then invests around the world in shady funds and places it would rather the university community did not know about. In so doing, the university is slowly becoming an important player on Wall Street but to play with the “big boys” it needs more and more capital, which requires constant fundraising campaigns. This money is destined for investment not students. Little of it will ever reach students in the form of scholarships or be used to offset increases in tuition.

This then is the dirty secret of the university: the real money that circulates through it is primarily student tuition and, as a result, student debt. No number of high profile or “mom n’ pop” donations is going to make that fact disappear. Why? Because to lower tuition significantly without making major changes to its business model (i.e. stopping its construction spree or eliminating costly administrative bloat), the university would have to raise between $500 million and $1 billion in donations every single year for the rest of its existence.

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14 thoughts on “Where Does the Money Go? The Victors for Michigan Campaign and the University’s Dirty Secret

  1. This writer doesn’t understand how endowments work. The University is NOT competing with Wall Street, it is using Wall Street to generate money for the endowment so that steady streams of $253 million can be expected each year. A large principle is REQUIRED in order to generate the yield that can be used appropriately by a University of this caliber. And in-case you didn’t realize that is nearly equal to the sum of money provided by the state, so your argument there seems a little off.

    Also an individual’s money should go wherever they want it to go. Would you have faulted Ross for not donating any money at all? I think not, or at least not in the same way. In fact doesn’t a donation to a population of already well off students seem a little ridiculous when there are starving children around the world? On that note making blatantly false accusations of the business students “ruining” society and the environment is absurd and uncalled for.

    Personally I pay for my tuition all by myself, without the help of my parents, funded by loans to support my out-of-state bill. While I am the first person to agree with an improved financial aid system at the University, you cannot blame any of this on the donations that we are receiving from generous people.

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  3. The author has a very simplistic view on the finance of the university.

    The endowment has distributed billions towards unit funds, endowed professorships and student scholarships. Every dollar that comes from the LTP is one less dollar that the students have to pay. In the last decade, the school has actually been able to increase the net cost (tuition less financial aid) of a U-M education at a rate UNDER inflation over the last 10 years despite a >50% cut in state allocations (inflation adjusted per student) in the last 10 years. This wasn’t accomplished though magic, it was the endowment and donations. The LPT and private support is absolutely critical if we hope to maintain the academic competitiveness of this university.

    I also wanted to respond to your suggestions, namely that the University should “stop the construction spree”. I would agree with you that the university is engaged in a lot of construction, but what would you expect? Entering the new millennium, U-M was filled with aging and drastically out of date infrastructure. Right now, interest rates are at an all time low, U-M has the highest credit rating possible, and donors are donating hundreds of millions towards building renovations. Michigan would be absolutely insane if they didn’t start building like crazy. In fact, if I had my way, the university would take out a little extra short term debt to renovate at an even faster rate, but that’s just me. Anyways, it’s important to make clear that this spurt of investment in infrastructure is temporary. It will almost certainly slow down in the next couple of years.

    With regards to your suggestion of eliminating costly administrative bloat, I totally agree. The university has taken excellent steps to address this (as well as non-administrative bloat) over the last couple of years. Michigan recently finished an extremely successful consolidation of IT services and is now undergoing a similar process for HR to keep up with similar universities like Yale and UC Berkeley who are also taking steps to increase administrative efficiency. Michigan spends about 8% of the general fund on administrative units which is definitely pretty good, but any improvement would be great.

    • “Every dollar that comes from the LTP is one less dollar that the students have to pay.”

      same trick fat cat administrators love to pull — talk about revenue, leave out expenditures. like the fact that lots of those dollars coming in go straight into new managerial positions and executive salaries. tuition has more than doubled since 2000, and even taking inflation into account it’s risen by half again. net tuition is problematic because it doesn’t take into account specific circumstances, or the fact that so much aid these days goes to wealthier students.

      This wasn’t accomplished though magic, it was the endowment and donations

      read the post, dude. the endowment contributes relatively little to the general fund, significantly less even than the state.

      now who is it who’s got a very simplistic view of the university’s finances?

