Are Our Colleges Playing Poor?

OCTOBER, 1928

BY WILLIAM B. MUNRO

I

SOME two years ago my distinguished colleague, Professor William Z. Ripley, told the readers of the Atlantic something about the faulty financial methods of the big business corporations. He called attention to the concealment of assets, the juggling of profit and loss accounts, the omission of proper allowance for depreciation, the failure to provide adequate reserves in some cases, and the frequent withholding of information which the stockholder ought to have. The devious ways of Wall Street were interpreted to Main Street in vigorous and colorful phraseology, with plenty of apt illustrations. These disclosures came as a surprise to the financially unsophisticated, but they were made in the interest of better business ethics, and even the corporations may be grateful for them in time.

I have sometimes wondered why big business, when its shortcomings are thus exposed to the world by college professors, does not reciprocate by sending some meticulous fellow to probe the financial methods of the colleges in quest of a tu quoque alibi. There would be no difficulty in finding a lot of them, for there is hardly a single off-color practice in corporate financing that does not have its counterpart in our institutions of higher education. College professors, as a class, are quick to see the mote in the other fellow’s eye. They take the righteousness of their own institutions as self-evident. In their courses on public finance, business organization, and accounting, they will dissect a municipal budget or a corporation balance sheet with caustic comments, forgetting that criticism, like charity, can sometimes make its best beginning at home.

Let me give an illustration. In the latest financial report of a certain American university there is a list of invested funds which constitute the endowment. It includes a block of General Electric common, nearly sixteen thousand shares, the value of which is given as one dollar! The actual value of that stock, as a matter of fact, is more than two million dollars. It is worth more, indeed, than the entire endowment of many small colleges. For the year covered by the financial statement, the dividends from this stock amounted to over $47,000. The treasurer points with pride to the fact that ‘the net income of the general investments’ amounted to more than 5 1/2 per cent for the year. No wonder, when a single dollar in book value yields a return as stated above! But is it in keeping with collegiate ideals of truth and light that the university’s financial reports should provide this particular brand of verity and illumination?

Copyright 1928, by The Atlantic Monthly Company. All rights reserved.

The foregoing illustration is by no means unique. You will find large holdings of United Fruit carried on its books by the same institution at less than $40 per share when the true market value of this stock is nearer $140. You will find Electric Bond and Share common, in big blocks, set down at a merely nominal valuation, when everyone knows that its value is substantial.

Nor is this college different from many others. Its financial statements are clearer and more candid than those issued by the majority of academic institutions; its treasurer is a man of the highest financial skill and competence. The practice of underfiguring assets, and thus showing an artificially inflated return on investments, is common in college financial statements everywhere. It is sometimes carried to a point where the announced figures of total endowment are quite misleading to the alumni and to the public.

There is a reason for this. Figures of modest proportions are desirable in support of the perennial assurance that college endowments are pitifully inadequate. And of course it is much easier to demonstrate this inadequacy of productive resources when book values are deflated 30, 50, or in some instances 100 per cent. It will be urged in extenuation, no doubt, that the college authorities like to be on the safe side and hence prefer to carry investments at what they cost, or even below cost, rather than at what they are worth; but a business corporation that does anything of the sort is likely to find itself charged by its professorial critics with a concealment of assets for the benefit of the insiders. Financial statements, by whomsoever issued, should aim to give a true portrayal of the actualities. If not, the only ethical ground for issuing them disappears.

Of course there is a reason why the colleges are not always ready to practise what they preach for the benefit of others. They claim to be engaged in the pursuit of truth, but that is not the whole story. The colleges are also engaged, with equal ardor, in the pursuit of funds. They want more endowment, and there are two good talking-points in their quest for it: namely, that the college authorities have great financial competence in handling the funds already committed to their care (as is proved by the high net yield), and, second, that if additional benefactions are obtained they will be made productive with the same efficiency. To this end, the invested funds are often juggled down and various assets written off. The valuations are shrunk to a point where they will not jeopardize the success of the college when it passes the hat among its alumni.

For the college must bear the protective coloration of poverty, no matter what its opulence. The exigencies of an endowment campaign sometimes call for a moratorium on the promptings of the academic conscience, but he who would be successful as a mendicant must not jangle the gold in his pockets. So the sum total of collegiate resources is neatly whittled for insertion in the president’s report, and then the need for increasing it by new subscriptions is assiduously proclaimed, in season and out, by those loyal house organs known as alumni bulletins. Their job is not merely to sell the college to the alumni and the public, but to keep it sold — which is a more difficult task. Very often these alumni publications are subsidized from the college treasury, from the tuition fees or other income, and the amount is hidden in the regular college budget under the head of ‘publicity’ or ‘promotional expense.’

