Common Sense: How Cooper Union’s Endowment Failed in Its Mission

Since Peter Cooper’s heirs gave the Cooper Union for the Advancement of Science and Art the land under the Chrysler Building in 1902, the school’s endowment has enabled it to offer students a high-quality, tuition-free education through two world wars, the Great Depression and multiple stock market crashes and financial crises.

So why does Cooper Union now find itself forced to charge tuition of an estimated $20,000 a year, abandoning what many consider its most important legacy?

This week, angry students were occupying the president’s office in protest. They might be even angrier to learn that some of their future tuition dollars will be going to support wealthy hedge fund managers who oversee some of the school’s $666.7 million endowment.

Cooper Union may be an extreme example, but it’s hardly the only college suffering from a combination of decades of bad decisions and recent treacherous markets. Its endowment was typical of the many endowments and pension funds that took the plunge into so-called alternative investments like hedge funds, which have lured investors with the promise of generous and steady returns in both good times and bad. And compared with many universities, Cooper Union did a good job managing its endowment through the recent financial crisis. As recently as 2009, the school maintains, it ranked first among all American universities for endowment performance.

Even so, hedge funds couldn’t solve the college’s dire financial problems, and many hedge funds have been far more successful at lining the pockets of their managers than beating market averages. (The typical hedge fund manager charges a fee of 2 percent of assets plus 20 percent of any gains.) In fiscal year 2009, which ended June 30, 2009, Cooper Union’s hedge funds and other managed assets lost 14 percent, and the returns since then have lagged the stock market’s recovery. Today, Cooper Union’s endowment is lower than it was at the end of fiscal year 2008, even as the Standard Poor’s 500-stock index has hit new highs. From 2009 to 2012, a simple, low-fee mix of 60 percent stocks and 40 percent bonds far outperformed hedge fund indexes.

Weak hedge fund performance is hardly Cooper Union’s only financial problem. Today’s crisis has been brewing for decades if not longer, and comes after years of what looks like bad management decisions with little accountability or supervision by New York’s attorney general, who oversees nonprofit institutions. Over the decades, Cooper Union has sold off assets piecemeal, failed to diversify its endowment, taken on debt and built a lavish new building. After the 2000-1 stock market plunge, the managed endowment, excluding the Chrysler Building, lost half its value. The school never cultivated its potential donor base, leaving most graduates with the impression that it was wealthy and didn’t need alumni contributions.

In some ways, it’s surprising that the school’s trustees managed to stave off charging tuition as long as they did. “We’ve only been one step ahead of the bailiff for decades,” said John C. Michaelson, a trustee who runs an investment firm and has been chairman of the investment committee since 2012, as well as from 2005 to 2008. “We were pulling rabbits out of hats.”

The simplest rule of asset management, one familiar to even novice investors, is diversification. Yet Cooper Union’s endowment is highly unusual in that it’s concentrated in a single asset — the land under the Chrysler Building — which accounts for nearly 84 percent of its assets, according to its most recent financial statement.

By contrast, Emory University in Atlanta, which as recently as 2001 had 60 percent of its main endowment in Coca-Cola stock, has since sold all of it and diversified into other assets.

Having so much of the endowment in a single asset “is against everything I stand for,” Mr. Michaelson said. He and other trustees said they considered selling it in 2006, when the college was facing mounting financial deficits, but concluded that would be impractical. Cooper Union receives annual lease payments of $9 million from the owner of the Chrysler Building, Tishman Speyer Properties, and $18.2 million in so-called tax equivalency payments that would otherwise go to New York City. The right to the tax revenue couldn’t be transferred to a buyer.

Article source: http://www.nytimes.com/2013/05/11/business/how-cooper-unions-endowment-failed-in-its-mission.html?partner=rss&emc=rss