      • ” tuition has more than doubled since 2000, and even taking inflation into account it’s risen by half again”

        I wasn’t talking about tuition, I was talking about net cost. Net cost is the total of money collected from tuition subtracting the financial aid budget divided by the number of students. To only look at tuition is horribly deceptive, especially when U-M has been growing the financial aid budget at an unprecedented rate. Michigan could easily reduce tuition by thousands of dollars per student if they rid themselves of financial aid. It would look great politically. Imagine, Michigan reduces tuition by 15%. Wow, sounds great. Unfortunately, it’s nothing more than political pandering, and would put the average student in an even worse situation. Net cost is what we want to reduce here, not tuition. Net cost HAS risen at a rate lower than inflation over the last decade.

        “net tuition is problematic because it doesn’t take into account specific circumstances, or the fact that so much aid these days goes to wealthier students.”

        I don’t know what “net tuition” is, but if your talking about net cost, this particular problem is not really seen at Michigan. U-M has always had a sensible financial aid disbursement strategy, and the university offers way more towards need-based aid over merit aid when talking about pure proportions over the vast majority of other public universities. You can look at the sample financial aid packages given by family income here http://www.finaid.umich.edu/TopNav/AboutUMFinancialAid/SampleAidPackages.aspx Needless to say, a lot of money goes to financial aid. It would be a huge misrepresentation of the facts to just pretend it doesn’t exist.

        “like the fact that lots of those dollars coming in go straight into new managerial positions and executive salaries”

        There are very logical reasons why U-M will make sure that executives have competitive pay. If we can get an official who is just 1% more effective at their job, it can have an impact of millions of dollars at the university. As a student myself, I have no problem if part of my tuition goes to retain the slightly higher paid administrators at Michigan over another school. It’s simply a cost benefit analysis, business 101. If we increase revenue/decrease expenses by $3 million through a brilliant decision made by an executive being paying 100k more in salary, the university benefits $2.9M. Now I’m perfectly aware that this is a simplistic example, but this DOES happen, just in more complex situations. It’s important for the university is aware of the market value of officials when it attempts to recruit top talent. Other universities are aware of these simple facts as well, and actually try to steal (sometimes successfully) U-M’s executives from within the university. If we wont pay them their market value (or at least close to it), other institutions will. I could write for days on what i think about the public sector/non profit salaries, but if you are honestly interested in my viewpoint , you should check out this TED talk http://www.ted.com/talks/dan_pallotta_the_way_we_think_about_charity_is_dead_wrong.html . The speaker perfectly mirrors many of my view on the matter.

        “the endowment contributes relatively little to the general fund, significantly less even than the state.”

        Well, yea. The endowment contributes almost nothing to the general fund, but it contributes hundreds of millions to the expendable restricted fund which assists the general fund in operational expenses. Why does it matter the name of the fund? It’s still used for the mission of the university.

        The endowment will on average generate >$400M per year in purchasing power over inflation (>$100M over state aid). Of course, given the very sensible goals layed out by the regents last year to prioritize long-term stability of the funds, the university takes out a little less than $400M (closer to ~$360M) on an annual basis. The $250M number that the article provides was in the heart of the recession. It’s not really a surprise that the university didn’t want to pull out as much money as usual especially considering the endowment lost about 30% of its’ value the year prior. Your not going to convince me that $360M isn’t a lot, because it is. It works out to well over $8,000 per student per year. The endowment brings in a lot, and the university wouldn’t have the reputation and academic strength it does today without it.

      • Good job, deleting my reply. Gotta love the openness to critical thinking and alternative opinions.

  4. Hi Michigan Administrator! Thanks for joining the discussion! Sorry it’s taken us awhile to comment. We’ve been doing a lot of organizing work recently!

    So derp is pretty much right about this one. There are a bunch of problems with your argument. First of all, not only has tuition gone up in inflation-adjusted dollars, but so has “net tuition” or “net cost,” whatever you want to call it (do a Google search, people use both terms). This is part of a general trend across public four-year universities in the US: http://www.insidehighered.com/news/2013/10/23/colleges-slow-tuition-growth-financial-aid-not-keeping-pace-report-shows. That article shows that financial aid is not keeping pace with tuition growth, even taking inflation into account. By the way, if you want your argument to be taken seriously, show us some data.

