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Colleges or investment firms?

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When I was doing research for this column, I noticed an Atlantic article entitled “Rich, Stingy Colleges.” Intrigued, I clicked on it, and a picture of Parrish lawn in the springtime filled my computer screen. So a good start for my writing process, but less so for Swarthmore. One of the major developments in higher education over the past few decades has been the ballooning of university and college endowments, concentrated mostly at the top. The top 4 percent of colleges and universities in the U.S. control 75 percent of all endowment wealth. Harvard’s endowment stands at $37.1 billion, with growth at a “disappointing” 8.1 percent last year — returns around 10 percent are more typical. Swarthmore’s is a comparatively measly $2 billion, but the per-student endowment is the third-largest in the country. You would think that larger endowments would mean more money for aid. But tuition costs continue to rise and tuitions remains difficult to pay for many working and middle-class families. The evidence points toward universities and donors who have no clear sense of mission, who prioritize wealth accumulation for its own sake, and who have shown a consistent inability to constructively reform themselves.

The general political mood seems to be turning against elite universities. In one of the very few instances where I agree with him, Donald Trump proposed a tax on the largest endowments, and the House Ways and Means committee sent a letter to 56 colleges and universities asking what composed their endowments and how they spent them. Universities retort that while their endowments may be exceedingly large, they can’t spend it all, only the return they get every year. This is partly true: many donors demand that their gifts be “in perpetuity” with only the returns spent. But while returns frequently hover around 10 percent, colleges spend only a fraction — Swarthmore only spent 3.7 percent of its return last year, according to the Atlantic. The rest goes back into the endowment. And schools often use hidden “administrative fees” to shift donor money into unrestricted funds. According to the James G. Martin Center, a university charging a 1 percent fee — like Rutgers — would earn triple the endowment of the original gift over 75 years, while only being obligated to spend the yearly earning on what the donor intended, not the fees or any of the original endowment. And much of the money not deposited directly back into the school’s “slush fund” is not spent on the pressing needs of financial aid. R.R. Reno, writing in First Things, notes that Princeton could spend $75 million of its endowment income to provide full scholarships to the quarter of students who receive financial aid. Which sounds like a lot of money, until he notes that Princeton’s average yearly income is $1.1 billion. Money goes into ever-expanding rosters of associate deans, fancy new dorms and landscaping, and other non-essentials. In an egregious example, Yale spent $480 million on hedge-fund managers for its endowment and $170 million on financial aid in 2015.

College presidents like to say that this helps create a rainy day fund for emergencies and maintains financial stability over time. But at least at the top level, endowments have grown beyond any reasonable “cushion.” Attempting to justify its $7 billion endowment, Duke University president Richard Brodhead claimed that the fund allowed Duke “to weather near-catastrophic situations, such as the crisis of 2008, when the … endowment lost 25 percent of its value.” Going from $7 billion to about $5 billion hardly seems like a near-catastrophe, and anyways, the Martin Center for Academic Renewal reports that in times of financial downturn, schools are far more likely to hike up tuition and slash payroll than actually spend their endowment. Focusing on the very long term is also a strange sort of reasoning. That kind of uber-conservative financial planning may be fitting for a trust fund, but schools have pressing near term obligations to invest in faculty, students, and educational resources. A $1 million gift may generate a 50,000 dollar scholarship every year, but spending it all at once, on many scholarships, will drastically increase access and create greater chances for more donors. The short term is preferable here, not least because more immediate graduates means a drastically higher chance of more gifts, sooner. Or if a university invests heavily in successful research, the payoff could come even quicker. Maybe some schools could even shore up declining humanities departments. After all, the point of college is education and research, not determining who can run the biggest hedge fund.

There are many useful proposals for reform in this area. One basic step would be subjecting the wealthiest universities to the same rules as other tax-exempt nonprofits and mandate they spend at least 5 percent of endowments on their “mission” — in this case, education, tuition, and research. Congress could also tax endowments that don’t spend, say, a quarter of earnings on aid for poor students. Even as universities report increases in aid, “the share of poorer kids in elite schools hasn’t much improved over time,” according to researchers at Stanford. Schools like Harvard enjoy comfortable majorities of students from the upper-middle and upper classes, while admitting just enough low-income and minority students to morally justify themselves. Of course, these two groups by no means necessarily overlap. More radically, donors and government could push for expansion of elite schools. Enrollment at the Ivies, for example, has risen marginally even as per-student endowment has skyrocketed and inequalities between the top and everyone else has grown. Why not have Dartmouth open a campus in Detroit, or Pomona and USC expand to the Central Valley? And if these schools’ traditional applicants turn up their noses at these locations, I’m sure there are plenty of local kids who’d be willing to go. It is absurd how little enrollment at top schools has grown relative to the country’s population, and if they don’t wish to expand core campuses, then satellites are an even better option.

Donors also have a role to play. The list of major gifts in higher education over the past few decades is overwhelmingly filled with big names: the Ivies, NYU, Northwestern, UChicago, and others. If you give hundreds of millions of dollars to an already elite school, as Phil Knight did for Stanford, there might be nicer buildings that are named after you, but not much will change. If you gave a $100 million to, say, Fresno State two hours south, the marginal benefits will be far larger and reach more students as well. In his podcast Revisionist History, Malcolm Gladwell tells the story of Henry Rowan, a wealthy industrialist who chose to donate not to his alma mater MIT, but to tiny Glassboro State. Asked to contribute $100 million dollars to MIT’s $750 million capital campaign, he realized that the 100 million would have much more impact at an underserved school. MIT, unsurprisingly, did just fine, and Glassboro was able to dig itself out of bankruptcy and build an engineering school.

Maybe that’s too much of a stretch, but places that receive tax exemptions and subsidies should at least try to function as the civic institutions that are meant to receive this kind of help.

