Someone disagrees with me — Horror of horrors…

A few posts ago I commented on privatization at the Ohio State University and posited that the problem is, amongst other things, that they are potentially leaving tons of money on the table. They will collect their $375 mil and then spend it in a year or two (as they did in Chicago) and then be right back where they started without the steady, like a tortoise, annual revenue the program now generates.  I added that there is an expectation of a hike in rates when the program goes private and noted that then the money on the table would be over $2 billion. Charlie gives the bureaucrats more credit than I do:

There is an assumption that the University is going to spend ALL the money soon. What if they invest it most of it? Even if they commit $100 million and invest the other $275 million, over 50 years that still translates into $1.9 billion and they are still ahead. But even then, they are “committing” the money, not spending the money. There is a difference. Committed money still earns interest . The $50 million dollar building does not cost $50 million in year 1. They could in thoery “commit” to spend all of it over the next 50 years, and still come out ahead.

The CFO knows his stuff and will do what Chicago didnt, properly manage the windfall.

Sorry Charlie, I’m not persuaded. If you put the money ($275 million) somewhere and let it compound for 50 years at 6%, you would have over three billion, but you have to leave the money there. If you take some out, then the number goes down. Certainly I understand that there are endowments (like Harvard’s) that contain billions and generate tons for the university. But remember, here we have a university that is looking for revenue now. They have budget issues, they need new buildings, and they are going to spend the money.

I just don’t have the faith in bureaucrats that you do. Government entities (and a university, like it or not, is a government entity) have gotten themselves into very hot water with their top heavy administrations and extremely well paid (and benefited) staff and faculty. Its been pointed out to me that the cost of going to a university has gone up 450% in the past 30 years, and that’s faster than health care costs. Most university systems are struggling to make ends meet. They need this windfall to keep their heads above water.

Rather that look at cutting costs (there are 65,000 students and 40,000 staff at the OSU — does that make sense? – there are about the same number of administrators as their are teachers — what’s that all about?) they look at increasing revenue.

What if they required each administrator to teach one class a quarter or semester?  What if they simply reduced the number of administrators and required professors to teach one more class a semester (Most full profs teach only two or three, if that?)  Well, I don’t know a lot about the financing of education, but most colleges have been on a gravy train that is fueled by student loans.  If the students weren’t able to easily get the loans (averaging $25K over the four years) then the universities wouldn’t have all the money readily available, so they would have to look elsewhere (like cost control) to keep their doors open.

Just saying…

JVH

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3 Responses to Someone disagrees with me — Horror of horrors…

  1. CJD says:

    Some schools spend a small portion of their overall budget on education. Schools like Ohio St and Penn State spend a great deal of federal research money. The ratio of 60,0000 students to 40,0000 employees is misleading. Many of those employees are not paid from tuition revenues or state subsidies, but rather grants and other revenue streams that cant be spent on direct education. Yes, school spending has skyrocketed, but it is a very competitive market.

    $375 Million invested with a 6% annual return, you could still withdrawal $20 Million a year for 49 years and STILL end up with with $1 Billion in the bank. Not adjusted for inflation.

    check it out for yourself.

    http://buyupside.com/calculators/withdrawalsdec07.htm

    Only history will tell. The Chicago deal was maybe undervalued to begin with, but they did not manage the money correctly. This CFO knows how to manage money.

  2. John Hammerschlag says:

    Greek bonds pay over 11%!

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