[Marxism] Cooper Union

Louis Proyect lnp3 at panix.com
Sat May 11 07:11:59 MDT 2013


The Cooper Union for the Advancement of Science and Art, commonly 
referred to simply as Cooper Union, is a privately funded college in the 
East Village neighborhood of Manhattan, New York City, located at Cooper 
Square and Astor Place. Founded in 1859, and inspired in 1830 when Peter 
Cooper learned about the government-supported École Polytechnique of 
Paris, the school established a radical new model of American higher 
education: its mission reflects founder Peter Cooper's fundamental 
belief that an education "equal to the best" should be accessible to 
those who qualify, independent of their race, religion, sex, wealth or 
social status, and should be "open and free to all".

full: http://en.wikipedia.org/wiki/Cooper_Union

NY Times May 10, 2013
How Cooper Union’s Endowment Failed in Its Mission
By JAMES B. STEWART

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 could 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.

But assuming a 5 percent return, a $27.2 million annual revenue stream 
would be generated by selling the Chrysler Building land for $544 
million, which doesn’t seem so far-fetched a price. Tishman Speyer sold 
666 Fifth Avenue, which hardly compares to the landmark Chrysler 
Building, for $1.8 billion in 2006, and bought the MetLife building in 
2005 for $1.72 billion. And the Chrysler site might have been highly 
appealing to a sovereign wealth fund or other major real estate investor 
looking for a trophy asset. (A Cooper Union spokesman said the trustees 
needed to generate annual revenue of $55 million, which the lease is 
expected to produce beginning in 2018. The amount necessary to generate 
that revenue at a 5 percent return would be $1.1 billion.)

Still, it doesn’t seem the trustees made any serious attempt to even 
determine its market price, and the college seems to have had a 
nostalgic attachment to it as a part of its heritage. In 2006, Cooper 
Union defended the decision not to sell the land by describing it as “a 
gift from the children of Peter Cooper,” that is “the heart of the 
Cooper Union.”

Instead, Cooper Union renegotiated the lease with Tishman Speyer, which 
was not due to expire until 2047. The college negotiated an increase to 
$32.5 million in 2018, which rises every 10 years thereafter. But it 
still had to make it to 2018, five years into the future.

At the same time that Cooper Union decided not to try to sell the site, 
it borrowed $175 million, using the Chrysler site as collateral, to 
build a new engineering and art building and “to meet future operating 
deficits,” as the school acknowledged in court papers seeking permission 
for the loan. The term of the loan was 30 years, at an interest rate of 
5.875 percent, which amounts to more than $10 million in interest 
payments a year. By today’s standards, 5.875 percent is exorbitant, but 
the college said it couldn’t refinance the loan at a lower rate.

Hardly anyone disputes Cooper Union’s need for new engineering 
facilities. Whether it needed that particular building, at such high 
cost — about $166 million — remains a matter of dispute. Trustees told 
me that the college’s development consultants told them that a signature 
building with a marquee architect — in this case, Thom Mayne of 
Morphosis Architects — would attract a large donor eager to have his or 
her name on a trophy building.

But no such donor materialized, and experts I consulted said Cooper 
Union had it backward — the first step is to attract the donor, who then 
is involved in choosing the architect and designing the building. “I’ve 
never heard of a case where you build the building first and hope a 
donor comes along,” said Kenneth E. Redd, director of research and 
policy analysis for the National Association of College and University 
Business Officers. Trustees I spoke to agreed that the assurances they 
got that donors would materialize proved to be wrong. “We were supposed 
to raise another $125 million,” a trustee told me. “We didn’t. Maybe we 
were over-optimistic, but we had these professional development people 
who told us someone would want to put their name on the building.”

Of the loan proceeds, $34 million was turned over to the school’s 
endowment. According to Mr. Michaelson, all of that was held in cash and 
used over the next few years to cover the school’s mounting operating 
deficits. “I never would have borrowed money to invest in the market,” 
Mr. Michaelson said. “It’s against everything I believe in; I don’t 
believe in leverage. Leverage is great on the upside. It destroys you on 
the downside. We couldn’t afford to lose money.”