    Second, the category of “financial aid” obscures more than it clarifies because it’s not a non-cost. As you well know, since you linked to the financial aid packages at U-M above, they include not only grants but also student loans (i.e. debt) and work-study (i.e. exploitation). Just because your “financial aid package” covers full tuition, you’re still going to be paying it back for years to come. And the students whose families are low-income (i.e. whose package includes the most grants that they don’t have to pay back) make up an increasingly scarce percentage of the student body on campus. Between 2000-2010, the percentage of students whose families make over $200,000 has increased from 18.4% to 27.6%, and most of that increase was taken out of students from the lower economic brackets. We covered this in our recent Teach-In (http://michigandaily.com/news/teach-and-strategy-session-combat-financialization-university?page=0,1) — you should’ve come!

    A couple more points. Either you don’t really know how the endowment works, or you’re being purposefully misleading. Your claim about it being the “heart of the recession” is wrong because the endowment’s payout is averaged over a period of seven years (it used to be five). You should try looking at some data, such as the most recent budget (sitemaker.umich.edu/obpinfo/files/fy_14_all_campus_grey_book.pdf‎): in 2013-2014, far from the “heart of the recession,” the endowment contributed only $277 million. And in any case, the point in our piece still stands: the endowment contributes a relatively small amount of money to the university’s operations. Less than state support, and way less than student tuition (or research funding, for that matter).

    You write, “Your [sic] not going to convince me that $360M isn’t a lot, because it is. It works out to well over $8,000 per student per year.” Aside from your numbers being wrong, that’s not how it works. For example, a quarter of that money goes to the Health System right off the bat. If your argument is that without the endowment student tuition would’ve gone up slightly more, then okay, but not only has tuition continued to rise, outstripping financial aid and inflation, the endowment comes at a huge cost — it ties the university increasingly to Wall Street, opening us up to the kind of crashes and instability that, as you acknowledge, hit us hard during the crisis.

    Keep your TED talks to yourself (and your econ 101 class),
    SUM

    • “Hi Michigan Administrator! Thanks for joining the discussion!”

      Most certainly a student. Perhaps an unusual one who happens to know a quite bit about the budget, but still just a student.

      “First of all, not only has tuition gone up in inflation-adjusted dollars, but so has “net tuition” or “net cost,” whatever you want to call it (do a Google search, people use both terms)…. By the way, if you want your argument to be taken seriously, show us some data.”

      Not at Michigan it hasn’t. If you want, you can look through the budgets over the last 10 years, look at the number of students, the money collected from tuition, the financial aid allocations, and the value of the dollar and you can come to the same conclusion. All of that data is public record. I did it sometime last year for the FY03 – FY13 data and I’m not willing to do it again as it took way too much time. If you aren’t interested in checking either, you can still take a look at page 9 in http://www.vpcomm.umich.edu/pa/key/budget/documents/FY14GF-BUDGET-RPRESENTATION.pdf .The official budget presentation doesn’t include inflation into their calculation, so their statement isn’t quite as broad as mine, but it still illustrates the same point. Michigan has been doing a tremendous job in keeping NET COST down.

      “Second, the category of “financial aid” obscures more than it clarifies because it’s not a non-cost. As you well know, since you linked to the financial aid packages at U-M above, they include not only grants but also student loans (i.e. debt) and work-study (i.e. exploitation). Just because your “financial aid package” covers full tuition, you’re still going to be paying it back for years to come….”

      True, it’s a bit nebulous, but counting financial aid is much much more representative of the truth than ignoring it. There will always be some error, but it shouldn’t be all that large as long as you compare allocations over medium and short term periods of only a couple of years or so. The fact of the matter is that financial aid budgethas been increasing at a ridiculous rate ever since it became a huge priority at the university. It has routinely seen annual increases of about 4 times the rate of inflation. To ignore that investment would be ridiculous.

      “Your claim about it being the “heart of the recession” is wrong because the endowment’s payout is averaged over a period of seven years (it used to be five). You should try looking at some data, such as the most recent budget ”

      Nope. The 7 year averaging process is used exclusively to create a maximum cap on the amount the administration can distribute. Michigan almost never pulls the maximum. The cap used to be a 5% pull on the 7 year average, but right after the recession hit it was lowered to a 4.5% pull on a 7 year average.

