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Wednesday, March 28, 2012

Wednesday, March 28, 2012

Net Negatives of Private Fundraising

UPDATE 2 (3/31):  UCLA's faculty Council on Planning and Budget endorse the Luskin Center after the Regents table it.  See Dan Mitchell's explanation and critique.  The CPB document he posts itemizes the funding of the $112M in costs after the Luskin gift, which are mostly bonds (pp 3-5).

Private fundraising is associated with so many of public universities' most exciting projects, and absorbs so much of each institution's creative energy, that it is easy to forget that it comes with costs and negative side effects that need to be weighed into the mix.  This week's meeting of the UC Board of Regents illustrates the issue.  On Thursday, the Regents will review the Annual Report on University Private Support.  This afternoon, the Regents are considering a funding proposal for a new conference center at UCLA that will bear the name of its major donor.

The report on private support offers the kind of aggregate figures that have convinced a lot of people that fundraising is a workable answer to public funding cuts. The takeaway is, This past fiscal year, the University of California received almost $1.6 billion in private support." Since this is about twice the current year cut in state support, and since UC's core funds are about $5.2 billion (Display 1), it looks as though this great intake could make a major dent in UC's budget problems. The report claims that  "every gift is helping UC continue its mission of research, teaching, and public service."

Reality is somewhat different. 

A rule of thumb at public universities is that private giving is about 2% unrestricted, and this year that figure is 1.6%, meaning that about $25 million could be plowed into general operations -- or about 0.5% of the total, even assuming all of the total arrived at UC that year.  Two thirds of the giving goes to three UC campuses (Berkeley, LA, SF), only 30% comes from individuals, so that most private support takes the form of inter-institutional contracts and grants that are more like standing revenues for existing activities than like new gifts.  Only about 10% of the total appears to affect students directly.  One could go on, but the main point is that the headline gross number is radically different from the "net" on the ground.  The utility of fundraising needs to be gauged by concrete effects and not by headline numbers.

We encounter further issues when we drill down in the fundraising process. Those that get the most attention are non-financial -- the possibilities of direct infringement on academic freedom, of the eclipse of core educational activities by the pursuit of funds (e.g. academic administrators who now spend a majority of their time developing revenues rather than developing programs), and of major influence over academic planning held by a small number of wealthy donors and/or a university's development office.  These issues have a large literature and need to be constantly watched.

Even when these issues are not present, fundraising raises the further issue of whether private support sends new money where it is most needed or most effective. UCLA has about 35,000 students on its general campus; Cal State Fullerton, not far away, has about the same enrollment.  UCLA has an endowment of about $1.5 billion.  Here is Cal State Fullerton's endowment:

Fullerton's endowment is not quite $24 million, or less than 2% of UCLAs.  Note too that its endowment is divided into many small pieces targeted at particular programs.  UCLA's past and future fundraising success will add resources for students who are already far better resourced than those at Cal State Fullerton.  Cal State's public budget has been so damaged by extreme cuts that it is planning an enrollment freeze for Spring 2013.  But private fundraising is going to do nothing to solve this problem.

A further issue is nicely illustrated by the new conference center being proposed for UCLA. It is called the Luskin Conference and Guest Center as a result of a $40,000,000 gift from two UCLA alumni, Meyer and Renee Luskin.  Obviously many UCLA officials thought this was an important use of a very large private donation, but the cost of the conference center is four times greater than the gift, or somewhat over $162 million.  The gift has produced an enormous effort to find supporting funds, some involving the campus, some the system as a whole.  The Regents will be asked to approve use of a non-negligible amount of campus funds ($3.2 million) and of housing reserves (profits from previous years)  for the project, and to approve $112,000,000 in external financing, including $35,000,000 in "standby financing" that may be arranged by the Office of the President.  The $112,000,000 in external funding is not broken down in the Regents' public document so I am still not clear where the money is supposed to come from.  As has been noted by Dan Mitchell at the UCLA Faculty Association blog  as part of his helpful coverage of this issue (e.g. March 23, and an update with some community objections and financial concerns March 28), part of the initial costs will come from subsidies from two other UCLA operations.

As this case illustrates, fundraising does not produce unencumbered net new money.  A  donor makes a generous gift.  The private money leverages public money (along with operating revenues here)-- each Luskin dollar uses 3 additional UC dollars.  The gift adds new resources to the university, but it also absorbs resources.  The gift is generally announced as self-financed or better, but here, assuming that actually becomes the case (after year 20, according to one speaker today), the revenues from the conference center revenues will never become available to help support academics, as one would like revenue-generating auxiliaries to do.  Academic activities will take place there, but funded by the campus with help from an additional Luskin gift.

Fundraising has two financial weaknesses.
  1. It targets but does not scale (e.g. the Fullerton case). 
  2.  It creates new liabilities and needs cross-subsidies.   
In order to deal with these issues, private fundraising needs to present itself not as a replacement for public funding but as dependent on public funding.  Donors need to be told that years of public funding cuts have jeopardized the ability of even the wealthiest of public universities to accept normally structured gifts.   Gifts will need to be restructured to reflect their full costs.  Finally, these costs need to be debated openly during a campus assessment period that includes the faculty and academic staff who are going to be bearing part of the cost.

UPDATE: read Dan Mitchell's latest tale of bloated plans, withheld documents appearing at the last minute, uncompensated parking garage teardowns, bond interest not seen as a liability -- among other things. the Regents did not recommend  the project for approval.  See also Cloudminder's Brain Drain version of UCLA giving up 70% of their interim funds in 3 minutes for no obvious reason other than that their big number was no more solid than their little one - yoolp.


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