Moving the cultural power now concentrated in certain schools to a more diverse swath of institutions would be better for this country — a diversification in student bodies, greater geographic dispersal, and more parity between the best and the rest would make the educational landscape a far healthier — and more interesting — place. Our tax dollars shouldn’t go toward expanding the gap between the top and the bottom, between (some) urban centers and everywhere else; they should be working towards unity in a culture that is increasingly polarized. Maybe putting some “liberal snowflakes” in West Virginia, or “redneck bigots” in Chicago would go a ways towards closing the gap.

New tax bill is harmful to many aspects of Swat life

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Currently, the nation is engulfed in a political and economic debate about the new tax bill that the Senate passed at 2:00 a.m. last Saturday. Though there are still two different versions of this controversial bill in Congress, both have serious consequences that affect the college’s budget, students, employees, and alumni due to an excise tax, repeal of the college’s tax-exempt status, and a tax on graduate students’ stipends.

One of the main parts of the bill that affects the college is the excise tax on college endowments. In the House version, the tax will apply to colleges that have an endowment of $250,000 or more per student. The Senate version has raised this to $500,000 per student, and according to vice president for finance and administration Greg Brown it applies to 27 colleges, including Swarthmore.

Economics professor John Caskey made some rough calculations of the financial effect of this tax. Since excise tax is 1.4 percent of the college’s earnings from the endowment — approximately $100 million per year — the college would have to pay $1.4 million every year. This money would be cut from the college’s operating budget, which is $163.3 million for 2017-2018. Over half of the college’s budget comes from endowment income.

Brown noted that one million dollars is about 20 scholarships, assuming they are $50,000 each. Caskey estimated that this kind of cut to the budget would be equivalent to letting about five professors go, which would also mean the loss of 16 courses per year.

“This would hurt students,” Caskey said. “Obviously, your selection of courses is smaller and the class size gets larger.”

According to Caskey, this could potentially affect prospective students’ college selections of colleges, but since the college’s competitors are facing the same tax, it will likely not make a difference. While the cuts to the budget would still be significant, Caskey said it is unlikely that the college would cut academics that severely.

The second part of the bill that would affect Swat is the removal of the tax-exempt status of colleges’ bonds, which is only present in the House version. This part of the tax plan would not only apply to wealthy, elite colleges but every college and university in the country. This means that if the college borrows money at an interest rate of 3.0 percent without tax exemption, it would effectively be borrowing at a rate of 3.5 percent due to the added tax premium it would have to pay. Because borrowing would become considerably more expensive, the college’s construction projects would be affected.

“That costs a lot of money,” Brown said, referring to the higher borrowing rate. “That’s serious for us.”

Unlike the excise tax, which would take effect immediately, the consequences of the change of the tax-exempt status would take effect gradually because it only applies to new debt that the college will acquire. According to Caskey, the college’s current debt is $250 million.

“If you assume [the debt level] continues, the loss of the tax-exempt status of the college’s bonds would probably raise the cost of the college’s borrowing by about half a percentage point … Over time, gradually, that would end up costing the college about $1.25 million per year,” Caskey said.

If the House bill passes, this cost would be in addition to the $1.4 million per year paid on the excise tax on the endowment.

The bill also increases the standard deduction, which is an amount of money that reduces a person’s taxed income if they donate money to charity. Caskey explained that currently, the standard deduction is $6,350 ($12,700 for a married couple), but under the new law, it would be raised to $12,000 per person ($24,000 for a married couple). Because of the higher standard deduction, people are less likely to itemize their donations when filing taxes. This reduces the incentive for people who would otherwise donate to give gifts to the college. Caskey noted that the college “is likely to see a decline in donations.”

Though he could not say for certain what the loss of money would be, he added that it is concerning to the college.

The combined effects of these parts of the bill would significantly impact the college’s finances. Over time, 10 to 12 years from now, with the combination of the excise tax and the loss of tax-exempt status together, there would be about $2.5 million cut from the budget each year. Caskey suggested that the college might have to cut from academics, libraries, sports teams, or the Dean’s office. Questions have also been raised about cutting financial aid from students.

“The college doesn’t want to do that, and they have a need-blind policy, but there are

other ways they could do it while maintaining need-blind,” Caskey said, though he added, “I don’t think the college is going to do that sort of thing … They could but they wouldn’t.”

However, it is still undecided where the cuts would apply.

Brown said, “I haven’t made any specific recommendations on that yet … If we’re looking at several million dollars a year on a $160 million a year budget, we would have to look to slow down some of the things that we’re doing. And based on our institutional priorities, make reductions in the budget … Right now, I think we’re running fairly lean, so any cuts I think will be seen and will hurt.”

According to Brown, Swat currently gives its employees benefits that includes money for their children’s or their own college education, but under the new bill, that money would be taxed.

“That becomes taxable income for [employees] instead of a benefit. The word I would use for that is unfair, and I think it goes against the values of our institution,” Brown said.

A highly controversial portion of the tax bill is the new tax on graduate students’ stipends, which has caused walkouts at universities across the country. This tax would affect recent Swat graduates who are pursuing their Ph.D.s or any current Swat student who would like to obtain a Ph.D. in the future.

Raehoon Jeung ’17, who is getting his Ph.D. in bioinformatics and integrative genomics at Harvard Medical School, said many graduate students are concerned about this change. Currently, graduate students receive a stipend for doing work, but it is not equivalent to a job because students don’t actually see the money and don’t get any significant savings from it.

“From what I’ve heard, we would be paying around $10,000 extra tax per year if the bill passes. Then, I will no longer be self-sufficient … If the analysis that I read in articles are accurate, the impact is very severe. We would go from being barely self-sufficient to being reliant on loans or help from parents as in college,” Jeung said in an email.

