Tag Archives: University of Virginia

Politically Incorrect: Robert Turner Defends T.J.

Robert Turner, UVa professor defends Thomas JeffersonThree cheers for Robert Turner, a University of Virginia law professor, who went public last week with a full-throated defense of Thomas Jefferson. Once upon a time, the idea that Jefferson needed defending at the university he founded would have seemed ludicrous. But that’s before the forces of political correctness started taking over U.S. campuses, and before 469 university faculty and students blasted UVa President Teresa Sullivan for quoting Jefferson in a speech. Mr. Jefferson was a slave holder and a racist, and that’s all that needs to be said to brand him with infamy.

Last week, I defended Jefferson in the larger context of his contribution to advancing the ideals, however imperfectly he lived up to them, of liberty and equality of rights that we now take for granted. But Turner went a step further, describing Jefferson’s many actions to circumscribe slavery.

Yes, Jefferson was a slaveholder, Turner write in the Cavalier Daily. He inherited the bondsmen from his father and father-in-law, and it was illegal under Virginia law to free them without the permission of the governor on the grounds of extraordinary service. But in 1769, Jefferson drafted a statute permitting the manumission of slaves. That rule eventually would be enacted in 1782.

Jefferson also drafted an amendment, enacted in 1778, to prevent the import of new slaves into Virginia. He also supported the proposition that children born to slaves in Virginia in 1800 would be born free, although the notion was deemed so radical that he never submitted a bill to put it into effect.

As a member of the Second Continental Congress in 1787, writes Turner, Jefferson drafted rules for the governance of the Northwest Territories, which read, “There shall be neither slavery nor involuntary servitude in the said territory, otherwise than in the punishment of crimes….”

While Jefferson advocated the law permitting the manumission of slaves, it is widely noted that he never manumitted his own slaves. But Turner provides the rest of the story: “Jefferson did not free his slaves in his will, because he was deeply in debt and Section 54 of the Revised Code of Virginia of 1819 prohibited the manumission of slaves until creditors had been fully compensated. Freeing his slaves upon his death in 1826 was simply not a legal option.”

Although stifling, politically correct thinking is rampant at UVa, as it is at most universities, a measure of intellectual diversity remains. There don’t seem to be many outright conservatives (if there are, they are quiet) but professors are still comfortable standing up for old-fashioned liberal ideals of free speech and open-minded inquiry.

Turner expressed his willingness to debate the issue at an appropriate venue, UVa’s Jefferson Literary and Debating Society, with the “champions of censorship.” That’s a debate I would love to see.

Could VCU Become the Next UVa?

UVa isn't the only Virginia university with a lot of unrestricted cash.

Unrestricted cash, cash equivalents and investments not with the Treasurer of Virginia. Image credit: Auditor of Public Accounts

When word leaked out about the University of Virginia’s $2.2 billion Strategic Investment Fund, UVa officials suggested that they had found a way to spin dross into gold. Sweeping up low-yield cash and short-term investments in assorted reserves and accounts, they consolidated a vast sum which, in the hands of the University of Virginia Investment Management Company, they expected to generate income of roughly $100 million a year. The financial innovation was a trick, they contended, that other public Virginia universities could do, too.

Yesterday, Eric M. Sandridge, audit director with the Auditor of Public Accounts, compiled a list of unrestricted cash and cash equivalents at Virginia’s major universities, which he presented to the House Appropriations Committee. That list is reproduced above.

Excluding UVa, Virginia’s higher ed institutions have $2.6 billion in unrestricted cash. Let us assume conservatively, as UVa does, that the cash, if placed in appropriate hands, could pay out 5% annually on a sustainable basis. That cash could throw off an ongoing revenue stream as large as UVa’s Strategic Investment Fund to use as the institutions see fit.

The primary beneficiary by far would be Virginia Commonwealth University, which accounts for $1.7 billion of the $2.5 billion, followed by Virginia Tech, which accounts for $465 million. (I presume that the “VCUHS” on the table above refers to VCU Health System.) A handful of other institutions could generate $1 million to $2 million in extra income a year. For the rest, the income would be chump change.

