Harvard’s Ex-Chair Joins Yale in Defending Endowments

David Oxtoby, President, Pomona CollegeThe former chair of Harvard’s oversight board—now president of an elite college—has come to the defense of endowment spending policies after a barrage of criticism that institutions hoard their wealth.

“These attacks on endowments reveal both an extremely short-term outlook, and a fundamental misunderstanding of what they do and how they work,” Pomona College President David Oxtoby argued today in a commentary published by the Chronicle of Higher Education.

Oxtoby has joined Yale University in pushing back against mounting calls for greater spending on students, ignited last month by a New York Times op-ed titled “Stop Universities From Hoarding Money.”

Both Oxtoby and Yale addressed the op-ed explicitly, saying it “rested on speculation” (Yale) and its ideas “betray a lack of understanding of actions and consequences.”

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Mandating an 8% annual spending rate for endowments—as Times contributor and law professor Victor Fleischer proposed—would “hold annual institutional budgets hostage to serious market volatility,” according to Oxtoby. Likewise, Yale said its outflow policy “prudently balances” short-term budget needs with a secure endowment value for the long term.

Yet neither response tackled a major thrust of Fleischer’s criticism. Schools not only ought to pay out more to students, he contended, but they should also spend less on asset management.

“We’ve lost sight of the idea that students, not fund managers, should be the primary beneficiaries of a university’s endowment,” wrote Fleischer, a specialist in private equity and education policy. “The private-equity folks get cash; students take out loans.”

That statement doesn’t ring true for Pomona, according to its latest endowment report. Need-blind admission guarantees full funding of “demonstrated financial need,” while private equity represented less than 10% of its $2 billion endowment as of June 30, 2014.

Oxtoby—perhaps cognizant of the fund’s 55%-plus allocation to alternatives overall—chose not to discuss fees in his response.

His leadership experience also includes the very wealthiest school—chairing Harvard’s board in 2013 as the endowment topped $32 billion—which Fleischer explicitly attacked in his commentary.

Rather than get into fees, Oxtoby argued for flexibility more broadly. Pomona and its peers must retain the ability and independence to preserve capital in strong years, thus cushioning for the weak ones, he said.

“When markets drop, we need, if anything, the flexibility to spend even more to provide aid to students and their families,” he concluded.

State pension funding is on the rise after “the best year since the recession,” according to new research from Loop Capital Markets.

The firm’s 2015 review of public pension funding found that most state pension plans are gaining ground, with funding levels on average increasing in 2014 compared to the previous year.

“2014 was the best year for state pensions since the recession,” wrote Chris Mier and Rachel Barkley, managing director and vice president of Loop Capital, respectively.

The median funded level for the 50 states and District of Columbia grew to 71.5%, up from 69% in 2013. The mean funded level in 2014 was 73.1%, compared with 71.9% the year prior.

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Despite the increases, only Washington, DC, South Dakota, and Wisconsin were found to be fully funded, with five states recording funded levels above 90%. A total of 18 states had funded levels greater than or equal to 80%, an increase from 14 in 2013.

However, while a total of 33 states increased funding in 2014, 16 states continued to fall further into pension debt. These states declined enough to bring the overall national funded level down from 73.1% in 2013 to 72.6%.

Worst off is Illinois, which remained stable over the year at 39% funded.

Over five years, 30 states have lower funded levels, with Michigan declining the most from 79% in 2010 to 61% in 2014. Funding for Kentucky, New York, and Pennsylvania dipped 14% over the same time period.

Meanwhile, Maine and Oklahoma had the largest five-year gains, with each seeing their funded level increase by 15%.

Despite negative outliers, the report concludes that pension health is improving overall, based on the number of states experiencing annual increases in funded levels. The 33 states with improved funding in 2014 represent a climb from 19 in 2013 and just five in 2012.

According to the review, 14 states have now reported increasing funded levels two years in a row—a possible indication of continuing growth in the future, Loop Capital said.

US State Pension Funding Map Source: Loop Capital Markets