Bacon's Rebellion

Hey, It’s Still Cheaper than Harvard

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by

James A. Bacon
in

An enduring theme of Bacon’s Rebellion is the escalating cost of higher education. Higher ed is both a vital institution in our society — and out of control. I recall reading that tuitions are rising at the rate of eight percent this year (sorry, no source) — not just in Virginia’s public universities, which are compensating for the supposed miserliness of the General Assembly, but throughout the nation.

The cost of attending Harvard has reached about $42,000 a year. Remarkably, this most prestigious of institutions maintains this exorbitant fee even as its endowment surges in size, reaching $25.9 billion in 2005 — or roughly $1.3 million for each of its 19,500 undergraduate and graduate students. Invest that $1.3 million per student in U.S. Treasuries, and you’d generate income of about $65,000 a year. (Clearly, no matter how much money you give this particular university, it will never be enough.)

Of course, Harvard is known for the acumen of those who manage its endowment. The university has invested a significant percentage of its portfolio in hedge funds, an investment category that has been generating higher returns than normal stock market indices — and much more than the five percent example used here.

Now, it seems, other universities are eyeing the outsized investment returns of Harvard and Yale, and they’re pumping their endowment money into hedge funds, too, according to a May 3 article in Business Week (and forwarded by alert reader David Kaplan). The risk is that hedge funds are now the “hot” investment category, they’re attracting billions of dollars in capital, and that too much money is now chasing too few opportunities. As in any other financial bubble, the late-comers will end up with sub-par returns — if they don’t lose their shirts outright.

I would be very interested in knowing the extent to which Virginia educational institutions are investing their endowments in hedge funds. I recall reading that the University of Virginia has done quite well by emulating Ivy League investment strategies — not that a booming endowment has been reflected by a moderation in tuition price hikes.

What concerns me is what happens if the hedge funds go bust as a category and endowments take a hit. Will Virginia university boards use that as an excuse to jack up tuitions even more aggressively? Heads we win, tails you lose?

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4 responses to “Hey, It’s Still Cheaper than Harvard”

  1. Frank Avatar
    Frank

    Jim, keep in mind that the public institutions have submitted six-year plans that specify their intended range of tuition increases. Further, they are required to revise these every fall and submit them to SCHEV.

    While this does not prevent the possible scenario you describe, it does provide a yardstick against which to measure their actual behavior against their intended.

    As to higher ed costs being out of control, I don’t know if that is really true. I do know that every year both congress and the general assembly add unfunded mandates to higher ed, both in terms of reporting and lately, curricular additions.

    For example, the VSP will receive additional funding and 15 positions to track sex offenders, while all colleges, public and private, will have to report names, ssns, and addresses of all admitted to the VSP, prior to enrollment,to allow a background check against state and federal sex offender databases. The institutions will receive no additional support for this work. Yes,it is a minor addition, but 20 years of minor additions add up.

    and by the way, there is no requirement that anyone notify students, or admittees, that this background check will be run. Thus, the privacy of 200,000+ plus students a year will be violated in the hopes of catching 3500 improperly registered or unregistered sex offenders.

  2. Jim Bacon Avatar
    Jim Bacon

    Terry, the issue of unfunded mandates and regulations is a legitimate one… sort of. I have no doubt that universities labor under a mountain of government-imposed red tape. So do private companies. But very few private companies have the pricing power in the marketplace to push through increases for core products/services of three percent to five percent per year adjusted for inflation.

  3. Frank Avatar
    Frank

    Jim, you might be correct…but, keeping in mind that IHEs are primarily driven by human resource costs…and that there is a state policy to achieve the 60th percentile of faculty salaries for each institutional peer group…and that IHEs also spend fortunes on technology, compare costs in other sectors that are primarily driven by personnel costs.

    For example, have hourly rates for lawyers working medium and large firms, remained flat since 1980? Have they climbed at the rate of inflation?

    Healthcare costs have also climbed…uncontrollably some might same. It may simply be that higher ed is an expensive industry.

    And going back to the faculty salary issue – any idea what every other public and private instutional goal for faculty salary is? Yep, 60th percentile (with a few exceptions like stanford which is seeking the 80th). Nice system, ain’t it?

  4. Jim Bacon Avatar
    Jim Bacon

    Terry M, you’ve nailed it — academia is a labor-intensive business and every institution sets the goal of exceeding the industry average in pay. It’s a never-ending treadmill. What universities are not doing effectively is finding ways to increase labor productivity — to harness technology or introduce new business models that teach more effectively. As long as the money keeps rolling in, why should they?

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