I’m not sure what the General Assembly intends to do with this information. I’m not even sure that other universities are set up to replicate what UVa has done — although VCU has a $2 billion endowment, second largest among Virginia public universities, and last year it created its own investment management company to manage the university’s financial assets. If VCU follows UVa’s strategy (and if I’m not overlooking something really important), in theory, the university could generate an additional $85 million in free-and-clear revenue each year. That would be a game-changer.

The VCU board of visitors then would face the same issue as UVa’s board: whether to use the windfall to advance the university as an institution or to make the university more accessible and affordable to students.

PC Strikes Again: Dissing Jefferson at UVa

Defending Thomas Jefferson at UVaOn occasion, I feel sympathy for UVa President Teresa Sullivan. As if she didn’t have her hands full dealing with state budget cuts and General Assembly criticism, now she’s under attack from the left for the grievous sin of…. quoting Thomas Jefferson at the university he founded.

Last week Sullivan tried to rally the community in response to the news, horrific to many at the University of Virginia, that Donald Trump had been elected president of the United States. But she showed insufficient sensitivity to the latest mutation of political correctness when she wrote, in reminding UVa students that they could change the future:

Thomas Jefferson wrote to a friend that University of Virginia students ‘are not of ordinary significance only: they are exactly the persons who are to succeed to the government of our country, and to rule its future enmities, its friendships and fortunes.’

According to the Richmond Times-Dispatch, 469 faculty members and students took offense at the Jefferson quotation on the grounds that he was a slave owner and a racist.

We are incredibly disappointed in the use of Thomas Jefferson as a moral compass. …

We would like for our administration to understand that although some members of this community may have come to this university because of Thomas Jefferson’s legacy, others of us came here in spite of it. For many of us, the inclusion of Jefferson quotations in these e-mails undermines the message of unity, equality and civility that you are attempting to convey.

Bacon’s bottom line. Yes, by today’s standards, Jefferson was flawed. We would not elect a slave-owner, or even a former slave-owner, president today. But we don’t revere Jefferson because he was a slave owner. We revere him despite the fact that he was a slave owner.

We revere Jefferson because he, more than anyone, espoused the rationale for breaking from the monarchical ideals of the Middle Ages and articulating in their place the principles of life, liberty, the pursuit of happiness, and the equality of all men under God and natural law. These principles, however imperfectly fulfilled in the founding of a country rooted in hierarchical privilege, animated subsequent movements to guarantee freedom of religion, abolish slavery, give women the right to vote, extend civil rights to blacks, and eventually to accept gay rights. Jefferson and his countrymen did not fully embody 21st-century democratic ideals, but they ushered in the single greatest leap forward for freedom in the history of mankind, creating the conditions for subsequent democratic achievements.

Moreover, unlike the small-minded people who belittle him, Jefferson articulated ideals that were antithetical to his own material self interest, creating a contradiction with which he struggled for most of his life. Jefferson also advocated reason and the acquisition of knowledge, fostering skepticism and questioning of his own era’s pieties — in stark contrast to the philosophical narrow-mindedness that seems so prevalent in some quarters of the University of Virginia today.

So, thank you, Teresa Sullivan, for standing up for Jefferson not as a plaster saint but a flawed but inspiring leader. The silent majority of UVa students, parents and alumni stand with you.

Can UVa Restrain Tuition Hikes?

UVa's Runk Dining Hall is big on fresh, locally sourced produce.

The Runk Dining Hall is big on fresh, locally sourced produce. Is a push toward resort-caliber dining pushing food services costs higher at UVa?

Under intense political pressure from the General Assembly and the McAuliffe administration, the University of Virginia Board of Visitors discussed several plans in its November meeting on how to hold the line on tuition increases. So reported the Washington Post Friday.

The WaPo article was short on specifics about what those plans were, but it was long on political context: “The conversation appeared to emerge out of the revelation this summer of the existence of the university’s $2.2 billion Strategic Investment Fund, which was quietly established and endowed within the past decade while the school raised tuition.”

