How universities became hedge funds: what America can tell Britain about the future of higher education.
| Author | Samuels, Bob |
| Position | Commentary |
As Britain debates the future of higher education, it might be helpful to understand what has been happening to higher education in the United States. While America is often cited as a model of how to organise universities, a deeper understanding of the American model reveals the destructive effects of the combination of public de-funding with the adoption of a market-based system. In fact, by looking at recent changes at the publiclyfunded University of California, we can see how Britain may be heading down a path of inequality, inefficiency, and injustice.
Welcome to the privatised public university
In August 2009, just one month after the state of California cut over a billion dollars from its higher education budget, the University of California (UC) lent the state $200 million (Asimov, 2009). When journalists asked the UC president, Mark Yudof, how the university could lend millions of dollars to the state while the school was raising student tuition fees 32 per cent, furloughing employees, cancelling classes, and laying off teachers, Yudof responded that when the university lends money to the state, it turns a profit, but when it spends money on salaries for teachers, the money is lost.
Welcome to the university as hedge fund. In this strange new world, institutions of higher learning care more about interest rates than educational quality. In fact, Harvard cared so much about reducing the cost of borrowing money that it made several expensive credit default swaps, which resulted in the loss of hundreds of millions of dollars and the halting of an ambitious expansion plan (Groll, 2010). Not only did Harvard gamble on interest rates to support future construction plans, but it moved much of its endowment into high risk investments, and the result is that the world's wealthiest education institution is now claiming poverty.
Risky business
Like Harvard, the University of California was seduced by the Yale endowment manager, David Swenson, who inspired universities throughout the United States to shift their investments from secure bonds and treasury notes to volatile equities. At first, schools showed high rates of return in their investment and pension portfolios, but when these investments turned south, the universities lost billions of dollars of savings (Humphreys, 2010). In fact, the UC lost over $23 billion dollars in its combined pension and endowment funds, and this loss will take years to recover.
Of course, universities will say that everyone lost money in the global financial meltdown, but schools like Harvard, Yale, and the UC lost so much more than everyone else because they followed Swensen's model of shifting funds into supposedly low-risk, high-yield assets. Moreover, these schools were pushed to gamble big in their investments in order to keep up with their expensive spending habits. For the fact of the matter is that when these universities were getting double-digit returns on their investments, they continued to jack up tuition, borrow more money, and increase compensation to the top earners. Now that the bottom has fallen out of their investments, they are left with no choice but to eliminate the non-tenured faculty who currently teach a majority of the students. Since it is very difficult to lay off tenured faculty, and administrators are reluctant to get rid of other administrators, the only thing left to cut is the instructors without tenure, and this means courses will be cancelled and class sizes will be expanded. In short, students will be paying more and getting less because big bets did not pay off.
To understand how both public and private research universities have gotten themselves into this mess, one needs to understand five interrelated factors: the state de-funding of public education; the emphasis on research over instruction; the move to high-risk investments; the development of a free market academic labour system; and the marketing of college admissions. These different forces have combined to turn American universities into corporations centred on pleasing bond raters in order to get lower interest rates so that they can borrow more money to fund their unending expansion and escalating expenses.
The defunding of higher education
Starting in 1980, as part of the Reagan revolution and the desire to cut the taxes of the wealthiest Americans, states began to reduce their funding for public universities. In order to counter this loss of funds, public research universities had to look for other revenue streams. They not only raised tuition to make up for the reduction of state support, but also expanded the research parts of their budget.
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