Jeung also said that had he known about the tax bill before attending graduate school, it would likely have changed his mind about getting a Ph.D., and he believes that it will influence students who would have otherwise attended graduate school.

“With this new plan in effect, the opportunity cost for choosing to go to graduate school [for a Ph.D.] is too high. During the 5-6 years, we are foregoing chances to earn more money, and now we would also be accumulating debt,” he continued.

This development is concerning to the college’s administration as well.

“For our government to basically say that furthering your education and furthering our ability to create the scholars who are going to come up with the solutions for future problems is very short-sighted,” said Brown. “It will discourage smart people from going to graduate school, who should go to graduate school. And it will discourage creativity and entrepreneurship.”

The college administration views the new tax bill as a serious threat to the college’s educational mission. On Nov. 13, President Valerie Smith sent out an e-mail to students outlining the damages that the new bill would inflict upon the college.

In the letter to politicians in Washington that she added to the e-mail, President Smith wrote:

The cumulative result of these tax changes will be losses in jobs and national economic health; educational access and quality; innovation and discovery; and American global competitiveness … This will directly harm students and their families.”

For many students on campus, the larger aspects of the bill would affect their family’s finances. According to Brown, about one-third of students from the class of 2021 who receive financial aid — 56% of the class — come from families who earn $60,000 or less per year.

“Almost a third of our financial aid students come from families who are in that lowest income bracket. And yes, I think they would be harmed by this bill,” said Brown.

He also cited another part of the House version of the bill that is damaging to Swarthmore students’ ability to pay back loans.

“Student interest is no longer deductible, so if you borrow for your education, you currently get a tax deduction for paying back that loan. Under this proposal, you wouldn’t get that,” he said.

Within student political groups on campus, there is also opposition the bill, particularly on the part of the Swarthmore Democrats, which held a flash phone bank on Tuesday to contact Pennsylvania representatives in Washington.

“The tax plan is ridiculous,” Abby Diebold ’20,  “Basically the entire Democratic party is aligned with Swat Dems in this instance.”

Diebold also said that while she wouldn’t characterize the parts of the bill such as the excise tax that target wealthy, elite schools like Swat as “anti-intellectual,” the effects on higher education are a problem.

“I think that our biggest issue with [the bill] is that academic institutions are the only corporate-type organization that is not having their taxes cut … taxes on the endowment and higher institutions are going up, and that doesn’t make any sense,” Diebold said.

Jorge Tello ’19, the new president of the Swarthmore Conservative Society, said that though there has not been a formal meeting to discuss the club’s position on the bill, opinion among the members seems to be mixed. Some, like Tello, oppose elements of the bill such as the excise tax while some support it in its entirety. Tello said that he doesn’t see enough strong arguments for the excise tax.

“Personally I’m against it as well,” he said. “I think my main concern with it is that I don’t understand what the main purpose of taxing endowments is because … I think there’s better ways to achieve [helping low income students], like possibly setting a percentage of the endowment that they have to spend on [those students]. Because that was one of the main arguments for it, that it would use more of its endowment on helping low income students.”

Caskey said that though he is personally against the excise tax, which specifically targets wealthy schools, he can’t find a strong enough argument against it.

“We’re an extremely privileged place … Is it unfair that we have to reduce our privilege?” he said.

Though it is true that the college is a privileged institution and will remain privileged compared to other colleges, there are other elements of the bill, particularly the House version, that will have a significant effect on the college’s finances as well as on current students and alumni. If the bill passes with any of these changes to the taxation of higher education, Swarthmore and its students will likely have to face financial problems, whether they are personal or in the college’s budget.

Increase of Restricted Donations to the Swarthmore Fund

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The Swarthmore Fund, which contributes to the college’s operating budget, consists of both restricted and unrestricted gifts by donors. In recent years, gifts to the college are becoming increasingly restricted. Young donors especially are increasingly restricting their philanthropy. Although unrestricted gifts allow for more flexibility in the college’s budget, restricted donations are important in supplementing the Swarthmore Fund and do not hinder the college’s ability to use funds, according to Assistant Vice President for Finance and Controller Alice Turbiville.

“An important part of the college’s budget is made up of both restricted and unrestricted gifts. Although the endowment provides the most significant portion of  the college’s funding, these gifts are vital for the running of the college.”

“Gifts to support the budget include the Swarthmore Fund and some federal and state
Support,” reads the Operating Budget Summary from 2016. “Given our reliance on endowment spending to support our operating budget, particularly in turbulent financial markets, we continue to strive to maintain the delicate balance between current needs and intergenerational equity.”

When donors give gifts to the college, they have the option of restricting where and how the funds will be spent. Restricted giving can significantly change the way in which a gift will be used. According to Zain Talukdar ’19, a Phonathon worker, restricted gifts are one of the many ways in which a donor can give to the college.

“Restricted gifts fall under one of the many categories that pay for the Swarthmore Fund,” said Talukdar. “Rather than allocating to the general pool of money, money is allocated to a specific group and counts as a restricted gift.”

The Swarthmore Fund is vital in supporting activities and providing opportunities for Swarthmore students. On the Swarthmore College website, the Swarthmore Fund is identified as the primary way in which the college supports present student needs, whereas the endowment ensures the long-term sustainability of the college’s goals. This means that gifts to the Swarthmore Fund go towards financial aid, staffing needs, and summer mentoring programs, among other things. According to Turbiville, restricted giving provides support in specific areas of the college’s budget.

“Restricted donations can provide the college with much-needed support for specific areas of the budget such as student financial aid,” said Turbiville. “These donations do not necessarily make it more difficult to use funds, depending on the donor agreement, but endowed gifts certainly impact the timing of the use of the gift.”

