Ivy League schools have gained a sort
of reputation as a system built for the rich and a pipe
dream for the poor. We're not talking about donating a building
so that a school's more likely to take your son or daughter. We're talking about
deception and fraud. That scandal was all about fraud. But go back to what the attorney
said at the beginning of his sentence. We're not talking about donating a building
so that a school is more likely to take your son or daughter. There's a perfectly legal way
to give big to universities. One place to pool all those funds
from alumni, or really anybody who wants to donate, is in
something called an endowment. There's a lot of money, power and
debt in the American higher education system. I've worked on stories looking
out why health care is so expensive, who gets rich off school
lunches and why college in America just costs so much. But for this video, I wanted to
follow the money through some of the wealthiest colleges in this country. There's billions of dollars piling up
untaxed, and some people still can't afford to go to college. Which got me wondering, where is
all of this money going? When we see charitable donations, the response
is that this is just how a rich person is choosing
to spend their money. It's not just the
rich person's money. There's a significant contribution to their
donation paid by the American taxpayer. These private universities have
a lot of power. Many people want to attend them. They want their children
to attend them. It is not surprising that statistics
show that the donations from alumni are going up spectacularly as their children
reach status as a senior in high school, and then a drop off
after that if they haven't been admitted. And there's no shortage of six,
sometimes nine-figure donations at these wealthy schools. Take Harvard, for example. The Ivy League school
has a big endowment. Not just big, it's huge. Thirty nine billion dollars. For context, Facebook has forty one
point one billion dollars in what's essentially cash. Amazon has $41.2 billion and Coca-Cola has $16 billion. And it's not only schools like Harvard,
even some public schools have huge endowments. Altogether, U.S. colleges have more than $616 billion
in endowment assets, but they only spend about five percent
of that every year. And since most universities are
nonprofits or government entities, those endowments come with a
multi-billion dollar tax break. Neither the public nor the people who
regulate endowments or tax them have a very good idea of what
the purpose of them is. My concern is people seeing these
institutions as islands of wealth that aren't accessible to ordinary people. A lot of universities will talk about
how they don't want to divest the endowment because that's
a political move. But investment is political. Perhaps it would be better for society if
they were to give this money to do some poor black college in the
South that really needs the money badly. Whereas Harvard is rather flush. Wake up and use your endowment
in a more responsible way. And since you aren't doing that,
we're going to tax you. I don't think they should care. It's Harvard's money. Which U.S. college endowment fund is bigger than
the GDP of nations like Jordan, Latvia, Tanzania and others? Well, of course it's it's Harvard. These massive university endowments
are pretty distinctly American. There is a little element I'm afraid
of mine is bigger than yours is. I can afford to keep $30 billion in
the bank and not spend it because I'm so flush. But colleges haven't always had
so much money put away. That's because philanthropy just wasn't as
popular as it is today. It wasn't until the 1800s that
universities got serious about fundraising. If you look at Harvard and Yale as
good examples, both of them were cut off from from state funding
over religious disputes. They had to raise money some other
way and they went to their rich alums and got them to
give them some grants. For the most part, wealthy Americans in
the 19th century kept their money in the family. Then came Andrew Carnegie, one of
the richest men to ever live. In 1889, He wrote an article that
challenged Americans to change the way they looked at wealth. Saying "the man who
dies rich dies disgraced." Then foundation culture took off, and
rich Americans like Rockefeller and Ford began donating millions, endowing
colleges and other nonprofits in the process. High up in a tower in midtown
Manhattan, are the offices of an unique organization devoted primarily not to making
money, but to giving it away wisely. That's the best
argument for endowments. They are a buffer for the operating
budget of the university because the economy goes bad, the alumni stop
giving, the government grants dry up. The problem is that they
aren't used that way. During the Great Depression, Yale was actually
constructing new buildings. But that was thanks to a few
specific donations, Yale's endowment took a hit and the university cut back. What we've seen with endowments is
when there are economic downturns, the schools with those endowments tend to
reduce spending from the endowment in order to conserve
the endowment resources. So if there's a downturn in the
economy, I wouldn't count on Harvard University stepping up to enroll
more low income students. By 1977, the U.S. had nearly $15 billion