Members of both parties in the General Assembly want to know why the investment fund, which is expected to throw off about $100 million a year, couldn’t be used to offset some of the 74% in-state tuition increases over the past seven years. Meanwhile, in response to a deteriorating budget picture, Governor Terry McAuliffe has asked universities to absorb millions of dollars in cuts without increasing tuition. UVa anticipates $10.5 million in state support on top of a one-time $3.3 million cost of covering a portion of the Virginia Retirement System.

The conversation will continue in the December meeting, according to UVa spokesman Anthony DeBruyn.

The alternatives are laid out in a PowerPoint presentation posted online, “Alternatives to Enhance Access and Affordability.” That document described eleven scenarios. Among the options: a three-year freeze in in-state tuition, a $1,000 cost-of-attendance credit for in-state undergrads, and an endowment with $100 million from the Strategic Investment Fund matched by philanthropic support.

Here’s what was not on the table:

  • Reducing the number of administrative positions
  • Scaling back investments to enhance university prestige
  • Scaling back ambitions to build an R&D powerhouse
  • Bolstering faculty productivity
  • Eliminating obsolete programs with few majors
  • Slowing the country club-ification of the university

Food for the elites. I found Alternative 7 particularly interesting. The idea is to take $70 million from the Aramak food services settlement and establish a “quasi-endowment.” These funds, which are currently pooled with other monies in the Strategic Investment Fund, would be used instead “to hold annual dining rate increases to no more than 1.5% through 2020.”

Let me get this straight. Food inflation was running about 1% at the turn of the year and now is in negative territory — meaning that food is getting cheaper. And applying the income stream from the Aramark settlement, about $3.5 million a year, will restrain the increasing cost of food services to a mere 1.5% annual increase? What is UVa expecting the cost increase to be without this subsidy? Are they serving filet mignon and installing gold chandeliers in the dining halls in Charlottesville?

Perhaps I’m being unfair. Perhaps there are legitimate reasons for excessive cost increases in food services. If we’re lucky, UVa’s Board of Visitors will uncover the forces driving this inflation. If we’re even luckier, as an alternative to sucking up the Aramak money, the board might even inquire whether the cost increases could be restrained in some other way.

Here’s my guess, and it’s only a guess: UVa regards resort-caliber food as a competitive weapon in attracting the best and brightest students with the highest SAT scores. (These students come disproportionately from affluent families that are accustomed to upscale cuisine.) But upgrading from the crappy cafeteria food I ate back in the 1970s to trendy, locally sourced food is expensive, and the lower-income and middle-class students whose families live on McDonalds or Olive Garden budgets are hard-pressed to pay for it.

Call me a cynic, but I’m guessing that conversation will never occur.

UVa, Inova Partner in Research Initiative

Inova CEO Knox Singleton and UVa President Teresa Sullivan sign partnership deal. Photo credit: Washington Business Journal

Inova CEO Knox Singleton and UVa President Teresa Sullivan sign partnership deal. Photo credit: Washington Business Journal

by James A. Bacon

The University of Virginia and Inova Health System have joined forces in a $112 million partnership to launch a medical campus and a biomedical research initiative in Fairfax County. The partnership has three main components:

  • A cancer research partnership between the Inova Schar Cancer Institute and UVa. Cancer Center. The aspiration is to achieve designation by the National Cancer Institute as a Comprehensive Cancer Center, which would enhance the center’s prestige and open new avenues for research funding.
  • A regional campus of the U.Va. School of Medicine, which will enable UVa. medical students to complete clerkships and post-clerkship education at Inova hospitals in Northern Virginia.
  • A research partnership to develop the Global Genomics and Bioinformatics Research Center at The Inova Center for Personalized Health.

As part of the expanded relationship, UVa’s Darden School of Business will lead a business accelerator to speed the commercialization of medical research and the incubation of companies with innovative products.

Most of the activities will take place at the Inova Center for Personalized Health on the former Exxon Mobil campus located near Inova Fairfax Hospital, Inova’s flagship hospital.

“U.Va. is one of the most prestigious research universities in the country, and Inova is one of the largest, most successful health-care systems,” Knox Singleton, CEO, Inova Health System, said in a prepared statement. “This partnership leverages the complementary strengths of two institutions committed to providing the most advanced treatments and prevention strategies to the communities we serve.”