Unrestricted donations can have a broader and more flexible role in funding the college. These gifts allow the college to use funds wherever they are needed and can have the most immediate effect due to their flexibility.

“Unrestricted Swarthmore Fund gifts provide the college with the most flexibility for use of the funds and have an immediate positive financial impact,” said Turbeville. “Unrestricted gifts account for approximately $5 million of budget support, which is less than 5 percent of annual operating costs.”

According to Fritz Ward, senior associate director of marketing, the national trend of donors giving restricted gifts has become more common in recent years. This trend is reflected in the proportion of Swarthmore donors restricting their gifts. Five years ago, 9.2 percent of the Swarthmore Fund donors gave restricted gifts, while last year, this percentage rose to 13.4 percent.

“Over the last 20 years, there’s certainly been a national trend of more donors choosing to identifying a specific area for their philanthropy,” said Ward. “We have seen an increase at Swarthmore that reflects this trend as well, but the vast majority of Swarthmore Fund donors, 86.6 percent last fiscal year, choose to make unrestricted gifts, which provides the college with the greatest flexibility.”

Although the trend of restricting donations is increasing, Talukdar reports that the majority of his Phonathon experiences have involved unrestricted gifts to the Swarthmore Fund.

“People from my experiences don’t give restricted gifs that much,” said Talukdar. “Basically in a year and a half of working at Phonothan, I think I’ve had two restricted gifts.”

The college has been working steadily to increase the philanthropy of young alumni. The Swatober Young Alumni Challenge, which concluded on Monday, was one such way to do so. This challenge matched each donation made to the Swarthmore Fund by young alumni with a $100 contribution to the Swarthmore Fund by the Board of Managers. The challenge managed to raise a total of $24,000 between October 24 and 31, according to Ward.

“The college has been moderately successful in our efforts to engage our young alumni philanthropically,” said Ward. “The college’s goal is to engage young alumni in a wide variety of ways, which includes everything from young alumni events to career services support to volunteer opportunities to philanthropy.”

One significant difference in the philanthropy of young alumni is the higher rate at which they restrict their gifts than other college donors. This is reflective of a national trend in increased gift restriction among younger donors, according to Ward.

“In the fiscal year of 2016, approximately 19.9 percent of young alumni designated their gift, while 11.5 percent of the rest of the alumni body did so. In the fiscal year of 2015, 14 percent of young alumni designated their gift, while only 9.5 percent of the rest of alumni did so,” said Ward. “The percentages vary year to year, but it’s consistent that a higher percentage of young alums designate their gifts than the rest of the alumni body.”

Many explanations exist for the increasingly restricted philanthropy of young alumni.

“There are a number of reasons often cited for this trend, from differences in generational attitudes to an increase in giving options, but one reason we see young alumni restricting their gifts at Swarthmore at a higher rate than the rest of alumni body is simply due to the relatively brief amount of time that has transpired since they graduated,” said Ward.

Gifts are often restricted, so that donors can ensure that their philanthropy goes towards an area they are especially passionate about, such as specific departments, clubs, or athletics. Young alumni often retain a stronger connection to the campus because of their recent graduation, and they are more likely to identity with certain programs, professors, or groups that they wish to support.

Although Talukdar rarely runs into restricted donations during his Phonathon work, he believes that restricted giving is important for young alumni engagement, and it can provide an opportunity for increased giving.

“To some degree, alumni are entitled to give to whatever they want to give to,” said Talukdar. “I think people would be more likely to give to the school if it was a restricted fund, so they know what it is going towards.”

While restricted philanthropy is on the rise among recent graduates, it remains an important contribution to the Swarthmore Fund and plays an integral role in supporting students, groups, and programs on campus.

Swarthmore should follow Yale’s lead, divest

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On April 12th, Yale’s Chief Investment Officer David Swensen announced the school’s decision to partially divest its endowment from fossil fuels. Swensen cited not ethical reasons, but financial prudence, as the top motivator behind the decision. Yale’s divestment came after Swensen asked their investment managers to consider the potential risks that investments in coal and oil pose to their endowment. One of the firm’s founders said they agreed climate change and carbon pricing were “unknowable risks and fossil fuel producers with significant carbon footprints were declining businesses, a profile the firm preferred to avoid.” Yale’s divestment is only the latest example of college and university endowments divesting in exactly the way Swarthmore’s Board of Managers claims is impossible.

Yale’s decision to withdraw $10 million of their remaining investments in the fossil fuel industry came after months of conversation with Yale’s external investment managers about the risks of continuing to invest in coal and oil. Swensen noted that “a few managers held positions we felt were inconsistent with our principles. Thermal coal miners and oil sands producers are two of the obvious industries that would suffer if regulation imposed the social cost of the carbon emissions on producers.” Two of Yale’s external managers maintained investments in industries incompatible with Yale’s principles, but Swensen prompted both managers to sell their holdings in oil and coal.

Yale saw a 11.5 percent return on their endowment in fiscal year 2015. Yale’s endowment is highly regarded as one of the best performing college endowments in the country. That Yale’s Chief Investment Officer has ruled divesting from fossil fuels financially prudent should not be taken lightly by Swarthmore, and makes clear that there is a strong financial case for divestment on financial grounds as well as moral political ones.

Swensen said that Yale’s endowment currently maintains only minor exposure to the oil and coal industries. But as the Yale case exemplifies, divestment is a process, not a leap that is taken overnight. Swarthmore could easily start taking small steps like asking our managers to move investments away from risky fossil fuels and identifying managers with funds in line with our financial and moral principles. This could begin the process of eliminating the financial risk posed by fossil fuel investments and taking the crucial step of revoking our support from an industry that is incompatible with a sustainable future.