But the endowment aside, the large loan did have the effect of adding a 
large amount of leverage to Cooper Union’s balance sheet at what turned 
out to be an especially bad moment. And the cash freed up other money 
for alternative assets at what turned out to be the top of the market. 
In 2006, the school had $19.4 million in hedge funds. In 2007, that had 
ballooned to $75.6 million, which amounted to more than 60 percent of 
the managed portfolio, excluding the Chrysler site and cash. By 2008, 
the hedge fund investments amounted to almost $103 million. That’s a 
very high concentration of the non-real estate assets in a single asset 
class.

Cooper Union’s heavy reliance on hedge funds “strikes me as 
irresponsible,” said Simon Lack, an investment adviser and author of 
“The Hedge Fund Mirage,” which questions many of the premises of hedge 
funds. “Of course, it was forced upon them by a long series of what look 
like bad decisions. But there’s no way that hedge funds could deliver 
the returns they wanted after their high fee structure.”

Mr. Michaelson said he anticipated there might be a market downturn, and 
that the hedge funds included so-called long-short funds and absolute 
return strategies intended to protect against declining markets. But by 
the end of fiscal year 2009, Cooper Union’s hedge funds amounted to just 
$18.8 million, in part because of market declines and in part through 
liquidation.

Mr. Michaelson said he was aiming for a 10 percent annual return, which 
may have been attainable in the early days of hedge funds, when they had 
much less capital to invest. Today, “such returns are simply 
unrealistic,” Mr. Lack said.

Hedge funds did help cushion the market decline in fiscal year 2009, 
when the S.& P. 500 dropped about 26 percent. But they have hurt the 
endowment’s performance since then. Mr. Michaelson said Cooper Union’s 
returns for the managed endowment, excluding the Chrysler asset and 
cash, were negative 14 percent in fiscal year 2009, 10 percent in 2010 
and 17 percent in 2011. Cooper Union’s portfolio lost 5 percent in 
fiscal year 2012. That portion of the endowment fell to about $85.9 
million at the end of fiscal year 2012, from about $169 million in 2008, 
and the total endowment dropped to $666.7 million from $710 million in 2008.

By comparison, a simple mix of 60 percent stocks, as measured by the S.& 
P. 500, and 40 percent bonds, using the Dow Jones corporate bond index, 
performed far better: down 11.7 percent in 2009, and up 14.5 percent in 
2010, 20.8 percent in 2011 and 7.9 percent in 2012. Yet investors keep 
pouring money into hedge funds — a record $15.2 billion in this year’s 
first quarter. Hedge funds now have $122 billion under management, a new 
high, according to Hedgeweek, a trade publication.

Cooper Union’s costs, especially health care costs, kept mounting 
inexorably. In 2008, the college was $4.6 million short in cash. Last 
fiscal year, the cash-flow deficit was $13.2 million.

Aside from endowment income, universities have only limited options for 
increasing revenue: donations, tuition and, for research universities, 
government grants. Alumni contributions have long been a weak spot at 
Cooper Union. Thomas R. Driscoll, a trustee and member of the alumni 
council, said: “There was never any sense of giving back. Cooper never 
asked. We always thought Cooper didn’t need the money because it had the 
Chrysler Building. Forty years ago, I would have stressed to students 
that someone had to make it possible for you to come here for free.”

With few donations, that left Cooper Union only one option: charging 
tuition. On April 23, the college announced that it would cut the 
full-tuition scholarship in half beginning with the entering class in 
2014, and would continue to offer full-tuition scholarships to students 
with demonstrated need. “Our priorities have been and will continue to 
be quality and access, so that we will remain a true meritocracy of 
outstanding students from all socio-economic backgrounds,” the college’s 
trustees said in a statement.

Mr. Michaelson conceded that the school could have continued to use the 
endowment to cover deficits and would have survived until 2018, when the 
higher payments from the Chrysler lease start. “But what kind of school 
would you have had by then?”




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