Twenty-eight million in funding will come from the Commonwealth of Virginia. Inova will raise another $56 million, and UVa will chip in $28 million. Dr. Richard Shannon, executive vice president for health affairs at UVa, told the Daily Progress that he did not know where UVa’s share will come from, although one possible source is the university’s new Strategic Investment Fund, which is expected to throw off about $100 million annually.

Meanwhile, in western Virginia… Virginia Tech plans to absorb the Virginia Tech Carilion School of Medicine in Roanoke within the next two years, according to Virginia Business. “Our school is a research-intensive medical school and to be able to identify that research you have to be part of the university. That was one of the drivers,” says Nancy Howell Agee, Carilion Clinic’s president and CEO.

Bacon’s bottom line: I am ambivalent about these developments. On the positive side, the UVa-Inova and Tech-Carilion partnerships could create the critical mass it takes to break into the biomedical big leagues. Both are targeting emerging fields of medicine in which they don’t have to compete against entrenched biomedical powerhouses. The potential exists to create important new drivers of economic growth in Northern Virginia and the Roanoke-Blacksburg regions, giving new impetus to Virginia’s lethargic economy.

Whether these partnerships can construct the research-clinical-entrepreneurial ecosystems it takes to be successful remains to be seen. Northern Virginia has a respectable (though modest by Silicon Valley standards) angel financing/venture capital sector which should be capable of supporting the commercialization of new technologies. Proximity to the National Institutes of Health in Bethesda, Md., is a bonus for snagging research dollars. The Roanoke-Blacksburg area, which lacks these advantages, is more problematic.

What concerns me is how these initiatives are arising from large, lumbering not-for-profit organizations — health systems and universities — that are raising their capital not from capital markets, where their deals will be subjected to close scrutiny by investors, but from their own internal resources.

Unlike private enterprises, universities and hospitals don’t pay income taxes and they don’t pay dividends. Not-for-profit hospitals extract “surplus” revenues (what for-profit enterprises would call profit) by charging patients more than they need to. Universities extract wealth by over-charging students. In other words, it can be argued that that Inova, Carilion, UVa and Virginia Tech are building their research empires on the backs of patients and students with little accountability to the public. Hospital and university boards, far from representing the interests of patients and students, are rah-rah cheerleaders for institutional growth.

Business communities and the political establishment are cheering these initiatives as well. The lack of public debate is appalling.

DeSteph’s “Relentless” Search for the Truth at UVa

uva_fog_smallby James A. Bacon

The controversy over the University of Virginia’s $2.2 billion Strategic Investment Fund may have settled down since a state auditor determined in August that the controversial pot of money was in full compliance with Virginia law. But William R. DeSteph, Jr., R-Virginia Beach, isn’t satisfied. He has released correspondence expressing his ire at university officials for keeping legislators and the public in the dark.

“My confidence in the forthrightness of the University’s leadership has been undermined by its own contradictory statements and numerous private conversations about public matters,” DeSteph wrote in a Sept. 14 letter addressed to UVa President Teresa Sullivan. It was a matter of “grave concern,” he said, that she continued “to refuse to provide the public records requested by my colleagues and me.”

“If you and the University’s leaders persist with obvious disingenuous efforts to keep the doors closed and Virginia in the dark,” he wrote, “you will only reinforce the nation that something’s amiss.”

DeSteph’s sentiments echoed those of a Sept. 8 letter that Del. Terry G. Kilgore, R-Gate City, had addressed to Sullivan and Rector William H. Goodwin Jr.: “Our concerns have always been that not only did the public not know about [the fund], much less where to look, but also that clearly neither did your Board of Visitors nor we as legislators charged with keeping a tight rein on the public’s purse.”

The existence of the fund was revealed by former Board of Trustees member Helen Dragas in a Washington Post op-ed shortly after she left the board this summer. She charged that board members had been coaxed into raising the tuition for incoming first-year students by 10% without understanding that income from the fund, estimated to be about $100 million per year, could have been used to offset tuition increases. University officials planned to use the money to recruit star faculty, enrich the student experience and provide financial aid for lower-income students as part of a longer-term plan to boost UVa into the ranks of the Top 10 universities nationally.