This month, a slew of divestment victories means Swarthmore stands increasingly alone in refusing the call to divest. This past Monday, the University of Ottawa also joined the ranks of institutions committing to divest from fossil fuels. On April 12th and 13th, a total of 43 students were arrested for sitting in for divestment at University of Massachusetts at Amherst and Harvard, prompting UMass President Marty Meehan to state, “I want to make UMass the first public university in the country to divest our direct holdings from all fossil fuel companies.” On April 15th, one year after students were arrested for taking nonviolent direct action for divestment, the University of Mary Washington passed a motion to maintain a portfolio that is 98% divested from the largest 200 fossil fuel companies. Students have since begun sit-ins and taken direct action at Columbia, Vassar, NYU, Northern Arizona University, University of Montana, and James Madison University.

In order to successfully avert runaway warming and to meet the goals laid out at the Paris Climate talks, more than 84% of current fossil fuel reserves must stay in the ground. This means there is a “carbon bubble,” and that there will be a severe devaluation of fossil fuel stocks as we make the necessary transition away from fossil fuels. We are already witnessing this effect. Peabody Coal, the world’s largest private sector coal company, filed for bankruptcy early this month citing an “unprecedented industry downturn.” If carbon assets are not stranded in the very near future, then the future holds approximately 4.5 degrees of warming or more, according to the IPCC. Not only will this mean a devastating loss of human life, but it will also almost certainly entail a collapse of the global economy—and Swarthmore’s endowment along with it.

While members our Board of Managers questions the effectiveness of divestment as a tactic, the fossil fuel industry takes it quite seriously. Prior to filing for bankruptcy, Peabody Coal listed the fossil fuel divestment movement as a significant risk to their profitability in their annual Form 10-K report, warning that fossil fuel divestment “may adversely affect the demand for and price of securities issued by us, and impact our access to the capital and financial markets.”

Yet somehow, despite a community mandate from the majority of the student body, a historic faculty resolution in favor of divestment passed last May, as well as a letter signed by Noam Chomsky and six other honorary degree recipients. Swarthmore’s Board has continued to stand on the wrong side of history by remaining invested in fossil fuels. This may be less surprising in light of the connections Swarthmore Board members have with the fossil fuel industry. Rhonda Cohen is a director of Glenmede, a financial manager founded on the Sun Oil Company fortune. Cohen, along with Harold Kalkstein and Sam Hayes have past and present connections to over $3 billion in investments in fossil fuel companies.

The urgency of climate change means we must do everything in our power to move away from the carbon economy that is poisoning our planet and harming frontlines communities. Not only do we have a moral obligation to divest, but as Yale’s actions would suggest, a fiduciary one as well. Sparked on our campus five years ago, the movement to divest from fossil fuels has since catalyzed the divestment of funds totaling over $3.4 trillion by more than 500 institutions worldwide. We call on the Board of Managers to follow the example of these institutions and begin to divest our endowment of fossil fuels. Swarthmore must revoke its support of a destructive and outdated industry and invest in a just and sustainable future.

Works Referenced



Administration holds finance and spending presentations

in Around Campus/News by

Since Feb. 1st, the administration has been holding meetings about the financial component of the college’s operations. On Jan. 18th, Vice President for Finance and Administration Greg Brown sent an email to all faculty, students, and staff announcing a series of information sessions entitled “Budget Essentials” that would be presented by representatives from the college’s financial and investment offices. The purpose of the presentations was to provide for greater campus awareness about how the finances of the college operate. Enrollment for the meetings was limited and meant to represent the stakeholders in the college — professors, students, staff members and administrators all attended. Presenters have included Brown, Vice President for Development and Alumni Donations Karl Clauss, and Chief Investment Officer Mark C. Amstutz.

The presentations have focused on different aspects of the college’s finances: the first, held on Feb. 1st, gave an overview of how the college makes its annual budget, while the second, held on Feb. 8th, detailed how Swarthmore’s $1.8 billion endowment is managed.

The third meeting, postponed by a week due to inclement weather last Monday, will give information about how financial aid is funded.

According to Brown, The “Budget Essentials” presentations came about because of a perceived interest in the fine details of how the college’s finances operation.

“During my brief time here, I’ve noticed considerable interest among faculty, staff, and students regarding how our finances work and how budgetary decisions are made on campus,” Brown said.

Brown explained that previous presentations about the finances of the college have occurred — including at the coffee talk with the Dean and ad hoc faculty and Manager committees — but were smaller and less comprehensive.

“I’ve had the opportunity to provide a broad overview of the ollege’s financial picture to students, staff, and faculty in other settings, and I’ve found that there’s a strong desire within our community to learn more about these subjects,” said Brown. “The Budget Essentials program evolved from these earlier outreach efforts.”

Details about the college’s finances were disseminated during the meeting. For example, Chief Investment Officer Mark Amstutz revealed that an early investment of $200,000 in Facebook eventually earned the college $30 million. At another point, Brown showed that in the last ten years Swarthmore has spent significantly less in absolute terms on new buildings than its peer institutions — Swarthmore spent half of what Amherst spent and only a quarter of what Williams spent on buildings.

Students have welcomed the presentations but maintain concerns about financial decisions the college has made.

Jeremy Seitz-Brown, ’18, who attended the meetings, said he found them helpful and hoped they would provide a forum for community members to voice their opinions about the budget.

“I think this Budget Essentials program is much needed and am glad that the finance and investments office is offering it. I think the structure of the class has been pretty good, and I hope that the class attendees are given clear avenues to make their voices heard on budget matters at the conclusion of the class,” Seitz-Brown said.

Seitz-Brown also noted, however, that the presentation about how the college used its endowment made him concerned about the college’s priorities.