worth of endowment assets. Endowments grew very slowly in
the 1960s and the 1970s. Then there was a shift where
the most prestigious colleges, the Harvard's, Yale's, Princeton's and some others started
investing more in things like venture capital stocks
and equity markets. From there, administrations became a lot
more intertwined with the finance world, their endowments became a lot bigger
and the universities became a whole lot more powerful. Ok, so some of the endowment does
go back to the universities, but exactly how it's divided up is left up
to the administrations and sometimes it's controversial. In 2016, the University of Texas system
spent millions on a bunch of empty land with no real plan of
what to do with it. People thought that money could be better
spent on education and UT later backtracked and said it
would sell it. Let's go back to Harvard's endowment. In 2018, most of the money was
put into things like hedge funds, real estate, stocks and bonds. That tiny sliver right there,
roughly 5 percent, that's $1.8 billion. And that's what went
to the university's operating budget. That means things like professors
salaries and financial aid. And schools are paying a lot
more per student these days. In 1977, the top 1 percent of
schools spent less than $10,000 from their endowment for every student. In 2012, that number had
jumped to more than $80,000. But that doesn't necessarily translate into
more people being able to attend Harvard. And some people think they could be
doing more to lower the cost of tuition. It's inconceivable to me that with all
that money you have now, why are raising tuition? They have used the funds that they
have to support more financial aid for low income students to make college
more affordable for those low income students that they do enroll. But again, they enroll so few low
income students that those increases in financial aid are
not that meaningful. When I asked Harvard about this, they said
that student aid covered 1 in 5 undergraduates tuition in 2018 because
their families made less than $65,000. When a person is admitted to Princeton
University, no matter how poor their family was, no matter how hard
scrabbled their upbringing was, they've been admitted to probably
the top 2 percent. They are no longer poor people. They are rich and
advantaged people in prospect. To give them an education for free
that they might otherwise be able to pay for, to some extent is not
redistributing from the rich to the poor, it's redistributing from the rich
to the merely extremely wealthy. Harvard's website does say that it
doesn't use endowments to reduce tuition because, one, they have
to maintain the endowment. And much of it is restricted
or set away for specific projects. Here's the crux of it. Schools have billions of dollars and
they don't just want that money sitting in a checking account. Lots of it is earmarked for specific
projects like a scholarship fund or research in a particular
lab on campus. The rest of the money is invested
to grow the endowment even larger, and that's where things get complicated. Annual endowment reports from elite colleges
like Harvard and Yale grab headlines every year, and the
finance world pays attention. Large endowments are managed by a committee
of investors, often as part of a university aligned
investment corporation. Schools with smaller endowments might not
have the resources to build their own investment team, so they
often outsource the job to money managers with more expertise. With billions of dollars floating
around, endowments and the universities behind them have a
lot of purchasing power. Like when they stopped investing
in South Africa during apartheid. Large numbers of American institutions,
not just university endowments, to withdraw or not make investments in
companies who do business in South Africa helped change the
regime in South Africa. And it's surprising and stunning. I wouldn't have expected it,
but I think it did. The issue of today? Investments linked to climate change. ...fossil fuels, to
its terrible investments... Harvard and other wealthy colleges have
made news for buying up foreign farmland and supporting
fossil fuel companies. If you look at Harvard's mission
statement it's about educating the citizen leaders of the world. How we can be a responsible civic
leaders while still supporting an industry that fuels the climate crisis
is unclear to me. Groups like Divest Harvard work
by organizing students and community members to pressure universities to stop
investing in things like private prisons, Puerto Rico debt or
the fossil fuel industry. Harvard hasn't divested from fossil fuels and
said it should not use the endowment to achieve political ends and
that the university works to influence public policies in other
ways, like through scholarship and research. A lot of universities will talk about
how they don't want to divest the endowment because that's
a political move. But investment is political. Harvard is full of smart
people like other universities. The point at which they will change their
minds, I think, is where so many people mobilize that to say no would
be more damaging to their institution than to say yes. I see the groups as being effective. However, I think it is a much slower
and longer play than I would like or they would like. Brian Bink is a PhD student
