Endowments at UofL

Anyone at the University of Louisville who relies upon endowment funding received some very bad news earlier this month. University endowments declined about 17% in 2015.

While this is very bad news in the short term, it is actually part of a larger long-term problem.

At their peak, UofL endowments were worth $824 million on June 30, 2014. However, in a period covering more than a decade, University endowments are up only about 7% in total. This is not as good as the performance of in-state rival University of Kentucky, which has seen its endowments nearly double in that period. InsiderLouisville, which reported these facts, included this long-term chart in a March 2016 story:



Given the recent hullabaloo over President Jim Ramsey's tenure at the university, I decided to investigate a bit further (especially given other recent controversies). After all, Ramsey is also the President of the University of Louisville Foundation, which is responsible for endowments. The Foundation outsources much of its money management, but is ultimately responsible for the outcomes. As its own webpage proclaims, "The Foundation is an independent 501(c)(3) not for profit corporation that holds, invests and designates funds of the University." Moreover:

The students, academic staff, schools, colleges and libraries of the University rely heavily on support generated from the endowments of the Foundation. These funds are invested and managed by the Foundation in support of the university’s education, research and service goals and used for scholarships, endowments, research chairs, grants and other academic initiatives. Gifts to the University are managed according to the wishes of the donor and the appropriate University departments. Gifts without restrictions are managed at the discretion of the Foundation Board upon recommendation of the president. 

Additionally,, the President often references his fundraising as a major success story at the University. In his recent public presentations (I saw these slides at a meeting with Arts and Sciences faculty and staff), the President notes that University of Louisville Foundation "private support" has grown from $35 million in FY 2002-03 to $154.7 million in FY 2015-16. 

Ramsey was hired at UofL on August 1, 2002, so this is essentially his tenure at UofL.

What about endowments during his entire tenure?

The endowment was worth $550 million on December 31, 2001, as revealed at the March 2002 Foundation Finance Committee meeting. Apparently, some UofL sources recently claimed that the value was only $221 million in 2002. At least one media outlet reported this number without checking the primary sources as I have here.

By the way, the endowment had grown an average of 14.7% annually for 5 years prior to Ramsey’s August 1, 2002 start date. This was reported to the Board of Trustees at their March 2002 meeting. Again, I'm linking to the primary sources from the University.

The endowment was worth $646 million on January 31, 2016. That means that during Ramsey's tenure as President of the University and the Foundation, the endowment has grown a total of $96 million, or about 17%. Annualized, the rate is about 1.25%.

Obviously, the growth would be a lot different if the baseline number was $221 million.

In any event, by comparison, the Dow Jones Industrial Average (DJIA) closed at 10021.57 on December 31, 2001. On December 31, 2015, the DJIA closed at 17,425.03, which means that it increased in value by about 73% during that time, or about 5.2% annually.

Readers with long memories may recall that fall 2001 was a tough time for the stock market. After the 9/11 terrorist attacks stock prices tumbled.

Indeed, because the value seemed low versus historic averages, my wife and I decided to invest about $5000 in the stock market that fall. However, we didn't really know anything and we didn't want to spend lots of money on a broker. We thought the future would involve more technology and knew that the NASDAQ hosted most tech stocks. Thus, we bought 150 shares of QQQ, which is an "exchange-traded fund (ETF) that gives investors and traders a snapshot of how some of the largest technology companies are trading stocks. The QQQ is heavily weighted toward large technology companies trading on the Nasdaq stock market, with over 50% allocated in the information technology sector."

We purchased 100 shares in October 2001 and 50 more a few months later in early 2002 (it was actually called QQQQ until 2011). The price was around $35 per share. For apples-to-apples purposes, the QQQ closed at $38.91 on December 31, 2001. On December 31, 2015, QQQ closed at 111.86. That means this NASDAQ-linked fund has almost tripled in value since the date we purchased it.

My only regret in hindsight is that we didn't invest more in QQQ.