“One concern is intergenerational equity; it seems like the college hadn’t been spending enough from the endowment compared to peer institutions. It sounds like endowment spending will move closer in line with peer institutions, though, as the number of incoming students on financial aid increases and as the college invests more in building projects on campus,” said Seitz-Brown. “We may offer students a great education, but how could we invest in and do more business with local communities? How could we align the endowment’s investments with our values?”

Brown hopes the program continues and expands in future years.

“Depending on the level of on-going interest, we plan to offer the Budget Essentials program once or twice per year, so that the community can become more engaged and more informed about our budget and related processes,” he said.

Attendees of the event have expressed significant interest in the final presentation regarding how financial aid is budgeted, scheduled to be held this coming Monday at 4 p.m. in Bond Hall.


Board of Managers decide not to divest

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Following two days of meetings and deliberations, the Board of Managers announced that they have reached consensus against divestment from fossil fuels, according to an email sent by Chair of the Board, Gil Kemp, just after 4:00 this afternoon.

Kemp cited the Investment Committee’s investment guidelines – established in 1991 after the college divested from apartheid South Africa – which state that the endowment is intended to preserve the robust endowment of the college well into the future, rather than make a social or political statement.

This decision comes despite the 44-2 decision of the faculty in favor of partial divestment as well as the month-long sit-in led by Mountain Justice outside of the office of Greg Brown, Vice President of Finance and Administration at the college, which ended in late April.

Professors question endowment spending policy

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In light of recent articles by the New York Times regarding Swarthmore’s unwillingness to divest from fossil fuels and its limited commitment to the promotion of socioeconomic diversity, the college’s endowment has been under increasing scrutiny from both internal and external critics. Last year, an analysis conducted by Cambridge Associates, a financial advising firm that specializes in endowment management, published data indicating that the college spends the endowment at a lower rate than most private colleges and universities with comparable and even smaller endowments. This media coverage prompted some members of the college community to conduct their own analyses, revealing further concerns, particularly whether or not the college is spending enough of its endowment on present students and whether or not this is revealing of chronic intergenerational inequity.

According to the National Association of College and Business Officers, the market value of the college’s endowment as of June 30th, 2014 was $1.88 billion, a 14.8 percent increase from the previous year. This growth — which represents an aggregation of donor gifts, investment gains and losses, endowment management fees, and withdrawals to fund institutional expenses — outperformed that of many financially comparable institutions including Williams College, Wellesley College, Harvard University, and the Massachusetts Institute of Technology.

Furthermore, the college has consistently received AAA certification from the financial ratings services Moody’s and Standard & Poor’s, indicating the highest degree of financial stability. The Moody’s report states, “the AAA rating reflects the strength of Swarthmore College’s financial resources and liquidity, as well as its prestigious reputation and position as one of the most selective liberal arts colleges in the nation.” This liquidity refers to the $586 million of unrestricted cash — reserves that may be used instantly for any purpose — that the college possessed as of June 30, 2012.

The college’s considerable financial security is perhaps more profound given the immense volatility of the market over the past decade. Since 2004, the college’s endowment has increased by $797 million or 43 percent, notwithstanding the effects of the 2008 financial downturn. This growth rate puts the college financially in the company of much larger universities such as Princeton, Yale, and Stanford. Still, some worry that the magnitude of the college’s endowment could actually be evidence of financial mismanagement.

Given the college’s impressive financial profile and clear capacity to fulfill its financial obligations, some faculty members are concerned that the college is not spending nearly enough of its endowment. Worse is the potential that this trend of conservative spending has been occurring for decades.

“The endowment has grown faster than the budget has grown during this period,” explained Peter Collings, professor of physics and a member of a recently established committee assessing the college’s endowment spending practices. “This is an indication that every year a larger fraction of the budget comes from the endowment. Still, we have spent less than a large majority of other institutions, including ones with large endowments.”

According to Mark Kuperberg, professor of economics, who has studied the endowment extensively, the average rate of return on the endowment over the past 10 years has been around 8.9 percent, while the growth rate of the budget has been only 2.72 percent. The analysis conducted by Cambridge Associates LLC explained that most colleges and universities expect to average between 5 percent and 7 percent in annual returns, indicating that the college’s endowment is outperforming peer institutions.

For the past 10 years, nearly half of the college’s annual operating expenses have been supported by the endowment. Given the growth of the endowment and stability of the budget over this period, there appears to exist some inequity in endowment spending from one generation to the next. According to Kuperberg, if the college had been spending a higher rate of its endowment over the past 40 years, but maintained the same percentage of budget support from the endowment over this period, it could be in an equally secure financial position today but could have spent considerably more on previous and present students.

“Future generations are very well-off, but in some sense it’s on the backs of present generations,” Collings agreed. “That can’t just happen and everyone will think it’s hunky-dory.”

According to Collings, the high rate of return on the endowment coupled with the college’s conservative spending practices indicate that the college is more concerned with protecting the real value of the endowment for future generations than it is with making sure the endowment meets the needs of present students.

“The college could have a much higher take-out rate than it currently does,” explained Kuperberg. “Basically the story is this: we take out a lot less than our guidelines, and other schools generally take out more than our guidelines.”

According to Greg Brown, vice president for finance and administration at the college, the college aims to spend between 3.5 percent and 5 percent of its endowment each year on operations. This rate is calculated annually based on a number of factors, including expected returns on the endowment, the predicted inflation rate for the year, and the endowment’s market value. The college’s primary goal in establishing these spending guidelines is to ensure that the endowment will be sustainable in the future and that the operations needs of the college can be met in the present. Despite the upper bound of 5 percent for this guideline, the spending rate has never exceeded 4.5 percent.