on Yale's Advisory Committee on Investor Responsibility, which is a group designed
to help address concerns about Yale's investments. Many schools with big endowments have something
like it in one form or another. For Yale, the standard that we have is that in order to
divest from company, we must see that the company is committing grievous, unethical
behavior that creates grievous social harm to others. That is a very high bar. We have to be able to prove
that they are reaching that bar. An ongoing discussion and I like to bring
up is, are the standards that we are given the right standards
to be operating under? Yale's ACIR doesn't actually get to make the
final call on whether or not to divest. The entire process takes
months, sometimes even years. The people who do have the final say
on how to use the endowment sit on this board. Perhaps the most famous endowment
investor is David Swenson. He's the highest paid employee at
Yale, which isn't uncommon for endowment managers. Swenson's investing strategies have
become known as the gold standard for endowments. In the 1990s, you started getting a big rise in
the wealth of the richest Americans, many of whom are alumni of
the most prestigious schools. Swenson's signature strategy at Yale is
all about investing in more alternative investments, like real estate,
venture capital and natural resources instead of traditional ones
like stocks, bonds and cash. Most people are kind of
in the middle, right? They're, neither aggressively active
nor completely passive. But in the middle you lose because
you end up paying high fees for mediocre active results. Endowment investors from schools like
Harvard and Princeton have followed Swenson's lead. Like when Harvard bought up a bunch
of farmland to secure the rights to the water underneath it. And there is a relationship between
board members who work in the alternative investment space and how
much universities actually invest in those alternative assets. It's tapered off since 2008, but as
Charlie writes, that's because all of the elite schools were investing roughly
60 percent of their endowments in alternative assets. On the one hand, it makes sense, if
you're going to put someone in charge of millions or billions of dollars,
you probably want them to have experience in the industry. But Charlie's research points out how
interlace the world of endowments and private equity are becoming. The financialization of the
charitable sector is a real problem that we have. The financial markets have taken on
a life of their own. And now a lot of the stuff that
they do is just about playing with money in ways to make money for people
who are playing with the money, having nothing to do with the purpose
for which you supposedly exist. It's fairly easy to see how board
members are connected to hedge funds. In a lot of cases, their titles
are listed right in their bios. But it's not so easy to figure
out if they're doing business together. Like when reporters uncovered university
investments in Puerto Rican debt. One major player in that story was
a hedge fund called Baupost Group, which owned almost $1 billion in
Puerto Rican debt under a subsidiary called Decagon Holdings. In 2017, Baupost told The
Intercept they regularly make investments through subsidiary holding entities. And here's the thing, Harvard, Yale
and Princeton all have big investments in Baupost, but it's hard
to find those too. And it's a good example of how there's
just not a lot of transparency in the world of endowments. It's a little easier to look at
public school filings because they have to disclose more of their finances. Like if you look at
UT's audit from 2017. With private schools, it's
a little trickier. For example, I read that
Harvard had this $1.9 billion investment with
Baupost Group. So I searched through Harvard's 990s for
Baupost, came up with a couple hits, but nothing for
that big investment. Instead, I searched for Baupost's address
and that's how I found the $1.9 billion investment under a
company name called HB Institutional. I searched through Yale's 990, they
have one called YB Institutional, and I had to double check
that with Baupost's ADV filings. There's kind of a pattern going on
here, Princeton has a fund called PB Institutional that was also
listed under Baupost's address. All that's to say, it's a lot of
work just to trace back one single investment to a hedge fund. And it's not just Baupost. It's hard to identify any of
the top funds in these 990s. Since it was so hard to find them,
I just reached out and asked the universities to disclose them,
but they wouldn't. Harvard didn't comment on why the
HB Institutional Fund doesn't have Baupost in the name, but a Baupost
spokesperson said while the HB, YB, and PB institutional funds cited don't include
the firm's name, Baupost is publicly disclosed as the manager of
those funds on its form ADV. And that the overwhelming majority of
its endowment clients are invested in partnerships which do
name the firm. You can make a lot of money by managing endowments for universities. You can make big big money. On average, hedge funds charge a 1.4 percent fee on the assets they
manage, even if they lose money. Plus about a 17 percent incentive fee
on all the money they do make. We reached out, but Baupost wouldn't tell