Overall, both the Dow Jones Industrial Average and NASDAQ index funds have offered a lot of value in average returns during President Jim Ramsey's tenure at UofL. Yet, the Unviersity's money gurus have managed to dramatically underperform the market.

How does this align with Ramsey's claimed fundraising success? I offer three explanations.

First, it appears the baseline start number has been....er, mis-remembered.

Second, some of the fundraising has undoubtedly reflected one-time gifts that have been spent on specific projects. These are not endowed funds and are quite valuable to the University.

Third, as media outlets have reported, in recent down years, the University has been spending endowment assets to pay bills. "Asked about the drop in endowment value after the March board meeting of the U of L Foundation, Ramsey said they’ve been using Foundation assets to pay the bills and replace declining state appropriations, and expect increased donations and an improvement in the market to make up for what they’ve recently lost."

Let's hope this plan works out because the investment results have certainly not been great during Ramsey's tenure.


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ISA 2016

Looking back at the archives, I forgot to blog about the ISA conference in Atlanta during mid-March. While at the conference I  caught up with some old friends, watched the first round NCAA Kansas basketball victory, drank some good local beers, and served as a discussant and/or chair of three different panels.

I also delivered a paper, "Popular Culture and Public Deliberation about Torture" that needs a good deal of work even though it is too long. That link takes you to the working draft at academia.edu.


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College Sports are Broken at Louisville

As I mentioned last week, the same day that the Kentucky legislature agreed to cut University of Louisville funding by 4.5% (roughly a $6.3 million annual spending reduction), the Athletic Department announced that football coach Bobby Petrino had been given a 7-year contract worth over $30 million. He'll be the 12th highest paid college football coach in the land, making over $4.25 million annually.

Today's sports section featured a story about the team hiring a new offensive coordinator at $607,000 per year in salary. The same story mentions that three other newly hired coaches are making about $600,000 per year in combined salary, meaning that these four assistant coaches are making over $1.2 million next year. Given that this is only a fraction of the coaching staff, the football coaches' total compensation will almost surely exceed the size of the state budget cut the rest of the University is facing.

As I wrote last week, new assistant professors make about $54,000 in my department at UofL. Even figuring nearly 30% in benefits, the University could hire 85 assistant professors for the cost of the football staff.

There's more recent news along these lines if you pay attention. For example, the front page of the February 4 sports section of the Courier-Journal carried news that the University is seeking $55 million to (again) expand the football stadium.

These stories highlight much that is wrong at my University and with big-time college athletics. Before I list them, I know the arguments that boosters make. Basically, they argue that big-time college sports are a competitive business and these salaries and stadium costs reflect "the market" conditions. Athletic Director Tom Jurich, for instance, defended his contract to Petrino with these words: "This is a very competitive business. There's a very, very small handful of great coaches in this country. I think that's very self-explanatory. It's obvious that we have one of them. So I'm going to do everything in my power to make sure that he stays with us, that he finishes his career with us." The same article claims that "None of this is money from the university, or taxpayers, or student tuition or fees."

Frankly, these arguments are laughable.

First, as more-and-more student athletes have been arguing, they are essentially underpaid labor in a business that strictly limits what they can be compensated. In a free market, the star athletes make a lot more than the coaches. As Taylor Branch wrote in The Atlantic back in fall 2011, college athletes do not work in a market environment:

College athletes are not slaves. Yet to survey the scene—corporations and universities enriching themselves on the backs of uncompensated young men, whose status as “student-athletes” deprives them of the right to due process guaranteed by the Constitution—is to catch an unmistakable whiff of the plantation. Perhaps a more apt metaphor is colonialism: college sports, as overseen by the NCAA, is a system imposed by well-meaning paternalists and rationalized with hoary sentiments about caring for the well-being of the colonized. But it is, nonetheless, unjust. 