According to Kuperberg, there are two major problems with the calculation for endowment spending guidelines. First, it ignores the impact of gifts, which provide 1 percent of the endowment annually. Kuperberg believes that this added 1 percent should increase the midpoint of the spending guideline accordingly to 5.3 percent. Second, Kuperberg believes that the data being used to make these calculations is not contemporary or relevant because it does not focus enough on the successes of recent years. Because of the stock market’s favorable performance over the last ten years and how little the college’s budget has grown, Kuperberg has calculated that the college could be spending its endowment sustainably at a rate of 7.2 percent per year.

“If everything going forward were to happen like it has in the last 10 years, you could take out over 7 percent forever,” Kuperberg said.

Collings agreed that the college could be taking out far more of the endowment than it already does. He cited the analysis conducted by Cambridge, which stated that the average private college or university in the U.S. spent their endowment at a rate of 5 percent per year in 2013. Cambridge surveyed over 300 schools including Swarthmore, and on the whole, most institutions — even those with smaller endowments than the college — spent their endowment at a higher annual rate than the college did. Collings worries that the college’s efforts to spend conservatively and ensure endowment growth are in some sense depriving present students from facilities and services to which they should have access.

Kuperberg agreed.

“The key here is really how little our budget has grown,” he said. “If you look at the endowment support to the budget ratio — so how much of our total spending is supported by the endowment — it’s increasing … It was something like 25 percent in 1960 and now it’s 49 percent, but if you think about all these kids in the middle, they got less than students now.”

Part of the reason the college has adopted a generally conservative spending policy is due to the high portion of the operations budget that is financed by the endowment. While operating in this manner means that the college shoulders many of the costs that might otherwise be borne by students, the market-value based policy, which dictates how the endowment is spent, leaves the budget susceptible to market volatility. In the event of a serious financial crisis, there is the concern that the college would not be able to support its operations budget as it has in previous generations, necessitating more conservative spending practices in the present.

David Singleton, a member of the college’s Board of Managers since 2000, explained this rationale.

“We could certainly be spending more now, but I think what we’re providing today is very high quality,” he said. “The real harm would be if we spent more now and in the future we have to throttle back because the money just wasn’t there … I think anybody on the board would say that on that scale from big spenders to tightwads, we’re not tightwads, but we’re certainly more in that direction than we are at the write a check for anything level. We want to be sure that the resources will be there in the future to maintain what we’re doing now.”

Stephen Golub, professor of economics at the college and another member of the Ad Hoc Committee on the Endowment, agreed, stressing the volatility of endowment income and the difficulty of cutting back college spending during downturns. He argued that it is therefore imperative to be cautious in raising spending when endowment returns are high.

“You don’t want the endowment return to control the academic program on a short-term basis,” Golub explained. “People look back after the fact and say, ‘Oh, we underspent,’ but you just don’t know. You could have ten bad years after ten good years, and you have to be prepared for that.”

According to Harold “Koof” Kalkstein, a member of the Board of Managers since 2008 and the chair of the college’s Finance Committee, the college’s preparedness for future market volatility was a major factor in the relative ease with which the institution was able to navigate the 2008 financial downturn. While other institutions were forced to make layoffs and pay cuts, the most drastic change to the college’s financial practices was the installment of salary and hiring freezes. This preserved the spending power of the endowment per student over time, which Kalkstein explained is the primary aim of the college’s financial decisions.

“If we didn’t have the endowment covering roughly half the budget, either tuition would be much higher or we would have to cut back dramatically on programs,” Singleton agreed. “Every student — not just those students receiving financial aid — receives a direct financial benefit from the endowment. That is close to $2 billion helping to support their education.”

Each year, the first part of the operations budget supported by the endowment is financial aid. Over the past 20 years, the college has gone from providing roughly one third of the student body to over 50 percent of the student body with financial aid packages. Today, the average financial aid package is around $40,000. This increase has occurred in synchrony with the growth of the endowment.

“If you’re accepted and want to come here, the college will find a way to make the numbers work for you,” Singleton said. “This is something we value very highly and clearly the endowment is critical to that. With half the budget coming from endowment earnings, if the endowment income declined, the need-blind philosophy would be the first thing in peril.”

Despite the merits of conservative endowment spending in regards to the provision of financial aid, concern remains that the college could be spending more of the endowment on present generations and still be able to maintain present financial aid policies in the future.

“Are we spending a lot of money? Sure, we are spending a lot of money, but whether you are spending too much or too little bears some relationship to how wealthy you are,” Kuperberg said. “Would I say Bill Gates spends too much even though he has this huge, elaborate house? I would say he doesn’t spend too much. He probably spends too little because he’s got so much wealth. We are the Bill Gates of liberal arts colleges.”

Kuperberg explained that the college could be investing in improving facilities, adding more faculty, building more labs for the sciences, and increasing salaries, especially for staff.

Collings agreed.

“You’re not giving the same opportunity to one generation over the other,” he said. “I felt that there were needs that were not being met … some of these can be facilities needs. Some of these can be curricular needs. For example, during those past 25 years, we could have easily put together a much stronger environmental studies program. I felt something was being lost.”

This is where the issue of intergenerational equity is most profoundly felt. Those who criticize the college for spending too conservatively argue that because endowment support to the budget is increasing faster than the growth rate of the budget, and the spending rate of the endowment is low, future generations will have far more access to endowment spending than present generations. If the college maintained the percentage of endowment support to the operations budget at a constant, sustainable level each year, the college could be spending far more on its present students.

According to Kuperberg, last year, the college took out $67 million of its endowment. If the college had established a stable and sustainable rate of support from the endowment to the budget, it could have taken out another $40 million last year. Instead, this money will be saved, growing the endowment for the future and further increasing the college’s financial liquidity.

“If you slightly underspend, the worst thing you’ve done is give more to future generations,” Singleton explained.

In the coming years, the board anticipates that some of the financial gains from past decades of conservative spending will be used to support the construction of the new Biology, Engineering, and Psychology building as well as the renovations occurring in Dana and Hallowell.