Looking through the reports of college treasurers, one is impressed, moreover, by the frequent examples of inadequate diversification. It will be conceded, I think, that trust funds should not be heavily thrown into investments of any one type, or concentrated in a single locality. In the interest of safety there should be a reasonable spread. Yet there are some colleges which have invested from two thirds to three fourths of their entire endowment in real-estate mortgages, with a very large proportion of these mortgages in their own immediate neighborhood. The danger of a serious financial reverse, in such cases, is by no means negligible — especially where farm mortgages bulk large in the list.

Safety is sometimes sacrificed to yield in other respects. The investing is usually directed by a finance committee of the board of trustees, with the college treasurer as a member. These men, although not slothful in business, have their own financial idiosyncrasies, or, what is more to the point, their own respective financial affiliations. They are directors of banks, railroads, public-utility concerns, or industrial organizations. If you keep the personnel of this committee in mind when you glance through the list of college investments, you will discern the possible explanation of a good many things, including the retention of some holdings which are obviously speculative or otherwise not suitable for such a list. If they were held by a bank, they would promptly come under the examiner’s censorship.

II

Then as to deficits. It is sometimes said that a college without a deficit is a rarity. That statement needs qualification. It is a rare college whose operating balance does not stand in the red at the end of the fiscal year, to be sure; but this does not necessarily mean an excess of current expenditures over current income, as in the case of business corporations. I have known a university to announce a deficit at the end of a year, and to plead urgently with its alumni for contributions on that account, when the total income actually exceeded the total expenditures for that year by several hundred thousand dollars. The deficit, as a matter of fact, was in unrestricted income only. It meant that the institution did not have too little money, but too little leeway in the spending of it.

In other words, a college deficit is sometimes a bugbear which is conjured up by the comptroller’s office as a spur to professorial economy and to alumni generosity. In accomplishing this it becomes necessary at times to employ some of the subterfuges which holding companies have devised for masking their true financial operations. One method is to charge against unrestricted income various expenses which could have been defrayed out of gifts for designated purposes, leaving the latter to pile up by the accretion of interest. Another plan, even more common, is to charge against current income a lot of items which are in reality outlays on capital account, and which would be so dealt with by any well-managed business organization. The whole cost of a new heating plant, or of reconstructing some old building, or the money expended for additions to the campus, or for the acquisition of permanent equipment — such things are sometimes debited against the income of a single year. There are many ways of getting the balance on the wrong side of the ledger when that consummation is desired.

And it generally is a desideratum in college accounting, because a surplus is one of the most embarrassing things that a college can possess. It is, in effect, an invitation to every head of a department to come forward and raid the treasury. Just announce that any college has money unappropriated, and within a few hours the president can count upon finding most of the faculty in his waiting room. Promotions, additions to the staff, more equipment — all sorts of things will be pressed upon his attention. Every college professor believes that his own branch of work is by far the most important in the whole institution. That is the glory of his vocation. So long as there is an annual deficit, he may restrain his importunities for expansion; but not when he hears that there is a credit balance in the exchequer. Before the burning ardor of faculty enthusiasm, even a large surplus will fade away like snowflakes in June. In this fading process, however, there is certain to be resentment engendered among those who have failed to get their share. Better it is to have no surplus at all — and it is so arranged by most college presidents who know their business.

III

The almost complete dissociation of contributions from control, and the vesting of ultimate authority in the hands of those who have provided very little of the capital stock — these are two features of corporate reorganization which have drawn much criticism from professors of economics during the past few years. But it is not certain that the colleges are altogether cleanhanded by comparison. College alumni are the Class B stockholders of the academic organization; they put their good money into the enterprise and are left without voting power. Or, to say it more accurately, they are merely vouchsafed the right to vote for members of some college board which does not control either the expenditures or the general policy — an alumni council, a board of overseers, or whatever it may be called.

These bodies do not, as a rule, appoint anybody or decide anything. The real governing authority of an endowed college, be it the board of trustees, or of directors, or of fellows, is not customarily chosen by the benefactors or by the contributing alumni; it is self-perpetuating. In the case of the state universities, on the other hand, it is usually appointed by the governor or elected by the people, who supply it with funds from taxation. Occasionally, in the endowed institutions, the alumni are given some representation on the board of trustees, but almost invariably these alumni representatives form a small minority of the board. It is the little group of ‘Class A stockholders with voting power’ who have the control and exercise it.