Second, market competition is artificially restricted. New business cannot spring up to compete against NCAA division I football or basketball programs. These businesses have formed a cartel, as Joe Nocera has written: "the N.C.A.A.’s real role is to oversee the collusion of university athletic departments, whose goal is to maximize revenue and suppress the wages of its captive labor force, a k a the players." He continues:

The N.C.A.A. has neither an antitrust exemption nor a player’s union to negotiate with. In other words, it lacks some of the legal protections that shield professional sports from antitrust suits. What it has, instead, is a work force full of young adults dreaming of becoming pros and willing to sign any document, no matter how onerous, if it will help them reach that goal. The document the N.C.A.A. forces them to sign completely stacks the deck against them.

Third, college sports are highly subsidized by government taxpayers and students (as I've blogged previously). The "free market" in college sports is cash-rich partly because some revenues are guaranteed and some costs are paid by third parties who do not directly benefit from athletics. Only about a dozen big schools do not subsidize their athletic programs and about another dozen could survive without subsidies. Some programs receive tens of millions of dollars in subsidies. The total amounts involved are truly staggering: "Public universities poured more than $10 billion over the last five years into their athletics programs."

At Louisville, about 20% of subsidies come explicitly from student fees and the total amount of subsidies averaged about $10 million annually from 2010-2014 (for a total of nearly $50 million). Again, for emphasis, in recent years the University has transferred about $2 million per year in student fees to athletics. Athletics has at least sometimes transferred a similar sum back to the University, but that is often framed as a generous gift from athletics rather than a repayment for subsidies.

Fourth, college football and basketball depend upon television revenue that is itself distorted by non-market limits on competition. This is from Reason magazine, so it is admittedly the extreme version of the libertarian argument. Nonetheless, the point it makes about the cost of doing business is true:

In an ideal world there would be property rights in, and markets for, spectrum. Unfortunately, the federal government nationalized the airwaves in 1927 and since then only licenses their use. Today, wireless broadband providers like Verizon and AT&T must bid at auction for the spectrum licenses they use, and this bidding helps ensure that the valuable airwaves are allocated efficiently to their best uses. Television broadcasters, on the other hand, have never had to bid for airwaves. The Federal Communications Commission licenses spectrum to station owners in exchange for a promise that they will operate in the public interest—and that includes making their programming available for free over-the-air and supported by commercial advertising.

Basically, there's a lot of extra cash in TV because the networks don't pay market prices for the right to use the spectrum. It creates a lot of funny money when they sell ads for programs.

Beyond these free market arguments, there are other economic (and ethical) reasons to challenge UofL athletic spending.

Sports competes with academics for philanthropy and other funds. Athletic Director Jurich notes that the stadium expansion will be privately funded, but that just means that UofL academics will be competing with the rest of the University to find new funding to replace funds lost to budget cuts.

Finally, consider the top-dollar nepotism at work in UofL Athletics. Tom Jurich's son Mark Jurich works for the Athletic Association in a variety of capacities. The former campus baseball star makes over $160,000 per year.

Bobby Petrino's son Nick is now the wide receivers coach for his father's team and probably makes $150,000 since that seems to be the minimum UofL coaches make. Petrino son-in-law LD Scott makes $150,000, according to that USA Today database.

A few years ago, Rick Pitino's son Richard served as an assistant basketball coach for two years. 

There's nothing like strong family ties, amirite?


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Note: This is the third in a recent series about the political economy of the University of Louisville.

Part 1: It's Good to Be the King posted April 12, 2016, concerns President Jim Ramsey's lucrative relationship with Texas Roadhouse.

Part 2: Winner-Take-All in the University Setting posted April 15, 2016, discusses the stagnation in assistant professor salaries, juxtaposed against the explosion in university president compensation.


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Winner-Take-All in the University Setting

Recently, Thomas Piketty gained tremendous attention for his academic work on inequality. "Piketty summarizes this complicated theory with the formula “r > g” where “r” is the rate of return on capital and “g” is the rate of growth in the economy." Put simply, the wealthiest individuals, who benefit from their investments or other linkages to the financial economy, have been grabbing an ever-larger share of the nation's wealth. This chart reflecting nearly 100 years of income data is quite telling:




Financier Steven Rattner pointed out a few years ago that similar inequality has been mirrored in sectors of the economy that are not directly linked to free market returns on investments. Specifically, he noted that even university presidents are beneficiaries of the "winner-take-all" society that is now the United States:

Recently, thanks to data compiled by The Chronicle of Higher Education, I saw these macro trends reduced to the micro level in a perhaps unlikely setting: institutions of higher learning. 

