Why bigger is most definitely better

February 27, 2004

They say size doesn't matter. But for US universities, to be well endowed is everything. A graph in the student newspaper of Boston's Northeastern University once showed a monstrous erect penis representing the scale of Harvard University's endowment, which had then risen to more than $17 billion (£9 billion). In the same graph, a tiny flaccid member, drooping down, indicated the limp progress of Northeastern's institutional wealth, which had dropped from a paltry $511 million (then) to a miserable $465 milion. The point was simple. Where would you rather go?

Harvard, founded in 1636, is the wealthiest university in the world. Nearby Northeastern, a late Victorian foundation, is a perennial also-ran, providing an unimpeachable education for more than 15,000 students, most famously in business management, but with few pretensions to global standing. Until now.

Harvard doesn't have an ambition other than to stay exactly where it is.

Northeastern, by contrast, has initiated its "leadership campaign", aimed at raising $200 million in private support so that the university can "claim its rightful place among the top 100 universities in the nation".

All over the US, university presidents, principals, chancellors and provosts are raising their game. And raising their game means, above all else, raising cash.

Standards are bought and sold in the US in the same way as baseball players. US academia applauds such aggressive determinism. Those who run the nation's 1,500 or so accredited universities and colleges regard them as franchises, in hot competition with each other for the glittering prizes.

Yet US higher education is moving into crisis. Figures on endowments for 2003 released last month by the National Association of College and University Business Officers show that of the top ten universities - all with more than $3.5 billion in endowments - seven are private. Another 29 universities had endowments of more than $1 billion. Most are private.

At the bottom of the heap was Georgia Perimeter College with an endowment of $321,000. The college, more than half of whose 20,000 students are drawn from ethnic minority groups, has an annual budget of less than $90 million and its main focus is on sport. Harvard has a budget of $2.4 billion a year - about times more than Georgia Perimeter. Between these two extremes, the typical endowment was $321.5 million. The average rate of return on investments in 2003 was 3 per cent. Harvard's rate of return was 12.5 per cent.

Who gives all this money? Corporations are the biggest single source of cash, but alumni are collectively just as important. Often, the two overlap.

In 2001, Walter Hewlett, the son of William Hewlett, co-founder of Hewlett-Packard, the computer company, donated $400 million to Stanford University, his father's alma mater.

Reunions at the university, which has charitable trusts all over the world, are serious business. The record attendance for alumni, known collectively as the Cardinal Society, saw 5,440 graduates, plus 2,539 guests, show up for a weekend get-together that included a roundtable discussion on "The power of influence and the influence of power". Estate planning attorneys and other experts from the Office of Planned Giving were on call to give advice and to maximise the tax deduction associated with a gift.

A professorship at Stanford can be endowed for $4 million, while to get a mention or "recognition", you need to give at least $150,000. It is, of course, an expensive business running a big university. Research eats quickly into reserves, but so does everyday living.

Ronald Ehrenberg, director of Cornell's Education Research Institute, which plans to invest $177 million on improving undergraduate housing, says: "The quest to be the best leads to this increasing arms race of spending. In the competition, you fall behind if you stand still."

Back in Boston, the Massachussetts Institute of Technology began its current funding drive in 1999, with a target of $3.5 billion. By January 31 this year, $1.75 billion had already been raised. But spending easily keeps pace, with $744 million spent on research and education, $150 million on professorial chairs, $125 million on undergraduates and student life, and $350 million on postgraduate facilities.

Alumnus David Koch, executive vice-chairman of Koch Industries, recently gave $25 million to support cancer research at MIT.

"I really, truly feel," he said, "that what I'm doing is creating benefits for society and for mankind. And it's really fun being along for the ride, being part of the team that's doing all this great stuff."

Koch's gift will not attract federal capital gains tax and may also avoid state tax.

The race for new funds and new ways of raising cash never stops. The University of Florida is reportedly pondering emerging markets, bonds and hedge funds, while Tufts University is re-examining real estate.

At New York's prestigious Cooper Union for the Advancement of Science and Arts, whose endowment rose by 42 per cent in 2003 to $196 million, an alumni gala evening was held last year featuring an alumni awards ceremony and dinner by a celebrity chef.

Later, Sotheby's auctioned contemporary prints and other artworks donated by graduates at prices ranging from $7,000 to $70,000. "Named" scholarships have been put on offer for gifts of $25,000 or more.

Back at Northeastern, things are not looking so rosy. The average gift last year by alumni of the Graduate School of Business Administration was $20, although across the university the average donation was $584. The total size of Northeastern's endowment fell at the same time by 2.9 per cent, to $410 million.

Getting into the top 100 isn't just about hard work and high grades.

Fundraising and college loyalty are vital to the mix.

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