Anyone who has sat on a board of college trustees is well aware of the numerous departures from sound operational financing which are the outcome of this control by a self-perpetuating board whose members, although men of the highest ideals and probity, are heavily immersed in their own affairs and have no time to spend on any close scrutiny of the college budget.. Most colleges profess to have a budget system, by the way, but in many instances it is not a system at all. Sometimes it covers the salaries only, leaving all the other expenditures as a hostage to good fortune. At any rate, the various criteria of sound budgetary procedure, as set forth by college professors for application in public and private business, are usually honored in the breach. Rarely, if ever, is a college budget the effective instrument of financial control that a budget is intended to be.

The procedure is something like this: the president and the treasurer (or comptroller) sit down together and figure out what the income for the next fiscal year is likely to be — income from tuition fees, from endowment, from gifts, and so on. Some of these items are hard to estimate with accuracy, inasmuch as the revenue to be derived from tuition fees will depend on the size of the student enrollment, which often varies considerably from year to year, and there is no certain way of forecasting what the gifts for current use will be. But, having made their calculations, they then deduct the actual expenditures of the past year from the total estimated income of the next, and the balance indicates how much additional the college can spend during the ensuing twelve months. The president thereupon, either alone or in consultation with the deans, proceeds to distribute this prospective overplus. Some of it goes where it will allay restlessness in the faculty, or otherwise do the most good. Anyhow, when all the additions are tucked into the estimates, usually without any allowances for depreciation of plant or equipment, or for reserves of any kind, the whole thing is called a budget.

Then the president lays it before the board of trustees, reminding them that they are busy men and of course will not care to hear it read in full. It is usually adopted without comment, question, or amendment. There are no hearings at which any of those who are most concerned in the appropriations may appear and be listened to. For the board of trustees to have the heads of departments come before them and explain what the various appropriations mean (as legislatures and city councils do) would be an unheard-of innovation. No self-respecting president would tolerate such an encroachment on his prerogatives.

I

Allowances for depreciation of plant and equipment, write-offs for obsolescence, and reserves for contingencies, whether foreseen or unforeseen, are the exceptions rather than the rule in college budgeting. It is taken for granted that when a building gets old and unserviceable some benefactor will come forward and replace it. If he does not, the departments which are housed in that particular building must struggle along, often under the most discouraging handicaps, for an indefinite time. Botany may be housed in a mansion, and chemistry in a shack, because some donor happened to have a bucolic idiosyncrasy. Good financial planning would suggest the creation of a building fund, with additions to it each year, so that the college might fill the gaps which benefactors invariably leave. Business corporations make provision for replacements, reconstructions, and contingencies; but colleges as a rule do not. Hence their educational plants are often badly out of balance. They are bound to be, so long as no deference is paid to the laws of amortization.

So with prospective burdens upon the salary schedule. Many colleges promise their professors the advantage of a sabbatical year; that is, every seventh year off duty on half pay. Or, as an alternative, they give the professor one half of every seventh year on full pay. But few of them ever create a reserve fund from which this arrangement can be financed without detriment to the regular programme of instruction. Hence, when the time comes for a professor to take his sabbatical absence, his courses are allowed to lapse for the year, or the additional work is thrown upon his already overburdened colleagues in the same department, or some ‘ shavetail’ instructor, adorned with a brand-new doctorate of philosophy, is hired as a pinch hitter out of the half salary that remains.

The impairment of instruction is serious, no matter which of these alternatives is adopted. It represents a lack of prevision and planning. If a college would set aside each year one fourteenth of the total salary appropriation as a sabbatical reserve fund, it could keep its instructional efficiency up to regular standards at all times, no matter how many sabbatical absences fell due in any one year. There may be some college that does this, but I have yet to hear of it.

V

In all fairness, it should be pointed out, however, that the financing of the endowed colleges has been a difficult problem during the past ten years. Enrollments have greatly increased, and the expansion of revenues has not kept pace. There have been numerous campaigns for new resources, and the alumni of colleges have everywhere shown an amazing generosity; but even so, few colleges are better off to-day than before the war. Even a freehanded granting of honorary degrees has not allured benefactions in sufficient measure. It has been said of one ambitious university president in the West that, having failed to get a large addition to endowment by a single drive, he still hopes to secure it a little at a time, by degrees. Looking over the list of degrees honoris causa at his recent Commencements, I see that he is on his way.

Meanwhile more students to be educated at a loss per capita, higher salaries for the teaching staff, the increased cost of equipment, supplies, and maintenance — these additional burdens go a good way to explain the hard financial sledding that so many of our colleges have had, although they do not tell the whole story. There are other reasons, even if they are not so frankly proclaimed in presidents’ reports or alumni bulletins.