In 2010, the 10 top-earning private college and university presidents made an average of $2.1 million. That’s up from $637,000 in 2000, a stunning average annual increase of 12.6 percent... 

And just as in corporate America, those who preside over these institutions have done far better than those who populate the armies that labor below them. Over the decade that ended June 30, 2010, average faculty salaries at the 50 wealthiest universities rose by 14 percent, while that of presidents increased by 75 percent.

When I was hired at University of Louisville in 1991, I made $31,000. That was considered a fairly modest starting salary -- it was certainly not at the high end of the pay scale. Using the CPI to adjust that to current dollars, my 1991 starting assistant professor salary would be worth $53,900 in 2015. The political science department has hired a handful of beginning assistant professors in recent years and all arrived making around $54,000. In short, 25 years after I was hired at a relatively modest salary (compared to what peer institutions offer), UofL is still offering the same beginning salary. The $54,000 figure is considered modest, competitive if adjusted for cost-of-living, but well below amounts offered by other schools.

University of Louisville President Donald Swain made $155,000 in 1991. He had been serving as UofL President since 1981, so he was in midst of his 11th year. Using the same CPI adjusted rate, that salary would be worth $270,000 today.  I have found some archival evidence that Swain also received modest deferred compensation payments, equivalent to about 10% of his salary. So maybe Swain made $300,000 in 1991.

Has the winner-take-all problem emerged at UofL? As I blogged earlier this week, Jim Ramsey, who is in his 14th year as the top administrator, makes more than a million dollars annually from his job leading both UofL and its Foundation, including about $1.67 million in annual salary, deferred compensation, and other perks (UofL pays his taxes, for instance, which accounts for $600,000 to $800,000 additional payments each year). A consulting firm retained by the University reported that Ramsey made $2.5 million from UofL in 2014. Note that the state of Kentucky reports that Ramsey makes about $350,000 from his job as president. That figure, however, does not include Foundation payments -- salary, deferred compensation, tax payments, etc.

Put simply, the intro political science faculty salary has been flat over 25 years. The University President compensation has apparently increased 5- to 8-fold, adjusted for constant dollars.

Incidentally, the Board membership at Texas Roadhouse is presumably tied to Ramsey's current position at UofL, but the external compensation is not figured into those earnings figures. As noted Tuesday, he's made millions of dollars more just from the common stock compensation he has earned from that service.

There is no common stock compensation for faculty, of course.

I am not posting this to argue that Ramsey has been a bad president of the University. He has performed his job and has helped move the school forward in many ways. Incoming student ACT scores are significantly higher than they used to be and student retention has improved. Despite his former "insider" status in state government**, Ramsey has not staved off incredible cuts in state funding. He has been successful in raising private funds and convincing the state to allow the University to increase tuition substantially. Some academic programs that make UofL (and Ramsey) look good were actually started by previous UofL leaders.

Could others have done his job just as well, perhaps for much less compensation? No one can know the answer to that counterfactual, but the "winner-take-all" mentality generally magnifies small differences in performance with large differences in compensation.

Yesterday morning, anyone tuning in to the budget livestream on the Health Science campus could hear about 5 minutes of live mic broadcast before the event started (it has since been edited out). An administrator (I believe from the medical school) was lamenting that he had already nearly forgotten his mid-semester vacation in Cabo because it had been 10 days since his return. A top-level financial administrator complained about the level of negativity she's constantly heard on the Belknap campus.

News alert: the inequity in financial compensation, illustrated by the mid-term vacation in Cabo as well as President Ramsey's compensation package, very much helps to explain the level of negativity on the Belknap campus.

Update: Yesterday's announcement of a new contract for the football coach won't help, but that's a matter for another day. He's going to be paid more than $30 million for 7 years of coaching. The Kentucky legislature, earlier in the day, approved a 4.5% budget cut for UofL. Given the current funding level of $140 million from the state, this will amount to a $6.3 million annual cut.