Collings sees this as evidence of the college’s endowment spending behaving in a self-correcting way.

“You go long enough and not spend enough, your buildings fall down, your programs aren’t competitive with other institutions, you can’t hire the right employees,” he said. “Well guess what? You have to spend some money to get back to where you were … My point is, this could have been done a lot earlier.”

How responsible is intergenerational inequality?

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Hold on, why is our campus now a construction site?

Anyone who has read the master plan, knows that the current construction projects aren’t the end of planned construction. They’re just the beginning: renovations are planned for Martin,­­­­ Beardsley, McCabe, Sharples, the athletic facilities, etc. Plus, two new dorms are being built near PPR and ML, and let’s not forget the expansion to Willets and innumerable small projects, like a pedestrian square in front of the Lang Music Building. Town Center West, Danawell and the Matchbox will soon be some of the oldest projects on campus.

One of the biggest issues with all of this construction is who is hired to do it, as Dan Block highlighted in last week’s Phoenix. This needs to be addressed, as do several other problems with this construction.

We all know that scarcity means that when you spend on one thing, you can’t spend on something else. I’m pretty sure the board of managers has heard this too, because most of their responses to recent campaigns holding them accountable for their spending have focused on scarcity. They don’t ‘have enough money to spend on extra things,’ they tell us. ‘If we divest, we lose financial aid.’ Sure, we could cut lots of things before cutting financial aid — so this is a scare tactic — but let’s move past this. Scarcity is an interesting lens through which to view this construction because the board is saying implicitly, ‘We value these projects more than any other spending we could be doing.’ So, yes, connecting Danawell and clearing ground for a hotel are more important than hiring unionized workers, divestment, childcare and even students on financial aid.

But about 52% of Swarthmore students receive financial aid. As you may know, not all of them are happy with their packages. In fact, some of them, including good friends of mine, have had to take semesters off because they do not receive enough aid. How better does someone demonstrate their financial need at an institution that purports to cover “all demonstrated need” than by spending a semester working at home because they don’t have enough money to come back and remaining in financial limbo when they return? I’m curious. The word community is used in excess by almost all of us, but each time a person leaves this school because they cannot afford to be here, the use of that word is watered down, cheapened.

The master plan that been endorsed by a board composed primarily — 30/39 — of former financial professionals. It is not a short-term plan. Professor Collings was right last semester when he pointed out that Swarthmore has spent 1 to 2 percent less of its endowment than peer institutions for the past 20 years. So $15-30 million per year has been continually reinvested since the ’90s in the name of “responsibility.” How responsible is intergenerational inequality?

In the 2011 board-endorsed strategic plan, the key strengths of our college were as follows:

1. Our singular commitment to academic rigor and creativity.

2. Our desire to provide access and opportunity for all students, regardless of their financial circumstance.

3. Our diverse and vibrant community of students, faculty, staff, and alumni.

4. Our conviction that applied knowledge should be used to improve the world.

It seems an alteration of point #2 is in order: “After we build a hotel… after we renovate Sharples… after etc…. we will provide access and opportunity for all students.” In case it isn’t clear by now, this isn’t an isolated pattern. Divestment campaigners, unionized workers, and those who want childcare have heard, ‘Sorry, we can’t afford it,’ even as the blueprints for Town Center West are approved. And professors? They, too, are feeling the heat from a board that won’t fulfill its stated duties. Look at the increase in numbers of visiting assistant professors on the faculty. How can we build a community of learning when students and professors are “visiting” until the money runs out?

Returns first. Responsibility second. Hotel on campus first, students and faculty second. That’s how financial capitalism works, so it makes sense that that’s how the board acts. We need some ground rules. Something like this, with more specifics:

1.   No community member should be excluded by financial boundaries.

2.   Swarthmore should be a leader in socially just action.

Lastly, remember that it’s true that the cost of making financial aid work for all students is small compared to the size of the endowment. But it does cost money. So how about instead of giving the board recourse to employ scare tactics like talking  about having to cut financial aid if we divest, we come up with suggestions for other things to cut — like the budget for speakers at the college. This idea was suggested by Ben Wolcott ’14 at a community meeting last spring. I would argue the marginal social benefit per person from a speaker coming to campus is not worth the $50,000 we pay them to talk for an hour or two. I would argue that if we put a bunch of students in a room and had them watch a short film of this person — which would be free — it wouldn’t make that much of a difference.

But assuming this argument is true — in fact, even if it’s not — why do we pay speakers so much money? Oh right, because it reflects the current market price for speakers — the market price that made one of my professors tell our class that she feels “dishonest” whenever she gives a talk. Why don’t we invert the paradigm? First, we don’t pay speakers too much money. Then, we claim it as a strength. Think about it: if we were to publicize that our school would no longer be paying speakers beyond covering costs of travel, accommodation, etc., do you think that the rest of the academic community wouldn’t take notice? How good would it be if, instead of speaking at Swarthmore in return for a ridiculous compensation package, we offered speakers a pure environment in which increasing knowledge was the goal of all speaking events? Would Noam Chomsky still come? Maybe not. But would some incredibly interesting speakers come? Probably. Would there be pressure in the speaker community for speakers to come to us? Maybe. And anyway, put it in perspective — is $50,000 better spent on bringing in a speaker for one day or on keeping one student on campus for four years?

We need to recognize that once someone has become a part of “us,” to tell them that they cannot belong for financial reasons is wrong. Until we speak up, we are all complicit. That’s how it works. So let’s come up with some ground rules. Then, let’s look at ways to make them a reality.

Check out the open-forum-coalition Swarthmore “Common Sense” on Facebook. Suggest meeting times, protest, boycott construction projects and pressure the board of managers to rein in their rampant spending.

Paul Green is a junior at the college.

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