Critics contend that, while what UVa did was legal in setting up the Strategic Investment Fund, the process was opaque to the public, the legislature and even some members of the Board of Trustees. They also charge that the first full explanation to the board of the purpose to which the fund would be put was held in a closed session in likely violation of Virginia’s Freedom of Information Act.

A joint Senate-House subcommittee of the General Assembly held a hearing last month to look into the matter. A state auditor showed how UVa had consolidated various reserves and other restricted funds and handed them to the University of Virginia Investment Co. (UVIMCO) to invest, which it did successfully. The actions were legal, properly accounted for, and fully disclosed in university documents, the auditor said.

In pursuing their inquiries, DeSteph and his legislative allies have asked for voluminous information from the university. In a Sept. 2 letter to DeSteph, Sullivan referred to “thousands of pages of document that we have already provided in response to your requests.”

According to a Sept. 9 letter to DeSteph, Senate Majority Leader Thomas K. Norment Jr., R-James City, had advised Sullivan that “any and all legislative requests for information on this matter would come either through the Joint Subcommittees or the respective Committee Chairs. … It is important that any requests for information be focused and pertinent to the use of the Fund to advanced the University’s mission.”

However, DeSteph, Kilgore and others were not satisfied. As DeSteph wrote to Senate Majority Leader Thomas K. Norment Jr., R-James City:

The issue has never been the legality of the fund. Instead, the issues have always been the University’s administration disguised the money, had private conversations with just a handful of the Board of Visitors’ leadership about how to spend public money and the investment income off of this public money, and convinced the Board to go along with its plans in an illegal closed session while simultaneously instructing members to keep them a secret from us and the public. …

Rector Bill Goodwin has been far less than candid over the course of numerous conversations, I’ve been given the run-around by President Terry Sullivan, and plainly told by Pat Hogan, the University’s chief operating officer, that what’s gone on is none of my business. Continue reading

Universities as Economic Engines

Source: "The Economic Impact of Universities: Evidence from Across the Globe"

Source: “The Economic Impact of Universities: Evidence from Across the Globe”

by James A. Bacon

The world’s first university was founded in 1088 in Bologna (in what is now Italy). The idea of bringing scholars together in a dedicated institution caught on. In time, universities were established throughout Europe, the United States and the rest of the world. Almost every country has a university today, with Bhutan in 2003 being the latest nation to open its first. The proliferation of universities has coincided with the accumulation of knowledge and growth of the global economy. Scholars (most of them employed by universities, as it happens) have debated the extent to which universities have contributed to that growth.

Drawing upon a 60-year database of nearly 15,000 universities in 1,500 regions across 78 countries, Anna Valero and John Van Reenen with the London School of Economics think they have an answer. “Doubling the number of universities per capita,” they say, “is associated with 4% higher future GDP per capital.”

Perhaps most significantly for readers of Bacon’s Rebellion, universities appear to have positive spillover effects to neighboring regions. In other words, the effect is felt locally and regionally, not just nationally.

Writing in “The Economic Impact of Universities: Evidence from Across the Globe,” Valero and Van Reenen posit several channels by which universities affect growth.

Perhaps most obvious and easy-to-measure impact is the demand created by students, staff and universities’ purchase of local goods and services. Like any other primary industry, universities provide a service (higher education) that pumps income into the region where it resides. The effect is especially positive when costs are financed through national governments from tax revenues raised mainly outside the region in which the university is located.

But there are other channels. Universities produce human capital, nd skilled workers tend to be more productive than unskilled workers. Universities also spur innovation. The innovation effect is both direct, as when university researchers themselves produce the innovations, and indirect, as graduates enter the workforce and innovate. A third channel is by fostering pro-growth institutions. “Universities,” write the authors, “[provide] a platform for democratic dialogue and sharing of ideas, through events, publications, or reports to policy makers.”

None of this is earth-shattering stuff, although the computation that a doubling of universities per capita results in a 4% increase in wealth is interesting. And there is ample room to refine the conclusions. The authors concede that their methodology does not adjust for the size or quality of universities. All other things being equal, one would expect that a large, prestigious university would have a larger positive impact on the regional economy than an obscure, als0-ran institution.