us how much it's making from each client. In 2016, Congress asked universities with
endowments how much they were paying their money managers. A lot of them didn't respond. But Stanford gave a range
that's consistent with industry standards. If you break it down and look
at how well hedge funds compare to traditional assets that don't require
fees, oftentimes universities would have just been better off putting
their money in the S&P 500. Were you surprised that the
performance was that bad? Thank you, Kelly. Indeed we were. A lot of people would say, OK, they
would have done better in the S&P 500. They would've done way better
in the S&P 500. Harvard wouldn't disclose its fee structure,
but a UT system spokesperson said UT is an advocate of the 1 or
30 rule, meaning they pay either a 1 percent management fee or a
30 percent incentive fee. And that 73 percent of UT's
hedge funds use this rule. Let's turn to how it's
taxed or not taxed. Since universities are either
government institutions or non-profits, they get out of paying some taxes. Even if they do have a
few billion in the bank. And the people who give to universities,
even the billionaires, get a tax break for their charitable donations. So say a high income person makes
a $100,000 donation to a college. They can take that $100,000
off their taxable income. And since their income tax rate is
about 30 percent, they essentially save themselves $30,000. After the college admissions scandal, Senator
Wyden said he plans to propose a bill that would do away
with tax breaks for people whose kids are currently applying to college. In response to Senator Wyden's proposal,
UT said it's common practice for donors to contribute generously to their
alma maters or where their children attend college. But that addressing the integrity
in the admissions process shouldn't jeopardize philanthropic
revenue streams. And it's not the first time the
tax exempt status has been under fire. In 2017, nestled in the Tax Cuts and Jobs Act
was a little provision that made Ivy League schools uneasy. A 1.4 percent tax was added for net
endowment income at private universities that meet certain criteria. That'll hit roughly 30 colleges
across the country, including Harvard, Yale and Princeton. It's hoping to tell
universities, wake up and use your endowment in a more
responsible way. And since you aren't doing that, we're
going to tax you. This whole thing has been more
controversial than you might think. Some people say it's just Republicans picking
on what they see as liberal colleges. These universities have tried
to restrict free thought. I think other politicians during the tax
reform debate were trying to get their hands on some revenue and,
they don't like what's happening at universities, in terms of
the liberal progressive bias. The tax is expected to raise $1.8 billion over the next 10 years. I don't really see
the justification for it. It's hard to look at the endowments tax and
not to see an attempt to tap a source of revenue from a
group of organizations that it's easy to criticize. And that's not I think how
we should be doing tax policy. I don't think it does anything to
address the cost of college throughout U.S. society. I mean, Republicans are very eager
to point out in debates about individual income taxes corporate income taxes that it's not society's money. It's an individual household's money and it's a corporations money. Well, you know, it's Harvard's money. I called Senator Chuck Grassley to see
what he thought the tax would accomplish. He talked a lot about schools
needing to do more to help kids go to college. But it was kind of hard to pin
down exactly what that would look like. When I pushed him on it, he said
schools should spend at least 5 percent of their endowments every year. Same rules as other nonprofits. But universities are already spending about
5 percent of their endowments every year, though not necessarily to
help lower the cost of tuition. In March 2018, a group of
university presidents, including those from Harvard, Yale, Princeton and Stanford, signed a letter urging Congress to repeal or amend the endowment tax. I know they are lobbying Congress now to do away with that tax. And if they want us to do away with it, showing us that they're using their endowment money more responsibly for helping kids to go to college, instead of using higher tuition from higher income families to subsidize lower income families. Neither the public nor the people who regulate endowments or tax them have a
very good idea of what the purpose of them is, and as a result,
we don't get very good policy. So there's the issue of climate
change, inequality in higher education, who should get taxed, but what about
the future of education altogether? Will endowments still be the best way
to make sure higher education has money to grow? Technology will change
for higher education. There'll be other ways of delivering
higher education that are better than residential Ivy covered
halls of wisdom. You'll just have a little screen in your
office or a chip in your head or who knows where how it's done. Those endowments will then be used
to perpetuate these great institutions of higher education for a quarter
of a century beyond their useful lifespan. I'd like the universities to
assure me that's not going to happen.
