Bacon's Rebellion

The Critical Role of College Endowments

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by

James A. Bacon
in

The economy of the New England states have a lot going against them: High labor costs, high cost of living and high taxes. That’s a deadly combination when it comes to retaining an industrial base, but it hasn’t yet crippled the region’s Knowledge Economy. New England’s secret to survival: World-class universities supported by fat college endowments.

A new study underwritten by the Bank of America sheds light on this little-recognized competitive advantage. Although schools in New England account for 5 percent of the national student body, their endowment assets represent 23 percent of the national endowment total ($62 billion of the total $267 billion in 2004). Endowments in the six New England states generate $3 billion a year for discretionary spending!

It’s not that New Englanders are any more philanthropic than anyone else. I suspect that one could trace the endowments back to the Gilded Era when New England played a leading role in the nation’s economy. Building on the gifts of the era’s super-rich industrialists, universities like Harvard and MIT achieved a preeminence that allowed them to attract the brightest students from across the country. When those students graduated, they dispersed, became successful and donated in turn. As a consequence, New England institutions of higher education have a large and affluent alumni base that continues to donate extraordinary amounts of money — and perpetuates their competitive advantage.

In sum, through the mechanism of fund-raising and endowments, colleges and universities pump human and financial capital into the New England states, shoring up what would otherwise be moribund and uncompetitive economies. No one disputes the importance of building strong universities in the Knowledge Economy, but the critical contribution of endowments and alumni fund-raising is understood only dimly.

In Virginia, the University of Virginia is the only educational institution that comes close to playing in the same league as the New England universities– and even UVa falls short. I would like to know: How well equipped are Virginia’s universities to compete in such an environment? Does state funding and affiliation help or hinder them? Would they be more competitive as private institutions?

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3 responses to “The Critical Role of College Endowments”

  1. Ray Hyde Avatar
    Ray Hyde

    Good observation and good analysis.

    New England does have high taxes, but an associated question is what do they get for their money? Boston has the sort of vibrant culture and transit you often hold up as a model. That transit costs a lot of tax money.

    New England has very little land in conservation easements, but they have a tremendous amount of publicly owned open space that anyone can use and enjoy. This not only costs money, but it contributes to their high cost of living.

    I’m not saying one is better than another, just that things are not always what they seem.

  2. Virginia Centrist Avatar
    Virginia Centrist

    Very interesting study.

    And sure, higher taxes lead to a slight competitive disadvantage.

    But better infrastructure also brings businesses…

    They’re not exactly flocking to low tax states like Tennessee or Alabama – and there’s a reason for that…

  3. Terry M. Avatar
    Terry M.

    Look at the break down of that $62B total. (from the Chronicle of Higher Ed, subscription required, 2004-05.)

    Harvard : $26B
    Yale: $15B
    MIT: $7B
    Northwestern: $4B

    The rest are chump-change in the same range as UVa. These are old, private institutions, so the question about whether state support hinders or helps is valid. The answer is both yes and no.

    For decades public institutions viewed endowments as unnecessary and as something that private institutions do. Fund-raising was not a priority.

    Under Va law, the GA, the administration and agencies (SCHEV) are prohibited from consider funding from private sources in budget decisions. However, the awareness of the existing endowment funds or future funds, is always there in the background.

    The same logic holds true in reverse for potential donors as they do not feel as easily compelled to donate as generously to a state-supported institution.

    One question is what do you want from higher education and should the state be involved in it?

    State-supported higher education has tremendously expanded the rolls of the educated because it made college much more affordable. Please note that the institutions are not known for their low tuition.

    Tuition, Fees, Room and Board at Harvard for this year: approx $42,000. About half of the entering class of freshmen will receive an institutional grant amounting to something over half that leaving Pell, state grants, loans, and family to pick up the rest.

    Even UVa’s total TFRB for non-resident students at only $31K.

    I think the real question is whether the economic impact comes from the value of the endowments and the local spending of the institution or it if it comes from the students they graduate and place back into the economy? Once you answer that question, I think you can then start to think about where to put your money.

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