For one thing, there has been a needless expansion of college courses. Even the so-termed small colleges no longer have small curricula. On the contrary, their programmes of instruction are making a valiant attempt to cover the whole field of knowledge, both human and divine. Nearly all our colleges have too many courses. They have too many courses because each feels that it must go its neighbors one better. Just look through their catalogues and see the interminable array of full courses, half courses, quarter courses, ‘intersession’ courses, summer courses, seminars and pro-seminars, conferences and colloquiums, which run the gamut from Assyriology to the Theory of Aeronautics and from Christian Missions to Foreign Exchange.

This disintegration of the field of learning into its subatomic elements is the result of collegiate rivalry in the attempt to teach everything that is teachable and some things that are not. It has diluted the curriculum in a way that is detrimental to the best interests of education, and it has burdened the colleges with too many teachers of nonessential subjects. Fewer courses, given by more competent and betterpaid instructors, would be of advantage to all concerned, and not least to the makers of the college budget.

A second reason for the relentless mendicancy of the colleges, despite successive increases in their tuition fees, may be found in the still greater inflation of administrative expenses. Manufacturers would call it ‘overhead.’ But whatever you call it, the cost of the nonteaching personnel has been growing like Jonah’s gourd. The colleges have been adding to their pay rolls a whole battalion of provosts, deans, assistant deans, registrars, recorders, auditors, bursars, business managers, publicity directors, purchasing agents, employment managers, vocational counselors, comptrollers, syndics, or what have you? Their increase is like that of microörganisms, by geometrical progression.

Time was, not so long ago, when a large university could get along with a single dean; to-day even a small one must have a whole hierarchy of them — a dean of the faculty, a vice-dean, a dean of men, a dean of freshmen, a dean of women (when it has any), a dean of special students, a dean of deficients, and anywhere from one to a half-dozen minor satellites as assistant deans. What these institutions will presently need is a Decanus decanorum, a dean of deans, whose business it will be to keep all the other deans marching in lock step.

For it is in lock step they march. Their paces are called out for them. Or, to shift the metaphor, all these administrative functionaries are carbon copies of the man higher up — a bit smudgy and indistinct, perhaps, but reproducing with mechanical exactitude even the slips in dictation. The dean of the faculty is the king-kleagle of all these ‘Yes-men.’ There is no division of power, and rarely a difference of opinion — otherwise there would presently be a new dean. In his relations with the college president, the ideal dean is a true Polonius: —

HAMLET. DO you see that cloud that’s almost in shape like a camel ?

POLONIUS. By the mass, and it’s like a camel, indeed.

HAMLET. Methinks it is like a weasel.

POLONIUS. It is backed like a weasel.

HAMLET. Or like a whale?

POLONIUS. Very like a whale.

In any event, much of the money which the alumni have contributed for the improvement of instruction has been diverted to these swivel-chair soldiers of the educational army. They have been eating up the commissariat. Who ever heard of anyone endowing the registrar’s office, or the dean of freshmen, or the director of regional service? No, these supernumeraries merely create a short circuit between themselves and the unrestricted income of the college. That is why the free income so quickly vanishes. Many professorships are endowed, and hence the incumbents are no burden to the budget; but the proportion of actual teachers to the total paid-personnel has been going down during the past dozen years. In some institutions they are already outnumbered by the noncombatants.

The opportunities for retrenchment in this overhead are everywhere considerable. There is hardly an institution of higher education in the land that could not cut its corps of administrative officers in half without serious injury to the process of instruction. This estimate errs, if at all, on the side of conservatism. We are in danger of forgetting what James Russell Lowell pointed out, many years ago; namely, that ‘the fame and glory of a college depend on the teachers who teach therein.’ All else is ancillary to the furtherance of the teacher’s effectiveness. The expansion of administrative work can be defended only so far as it contributes to that end. In many of our colleges, however, it has gone much further; it has become an end in itself. The teacher who wants to teach, to study, and to write is compelled to divert his time and attention to the chore of compiling records, filling questionnaires, making out requisitions, authenticating vouchers, and elucidating the obvious at the behest of these paper-work zealots who spend a small fortune each year for stenographers, printing, stationery, and postage.

VI

But there is no need to multiply illustrations of the various ways in which the colleges fall short of the perfection which they expect business organizations to exemplify in matters of financial candor and efficiency. It will be replied, of course, that a college is not a cotton mill and should not be measured with the same yardstick — which is true; yet it does not alter the fact that accuracy, frankness, and fidelity to ideals are virtues no less in education than in business.

The endowed colleges of the United States, taking them as a whole, are giving a high measure of service in return for the generous benefactions which they have received and are receiving. They have greatly improved their methods of accounting and of financial reporting during the past quarter of a century, which is in part due to the pressure exerted upon them by the various educational foundations.

But there is still some distance to be covered before the college professor of business administration can feel himself safely out of a glass house.