      Michigan has had an average annual rate of return of 10.2% over the last decade which given the current $8.75B value of the endowment, would lead to about $875M in expected returns in the next fiscal year. Once you include inflation, it would still generate in excess of $600M of purchasing power. I admit, my ~$360M pull was a bit optimistic, but it was based on the fact that Slottow was expecting U-M to almost hit the distribution cap in FY2015, and the fact that the endowment has done a tremendously good job at increasing it’s value. Going back to the distribution cap, next year’s will also be quite a bit larger than FY14’s.

      So I’ll take the time to amend my previous statement. You’re not going to convince me that $600M in purchasing power per year isn’t a ridiculously large amount, because it is. It works out to well over $13,500 per student per year.

      If anything, you should be arguing that distribution policies should be changed to give more emphasis on the present, because your current argument that the endowment doesn’t have the ability to contribute much is absolutely insane.

      “Aside from your numbers being wrong, that’s not how it works. For example, a quarter of that money goes to the Health System right off the bat.”

      Well, obviously. My $8,000 (or amended $13.5k) per student per year figure was to give you a sense of scale, not to imply anything in the way of how it was distributed. The endowment is almost completely filled with completely restricted funds. Whether one of these funds endows the repainting of fire hydrants or if it’s used to generate financial aid in perpetuity, they are all benefiting the university.

      ” If your argument is that without the endowment student tuition would’ve gone up slightly more, then okay, but not only has tuition continued to rise, outstripping financial aid and inflation”

      Net cost adjusted for inflation HAS DECREASED in the last 10 years. This is a fact. Period. If you think we could say the same if we didn’t have an endowment, you are very very wrong. You have evidence to disprove me? Well then, go through the budgets and present it in your next article. You are the one publishing these. The burden of proof is yours. Posting random articles about general trends in higher education is not sufficient.

      “the endowment comes at a huge cost — it ties the university increasingly to Wall Street, opening us up to the kind of crashes and instability that, as you acknowledge, hit us hard during the crisis.”

      Sure, investing has some risk, but what alternative would you suggest? The endowment is an imperfect solution to a very real problem. Even considering it’s imperfection, I can guarantee you, we are WAY better off with it than without it.

      “Keep your TED talks to yourself (and your econ 101 class),”

      Oh, so you no longer think I’m an administrator? Darn. Shame you didn’t like the TED talk, I thought it was quite good.

  5. Just a couple of points. First, on tuition, net cost, and financial aid. Hate to disappoint you, but you’re still wrong. Just to reiterate, tuition has been consistently increasing in both absolute and inflation-adjusted terms. So has net cost for the average student. The weakness of your argument, predictably, is the part of our argument that you completely ignored. It’s true as you say that net cost has decreased for some students — those coming from the lowest income brackets. They get a great deal! But there’s less and less of them. The class composition of the student body has shifted drastically since U-M shifted to the “high tuition, high aid” model in 1997. As we noted in our previous comment, between 2000 and 2010 the portion of the student body whose family income was $200,000 and above increased from 18.4 to 27.6% of the overall student body. And we just found some data that allows us to push the comparison back to 1997 (http://www.crlt.umich.edu/gsis/StudentProfileDatafor2007.pdf). In 1997, students whose family income was $200,000 and above made up just 14.8% of the student body. From 1997 to 2010, then, that number has nearly doubled. Similarly, if in 1997 the portion of students whose family income was $75,000 and below was 38.5%, by 2010 it was 26.5%.

    It’s true that net cost adjusted for inflation has decreased for the neediest students, but as U-M has shifted to what is essentially a for-profit funding model these students are increasingly being pushed out of the university. In other words, the university is channeling slightly more money to fewer and fewer students. Likewise, while it’s true that U-M has increased spending on financial aid — far from “a ridiculous rate” — the majority (and an increasing proportion) of that money does not go to the poorest students but rather functions as “merit aid,” targeting wealthier students to lure them in, since U-M sees itself as competing with other elite universities for rich, out-of-state students. In other words, focusing on the quantity of money while ignoring how it’s distributed, as you do, is at best useless and at worst manipulative. As documented in the recent report, “Undermining Pell: How Colleges Compete for Wealthy Students and Leave the Low-Income Behind” (http://newamerica.net/publications/policy/undermining_pell):