Bacon’s bottom line. But the study provides a useful reminder as Virginians think about what they expect from their public education system — especially the flagship institutions of the University of Virginia, the College of William & Mary, and Virginia Tech. On the one hand, we want to make high-quality higher education affordable and accessible to Virginians. On the other, we like it when universities function as engines of local and regional economic growth. Insofar as it takes money for universities to generate bigger payrolls, R&D contracts, business spin-offs and other economic benefits, institutions that most effectively extract revenue from whatever source, including their students, will tend to be more powerful economic engines.

The trade-off is most clearly evident at UVa where administrators devised a way to cobble together a $2.2 billion pool of capital capable of throwing off roughly $100 million a year in unrestricted funds. The Board of Visitors voted to dedicate that money to enhancing the prestige of the university, indirectly stimulating economic growth, rather than lowering tuition & fees in order to make a UVa education more affordable.

I have criticized the board’s decision; I think the university has lost its way by embracing the Ivy League high tuition/high aid financial model that exploits its student body, especially middle-class students who struggle to pay the massive bills but don’t quality for student aid. But I also acknowledge that the UVa approach does have the advantage of creating economic growth. If the university were a company that, to pick a fanciful example, developed and manufactured leading-edge smart phones, for which it charged ever-higher prices and plowed revenues back into growing its business operations, Virginians would applaud it as an economic champion.

The higher ed affordability crisis is very real. But so is the economic contribution of Virginia’s universities. We need to strike the right balance between the two.

Digging into Rate-of-Return Assumptions


by James A. Bacon

House Speaker William J. Howell is rightfully concerned about the long-term health of the Virginia Retirement System. The pension system’s own actuary estimated a year ago that the $68 billion retirement system has unfunded liabilities of $22.6 billion.

On Sunday, the Richmond Times-Dispatch’s Michael Martz described the debate over restructuring the VRS from a defined-benefits system to a defined-contribution system. Today, Martz reports how Howell is questioning the outsized fees paid to outside fund managers, who handle two-thirds of the system’s assets.

“My biggest concern is the unfunded liability and the fact that it’s just going to grow,” Howell said.

Howell has every reason to be concerned. Unfunded liabilities might turn out to be far bigger than the actuary’s estimate. As I have observed many times, the liability is based upon an assumed 7% annual rate of return on the $68 billion portfolio. If the system under-performs expectations, as the VRS has done the past two years, the unfunded liability can grow by tens of billions of dollars. Writes Martz:

For Howell and other lawmakers on the [Virginia Commission on Retirement Security & Pension Reform], however, the retirement system’s recent investment performance has raised questions about whether the 7% assumed rate of return is too optimistic for the longer term, especially with interest rates keeping bond yields low for the foreseeable future. …

The 7 percent return, lowered by the VRS board from 7.5 percent in 2010 is among the lowest in the country for public pension funds, said Katie Selenski, state policy director for the Pew retirement initiative. “At 7 percent, you’re in a good, prudent position.”

Prudent? Not really. The pie chart above shows VRS’s portfolio allocation. Some 17.6% consists of fixed income assets. Barring some bizarre experiment with negative interest rates in the U.S., there is no way in a zero interest-rate environment that these assets can generate a 7% return. Another 39.8% of the portfolio consists of equities. Insofar as the bull market in stocks over the past 30 years has been driven by lower interest rates and an expansion of earnings multiples, there is no way to replicate the stock gains of the past ten years. Indeed, earnings and earnings quality of stocks are deteriorating, not a good sign for near-term price performance. Meanwhile, the performance of hedge funds nationally has been dismal of late. There is no rabbit to pull out of the magic hat of alternative investments.

For another view on the outlook for long-term portfolio performance, it is instructive to turn to the University of Virginia, which, whatever one might say about the Board of Visitors’ strategic priorities, one must credit with doing an excellent job of managing its endowment. The 10-year return of the University of Virginia Investment Management Company (UVIMCO) has been 10.1 %, according to its 2014-2015 annual report. That compares to 5.8% ten-year performance calculated by the VRS in 2014-2105.