Here's a counterfactual: How many wins could the football team achieve with a coach paid $375,000 instead of $4.375 million annually?


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** Readers can judge for themselves what role Ramsey played in the current budget situation as he was state budget director for Governor Paul Patton when the state diverted $30 million from pension plans for other spending purposes. This was apparently a seminal move to divert such funds and it was replicated often over the next 15 years. Current Governor Matt Bevin is cutting University funding to pay for the past diversion of pension funds.


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It's Good to Be the King

It's also good to be President of University of Louisville.  Heck, to prove this, the University even commissioned a study by a consultant:

In a report that cost the university about $23,000, Verisight Inc. of Chicago found that [President James] Ramsey’s total annual of compensation of $1.1 million is 60 to 80 percent above the median pay for presidents at similar universities.

Those numbers don't include deferred compensation and other benefits.

In any case, despite this high level of compensation, I should say that it used to be good to be President of University of Louisville. However, recent events have muddied the waters tremendously. Lately, President James Ramsey has been under fire by some elements of the faculty -- and by a number of Board of Trustees members. My College, Arts & Sciences, overwhelmingly supported a "no confidence" vote in a survey of faculty.

Why all the recent troubles?

As noted, President Ramsey's salary is very high compared to other University presidents, while faculty and staff salaries are relatively low. The salary problem, by the way, is particularly acute in Arts and Sciences. Some members of the community are angry about the decision to withhold the men's basketball team from this year's NCAA tournament. A whistleblower has alleged serious executive misconduct. The medical school apparently had some recent trouble with accreditation. The array of concerns is large and diverse and I won't discuss them thoroughly here.

Let's focus on one rarely discussed issue.

Some members of the University community are especially unhappy about the business model UofL has adopted under Ramsey's leadership. There are a number of implications of this, but this post will focus on merely one: consider the University's relationship with Texas Roadhouse, a local company (despite the name):

Texas Roadhouse and U of L have enjoyed a close relationship in the past, most notably in 2010, when the university opened its Texas Roadhouse Student Center at the College of Business. This 1,840-square-foot lounge is designed to look just like a Texas Roadhouse restaurant, complete with signage and branding, though there’s no kitchen. It cost a reported $200,000 to build.

Why should this matter? Well, President Ramsey is a highly-compensated member of the Texas Roadhouse Board -- paid primarily in valuable shares of common stock:

On Jan. 7, the University of Louisville president received 8,500 shares of stock from Texas Roadhouse, where he serves on the board of directors. The acquisition brings his current reported total up to 97,418 shares. The next day, he received an additional 25,500 restricted stock units from the steak giant, which he can collect over the next three years but doesn’t own yet.

Texas Roadhouse stock shares closed Jan. 15 at $33.67, meaning Ramsey’s 97,418 shares were worth $3.28 million at that time.

The newest 25,500 shares are restricted, meaning they are incentives for him to stay on at the company as a director. The shares of the stock were broken into three separate tranches of 8,500 shares of restricted common stock. They were granted as part of the firm’s 2013 Long-term Incentive Plan.

The stock price is now $44 per share, meaning that merely the 34,000 shares of stock Ramsey received or was promised in January 2015 are currently worth almost $1.5 million. Then again, he must continue to serve on the Board through January 8, 2018, to receive the final 17,000 shares. Half (8500 shared) will be awarded January 2017 and the other half on that January day in 2018.

Ramsey's full SEC disclosures as a Board member can be found here -- and lots of other places on the web. These are required by federal law under "insider trading" regulations.

Interestingly, however, for many years President Ramsey apparently did not disclose these ties as part of the ordinary "conflict of interest" form that all UofL faculty must file.

This story summarizes President Ramsey's legitimacy crisis among many members of the faculty -- extravagant compensation, use of position and privilege for personal gain, double standards vis-a-vis the rest of the University community, and at least a whiff of unethical behavior.


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