    “Another school that has shown disappointing results is the University of Michigan at Ann Arbor, which also enrolls a relatively small share of low-income students (16 percent of students receive Pell Grants) despite providing generous amounts of need-based aid. In 1997, the state of Michigan freed the university to pursue a high-tuition, high-aid model. But 10 years later, the university found that it was enrolling 10 percent fewer students from families making under $75,000 than it had previously, and 8 percent more from families making more than $200,000. University officials said they believed that many financially needy students have been scared off by the institution’s higher prices. While this may well be the case, it’s also true that the school aggressively uses merit aid to recruit students, regardless of their need. The University of Michigan awarded merit scholarships to 46 percent of its freshmen in 2010-11, averaging nearly $6,000 per student.” (p. 24)

    Another way of visualizing the same shift is increasing student debt. If net cost were actually going down overall, you would expect to see the student debt numbers going down as well. But they’re not. At U-M, nearly half of the student body graduates with student debt, and as of 2010-2011 the average debt load was $27,644. Now it’s true that, as the administration loves to declare in its talking points, that from 2009-2010 to 2010-2011 the percentage of students who graduate with debt actually dipped slightly, from 46% to 44%, but even that decline still represents a significant jump from before the massive tuition hikes. In 2000-2001, just 38% of the student body graduated with debt and the average debt load was $16,024. http://college-insight.org/#topics/go&h=d592e5dabca46b2b1db539eb1d539091

    Now, regarding the endowment. It’s not exactly clear how you’re disagreeing with us — the payout from the endowment is set at 4.5% (previously 5% as we both have pointed out) averaged over a period of seven years. (FYI when the cap was 5% they used a five-year average, not seven as you claim.) They do it that way so market fluctuations don’t radically affect the payout from year to year. The reason we made that argument was because you claimed, wrongly, that the reason the payout was low in 2010 was because it was the “heart of the recession.” That continues to be wrong. Again, the bottom line is that the endowment contributes a relatively small percentage of operating costs — less than state funding, and way less than tuition. In 2013-2014, the endowment contributed $277 million, the state $279 million… and student tuition $1.2 billion.

    Finally, your predictions about future returns on the endowment are problematic because the endowment has not performed increasingly well every year. A sample size of ten years is not “forecastable” in the way the university’s CFO would like us to believe, especially because the global economy is in such bad shape. The chances of another major crisis are much higher than not, so even if you totally believe in the administration’s propaganda your argument doesn’t make sense. The university should be protecting itself against future crisis, not barreling right into it. It’s like the old poker adage: if you look around the table and don’t see the sucker, get up, because its you.

    Here again, your focus on the quantity of money, while completely overlooking how it’s distributed, is at best irrelevant and at worst manipulative. You write, “Whether one of these funds endows the repainting of fire hydrants or if it’s used to generate financial aid in perpetuity, they are all benefiting the university.” That’s wrong. Luxury dormitories are not a “benefit.” Higher salaries for upper level executives are not a “benefit.” Defining what “benefits” the university isn’t some neutral act where you just tally up some numbers — it depends on your vision of the university, what you want the university to be. Now, you may not be an administrator (here’s one place where you’ve actually convinced us — this dialogue has revealed that your grasp of university finances isn’t quite solid enough), but you seem to share their vision of what the university is and should be. You, and they, want a for-profit university that serves an ever whiter and ever richer student body, that increasingly depends on hyper-exploited adjunct labor while expanding, cancer-like, the already bloated ranks of high-level executives and managers. We obviously don’t.

    • I just wanted to let you know that you STILL don’t understand the concept or inner financial workings of a Trust Fund or an Endowment, which are essentially the same thing with different titles. If I wasn’t spending time with family right now I would post a lengthy rebuttal to your argument. In the mean time I will say that Michigan Student/Man/Troublemaker has been so much more correct than you have throughout your posts on this fallacious article that it is frustrating to read your erroneous responses over and over again. But don’t worry, next time I am bored, I will point out exactly why you are wrong, with MANY sources to back both myself and Michigan Student up.

      And just so you are aware, I am VERY frustrated with the University from a financial perspective, but most specifically the Financial Aid department. The Fin-Aid group is run by a bunch of people who, pardon my rude blanket assumption, were never good enough to work at a legitimate tax accounting firm.

      Now that the small rant is out of the way, which clearly wasn’t targeted so much at you, I wish that the facts would be straight for the general student public. So as little readers as you may have, those who do read, I hope read the responses so they do not go around uniformed on these very important matters.

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