How much do UVa’s masters of the universe think they can earn on their portfolio looking forward? As best as I can tell from perusing UVIMCO’s annual report, they don’t say. UVIMCO doesn’t report that assumption because it isn’t relevant:  Although UVIMCO does have unfunded commitments, it is not a pension fund in which shortfalls must be made up by taxpayers.

Still, it is possible to get a sense of UVa’s expectations from comments made by university officials that they expect the controversial $2.2 billion Strategic Investment Fund to throw off $100 million a year to pay for programs to advance the university’s strategic goals. University officials have not explained what rate-of-return assumptions they are using. But a simple calculation reveals that $100 million is only 4.5% of $2.2 billion.

From that, one can draw one of two conclusions. Either UVa’s investment mavens are assuming a much lower rate of return than the VRS, or they expect a higher-than-4.5% rate of return but plan to retain a substantial fraction of the earnings, presumably in order to grow the size of the portfolio.

It appears that the second conclusion is true. Here’s what the UVIMCO annual report says: “Each year a portion of the endowment value is paid out to support the fund’s purpose, and any earnings in excess of this distribution help build the fund’s market value over time. In this way, an endowment fund grows and provides support for its designated purpose in perpetuity.”

For legislators digging into UVa’s controversial Strategic Investment Fund, which is managed by UVIMCO, it would be interesting to know what rate-of-return the university is assuming for its endowment and what percentage it figures on spending and what percentage it figures on retaining. The numbers should be equally interesting to Speaker Howell. It would send out a flashing yellow caution signal if the UVIMCO’s assumption about of future performance was more conservative than that of the VRS.

A Bright Line between Research and Academic Funding at UVa?

Gerald Warburg, professor of public policy at U.Va.’s Frank Batten School of Leadership and Public Policy.

Gerald Warburg, professor of public policy at U.Va.’s Frank Batten School of Leadership and Public Policy.

by James A. Bacon

Gerald Warburg, a professor of public policy at the University of Virginia, provides important context for the university’s controversial, $2.2 billion Strategic Investment Fund. In an op-ed published a week ago in the Virginian-Pilot, he describes the fund as a tool to boost the university’s research mission without relying upon state funds or tuition dollars. The fund should serve as a national model for public universities, he says. He writes:

A decade ago, cuts from Richmond made clear legislators’ conclusion we could no longer afford to bear the financial cost of maintaining world class, state-subsidized research universities.

During the subsequent recession and recovery, U.Va. administrators struggled to reinvent a model public research university. …

Today in Virginia, the funding responsibilities are clear. Tuition, endowment and modest state support will fund access to education and training. The university and external sponsors of academic research are responsible for funding research. No other university in America has addressed this challenge as successfully as the University of Virginia.

Read the whole thing. It’s the most coherent justification I’ve yet seen for the Strategic Investment Fund.

Bacon’s bottom line: If I understand him correctly, Warburg is saying that UVa is drawing a bright line between its academic mission and its research mission, and that the academic mission is funded by tuition and state support, while the research mission is (or will be) funded by the Strategic Investment Fund and external sponsors. Politically, this is an astute way to frame the issue because it alleviates fears that students and parents are helping pay for UVa’s research ambitions.

Creating that bright line is a worthwhile goal, if it can be achieved. I laud Warburg for articulating it. Research universities really do cobble together two distinct missions — academics and research — each of which really should have their own dedicated sources of funding. Students should not be asked to subsidize corporate and federally funded research.

But I have two questions: (1) Are the academic and research functions so intertwined and the funding so inter-mingled that it is even possible to separate research from academics, and (2) where did the money come from to seed the Strategic Investment Fund in the first place?

UVa has not even tried to answer the first question (in fairness, no one has yet asked it), and it has yet to give a clear and comprehensive explanation of the second. University officials have said that some of the funding came from university reserves and some from squirreling away savings from “efficiencies.” One might speculate that other funds have come from budgeted monies unspent at the end of the fiscal year, or budgeted monies not spent on construction projects, or monies accumulated from hospital operations in the same way that the Inova and Carilion health systems have used surplus revenues (what normal people would call profits) to fund their own research initiatives. One could make the argument that any of these sources, known and speculated, were extracted from students or patients and, from an ethical perspective, should be used to reduce tuition and hospital charges.

