US universities face challenges but will not lose dominance

 

The battle lines are drawn. More than 200 American universities and colleges have united in opposing what they regard as overreach on the part of the Trump administration.  A statement signed by, among others, the presidents of Columbia, Princeton, Brown and Harvard, says:

As leaders of America’s colleges, universities, and scholarly societies, we speak with one voice against the unprecedented government overreach and political interference now endangering American higher education. We are open to constructive reform and do not oppose legitimate government oversight. However, we must oppose undue government intrusion in the lives of those who learn, live, and work on our campuses. We will always seek effective and fair financial practices, but we must reject the coercive use of public research funding.

The pushback comes as the Trump administration demands sweeping changes in the way American universities are run, in particular, their response to alleged antisemitism on campuses. The US government is mounting pressure on universities in three ways: withholding federal grants, looking into their tax-exempt status, monitoring international student enrolment (which is a source of funding as well as diversity of talent).

The large universities have huge pools of endowment. Harvard sits on over $50 bn in endowments. Does the US government withholding around $ 2bn matter? How material is government funding for American universities? The Economist has some useful data and points to make.

Federal research grants account for a double-digit share of the revenue of most prestigious private universities, so losing them permanently would be a body-blow for any of them. They make up 11%, 15% and 18% of the income of Harvard, Yale and Princeton universities respectively. Columbia, at 20%, is especially vulnerable.

The proportion may be higher for small universities, rendering them even more vulnerable to government pressures. Can the leading universities use their endowments to tide over the cutbacks? It's not easy:

Universities’ endowments are not as much help as their billion-dollar valuations would suggest. For a start, much of the money is reserved for a particular purpose, funding a specific professorship or research centre, say. Legal covenants often prevent it from being diverted for other purposes. In any case, the income from an endowment is typically used to fund a big share of a university’s operating costs. Eat into the principal and you eat into that revenue stream.

 What is more, eating into the principal is difficult. Many endowments, in search of higher income, have invested heavily in illiquid assets, such as private equity, property and venture capital. That is a reasonable strategy for institutions that plan to be around for centuries, but makes it far harder to sell assets to cover a sudden budgetary shortfall. 

There is also the threat to the tax-free status. The previous Trump administration had imposed a tax of 1.4 per cent on endowments larger than $500,000 per student-it affected only 52 institutions. Moves are afoot to lower the endowment threshold and increase the tax rate. Why not tax the richer universities and use the money to fund public education, many argue.

American universities are in no mood to bend before the US administration's demands, so they do face challenges in respect of their finances. The Economist warns in another report:

The MAGA plan to remake the Ivies could have terrible consequences for higher education, for innovation, for economic growth and even for what sort of country America is. And it is only just beginning. 

Well, the Economist exaggerates the threat. US universities will find ways to raise resources- through debt, more endowments, more projects, higher fees. Even if there is some hit to the income, the scale of research funding will dwarf what is available in the rest of the world. Government departments, such as the Pentagon, will continue to fund projects of importance to them, entirely out of self-interest- they need the cutting edge that American universities alone can provide. 

American leadership of higher education is so dominant that it's hard to see it reduce in the foreseeable future. The Trump administration's moves pose headaches but are unlikely to pose any major threat to American universities.