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A big chunk of this surplus goes back out the door as "mandatory transfers," such as payments on university debt. The rest of the money disappears through a mysterious category called simply "other transfers"--money that is moved around at the discretion of the trustees. Some gets plowed back into the university's burgeoning endowment, some pays for services provided by one portion of the university to another, and some is transferred into surplus accounts for use by those departments lucky enough to have spent less than they were budgeted for.
In the past, such maneuvers have allowed universities to conjure up an image of poverty, useful when trying to raise money or justify an increase in tuition. But this year, for the first time, a change in accounting rules will require universities to present a more realistic picture of their financial health. By requiring more rational disclosure of the origins and destinations of money, the new rules will probably make universities look a lot healthier than the common wisdom might have presumed, says Morton Schapiro, dean of arts and sciences at the University of Southern California and an expert on academic finance. "It's going to be harder for presidents to write those letters about why they had to raise tuition."
In particular, the change will clarify the long-mysterious relationship between a university's endowment and its operating budget. An endowment functions like a charitable foundation but with a single recipient, the university. Each year universities transfer to their operating budgets a percentage of the total value of their endowment. They set a "spending rule," which typically requires that they transfer 5% of the total value of the endowment. In practice, says Schapiro, schools often don't contribute even that much. "Everybody says it's a 5% rule, but that's bulls___."
Penn's endowment rose 25.9% last year, to more than $2.1 billion, much of the increase coming from market appreciation. The university's spending rule calls for it to spend 5%--but not of that full amount. Rather, Penn limits itself to spending 5% of an average of the total endowments reported for the latest three years. For this school year, that moving average is $1.5 billion. But Penn gets even stingier. This year it projects that it will spend only 3.7% of this average, or $58.3 million, on university programs. Which works out to 2.8% of the current total of $2.1 billion.
Everybody does it. "We can be out in a boom market making money hand over fist, and very little of it will show up in the operating budget," says Gordon Winston, co-director of the Williams College Project on the Economics of Higher Education. Yale, says Gordon Lafer, research director of the Federation of University Employees, Locals 34 and 35, "could afford to have nobody pay tuition, and still the endowment would increase."
In fact, Penn is set to have its trustees consider increasing its spending-rule percentage, says Judith Rodin, president since July 1994--but to pay for major capital projects, not to limit tuition.