Hopefully, we’ll be learning the details Aug. 26 when the House Appropriations Subcommittee on Higher Education and the Senate Finance Subcommittee on Education hold hearings on the Strategic Investment Fund.

Strategic Investment Funds: Not Just for UVa Anymore

uva_fog_smallby James A. Bacon

The University of Virginia’s controversial $2.2 billion Strategic Investment Fund is such a great idea that UVa officials are recommending it as a model for other state universities.

By adopting UVa’s approach and consolidating university reserve funds statewide, a sum that could approach $9 billion, the Commonwealth could establish an investment fund that would generate $450 million annually in extra income, UVa Rector William H. Goodwin said Monday at a Board of Visitors meeting, reports the Richmond Times-Dispatch.

Vice Rector Frank Conner also recommended the investment strategy for other Virginia public universities. “A lot of people will be calling us,” he said. “This is very creative.”

Members of the UVa board are upset by questions swirling around the creation and purpose of the fund, the existence of which was revealed publicly in a Washington Post op-ed last month by former Rector Helen Dragas before the university could manage the roll-out. Questions have arisen regarding where the money came from and why it won’t be used to dampen tuition increases rather than fund programs to enhance the university’s prestige.

Board members pushed back yesterday against outside criticism. It is “a shame we’re getting arrows in the back for being first,” said James B. Murray Jr.

Barbara J. Fried said the university needed to do more to “overcome lying sound bites.”

But the university has been slow in explaining exactly how UVa’s Strategic Investment Fund was accumulated. A month ago, the official explanation was that the money was cobbled together from $385 million in operating reserves, $620 million in “unrestricted funds and related earnings that had accumulated in [the university’s] history,” and $700 million in earnings on those funds. The university provided no detail on the $620 million in “unrestricted funds and related earnings,” and legislators have called for an accounting.

Goodwin added a bit of new detail Monday. He credited Executive Vice President Patrick D. Hogan with, as the T-D put it, “finding efficiencies in operations during the past few years that, along with investment earnings, were used to create the fund.”

Bacon’s bottom line: Let’s make one thing clear: It is great news to discover that UVa has compiled a $2.2- to $2.3-billion pot of money. That money can do a lot of good.

Apparently, UVa, like other universities, kept a lot of cash sitting around in reserves yielding very low interest rates, and Hogan deserves credit for figuring out how to tap those funds to generate a higher return in other kinds of investments. Among other things, this involved negotiating a line of credit to maintain the university’s liquidity. The payoff from this financial restructuring could be huge. If Goodwin is right and the idea could be applied to other Virginia universities, the innovation could very well revolutionize higher education finance. (The idea must be viewed with caution, however. Not all institutions have a AAA credit rating like UVa; some may not be able to leverage their balance sheets in the same way.)

But no one is criticizing the board for being creative financial stewards and investing the money well.

People have legitimate questions about where the money came from. According to UVa’s own explanation, only $385 million of the seed funding came from operating reserves. Another $620 million came from what is described as “unrestricted funds and related earnings that had accumulated in its history.”

What the hell does that mean?

Well, we learn from Goodwin that a good portion if not all of that $620 million come from operating efficiencies — cost cutting. Again, Hogan deserves kudos for the achievement. But no one is criticizing him for running a tight ship.

These are the questions that people are asking: Should UVa have used the savings from cutting costs to blunt increases in tuition and fees rather than setting them aside and accumulating $620 million? Who set up this operational fund anyway? Did the Board of Visitors ever approve the strategy of setting aside and accumulating funds from cost-cutting initiatives, a strategic decision that should be made by the board and not the administration? Did the board approve handing those monies to the University of Virginia Investment Management Co. (UVIMCO) to invest? When the board recently voted to increase tuition for incoming students by 10%, were members aware that the university had accumulated hundreds of millions of dollars, plus investment returns, from cost cutting? Did board members give consideration to the possibility that the accumulation of those funds represented a form of overcharging students and their families?

Legislators want answers, and I don’t blame them.