Fleischer on Mandatory College Endowments in the NYT

Professor Victor Fleischer from the University of San Diego has an opinion piece in today's New York Times advocating an 8% annual required payout for university endowments over $100 million.   Such a payout is more than the 5% amount required for private foundations under Section 4941, and well more than the payouts for medical research organizations and private operating foundations.  In fact, it is more than the amount set as a rebuttable presumption of unreasonableness for endowment spending under Section 4(d) of UPMIFA, which is 7%.

Fleischer's concern was prompted by his research into investment manager compensation, which indicated that that private equity fund managers received more in payouts than students at at least five universities: Harvard, Yale, Texas, Stanford and Princeton.   Much of this compensation was in the form of the dreaded carried interest, which is under scrutiny in numerous arenas, not just the nonprofit world.

It is an interesting proposition.   I am somewhat dubious of an 8% payout, wondering whether that might have an adverse impact on the risk profile of endowments, which by all accounts already have fairly aggressive asset allocations (Fleischer says that endowments this size are returning over 8% already so it won't matter).   I also wonder what rationale there is for subjecting only university endowments to such a rule, as it seems to me that there may be other exempt organizations of a similar size that might have a similar investment compensation issues (large foundations, for example, only pay 5%) that are not subject to such a high payout requirement.   Finally, isn't the issue really the investment manager compensation, so mandating a payout isn't really reaching the root of the problem?  But I may be picking around the edges on this.     Would love to hear others thoughts.

EWW