What goes into a university budget? And how do endowments work? Let an expert be your guide

Across the U.S., university budgets are in flux, in part because the Trump administration has shaped higher education policy through funding threats, investigations and lawsuits against colleges nationwide.

At least one university has agreed to pay the federal government millions of dollars to settle investigations — and to restore access to over $1 billion in federal funding.

And in California, some campuses face layoffs and course cuts — even though tuition and enrollments are at all-time highs.

To better understand the inner workings of higher ed budgets, LAist turned to an expert: Jesse Rothstein is a professor of public policy and economics at UC Berkeley, as well as the director of the college’s Center for Studies in Higher Education.

What’s in a college budget?

Whether public or private, Rothstein said, university budgets mainly consist of:

• tuition and fees
• donations 
• research grants from the federal government and private foundations

Some schools also bring in revenue by running hospitals, which allows them to charge for procedures and collect insurance payments. Public universities also receive state appropriations.

Historically, Rothstein added, public universities in California did not charge tuition, because the state appropriation covered all of it.

"But, over the years, the state hasn't kept up its share of the funding,” he said. “We've enrolled more and more students, and the state hasn't been able to increase the funding commensurately."

And even when universities increase tuition, not all that money is actually going into university's bank accounts.

"A pretty substantial share of tuition gets folded back into financial aid, because many students can't afford to pay the whole tuition," Rothstein said. "When you increase tuition by a dollar, something like 30 or 40 cents of that is going to go back to providing financial aid for students." 

What is an endowment?

Colleges often get donations from alumni, and from corporations and other interested parties.

"Many universities, especially the more selective [ones], do raise a fair amount of donations,” Rothstein added.

The donations are sometimes earmarked for specific purposes, including research projects, new centers, faculty chairs, or financial aid.

“It's up to the donor how they want to allocate that money," he said.

These donations make up what’s known as “endowments,” which are pools of money that campuses invest in stocks, bonds and real estate, Rothstein said. The returns on that investment are used to fund the aforementioned items (centers, chair, aid, etc.), sometimes in perpetuity.

Some of these university endowments are huge. Harvard, for instance, currently has an endowment of $53.2 billion.

How can endowments be changed?

For decades, student activists and faculty have called for universities to cut ties with investments they oppose, including companies linked to apartheid in South Africa, fossil fuels and, more recently, investments from weapons manufacturers and companies and assets tied to Israel.

How hard is it for universities to divest?

If a college's endowment bought shares on the stock market, “then it's as simple as selling the shares,” Rothstein said. The universities “might take a loss on those shares because they're selling it at a bad time, but it's not that complicated.”

But, often, universities “find that their returns are better if they don't just buy shares on the stock market, but make private investments that are off the market,” he added.

This could include investments in non-traded companies or developments. “And those are less liquid,” Rothstein added. “That makes it harder to sell them at the drop of a hat, if you need to. You may take a big loss if you try to get out of them."

Universities might also choose to invest in index funds, he said.

“There are companies that will sell funds that allow you to invest in all the [30] different companies that are in Dow Jones, or all the different companies in the S&P [500]. And when you buy the index fund, you don't get a choice,” Rothstein said. “You're investing in little bits of all of them."

Why research grants are a big deal

Private companies and foundations sometimes provide research grants to universities, but the biggest supplier is the federal government, Rothstein said.

This money is used to fund a specific research project at a university. Usually, a researcher — or a team — will submit a proposal, indicating what they’re trying to accomplish, how long it will take and how much it is projected to cost.

Earlier this month, Columbia announced that it has agreed to pay more than $200 million to the federal government, following several investigations and months of negotiations with the Trump administration.

The settlement, as NPR reported, restores Columbia's access to about $1.3 billion in federal funding. More specifically, the settlement resumes payments on research grants the government had frozen, as well as some contracts the government had terminated.

In an email, acting President Claire Shipman said that in addition to providing “critical continuity for faculty, students and staff across every discipline,” the settlement also makes the university eligible for future grants, contracts and awards.

When discussing the settlement, Rothstein underscored that "$1.3 billion is not one big arrangement between the university and the government.”

That figure, he said, is made up of “thousands of different projects that different researchers have written proposals for and have gotten grants to fund and have used those [grants] to hire the people in their lab.”

“There are established processes by which the federal agencies gave out these research grants,” he added. “They have very elaborate review processes with external review boards. And then, when they finally select somebody to give a grant to, there's a contract between the government and the university about the work. It is not usually an option for the government to just say, 'Oh, sorry, we decided not to fund that anymore.'”

When the government and a university enter a research grant agreement, they also negotiate on the project’s indirect cost rate. The federal government, Rothstein said, has decided to cap them at a much lower rate than in the past. And that’s a violation of the contracts that have been set up.

"I think it's important that people understand that these indirect costs aren't graft, they aren't corruption. They're just a way of managing the cost of a complex project where it doesn't make sense to itemize every single cost that you face in doing it," he said.

How can a university recover lost grant money?

In the past, Rothstein said, when universities were accused of breaking the rules — “maybe not honestly reporting their expenses or somehow violating their contracting rules” — what typically followed was “a negotiation about what the punishment will look like.” Sometimes that involved paying fines. “But there's always been a clear violation and a clear due process for investigating that violation," he said.

"I've never seen [disputes between universities and the federal government] take this form,” he added. “It feels an awful lot like extortion.”

In Rothstein’s view, the longstanding research grant system in the U.S. has made the country “the unquestioned scientific leader in the world.” Researchers, he said, have found cures for cancer and invented the internet, among other accomplishments.

“If we break this model, we don't really have a plan for how to replace it,” he said. “I think we risk really tearing down one of the jewels of the United States economy."