The public university’s future in private funding
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The public university’s future in private funding

The mysterious $3.5 billion dollar foundation's support is crucial to UW, but doesn’t answer to shared governance

The grey building of the UW Foundation and Alumni Association sits at 1848 University Avenue only a short drive away Bascom Hall. It may not look like much from the outside — but on the inside, it’s home to a multi-billion dollar endowment that supports the whole of UW-Madison.

Within the next three years, private donations through this endowment will rival the contribution of tuition dollars and state funding to UW-Madison’s revenue, according to WFAA President Michael Knetter.

“One thing that I’ve particularly worked on is trying to get people to understand that sources for new funding for this university are not going to come from the state,” Chancellor Rebecca Blank told The Daily Cardinal.

Private giving is currently the school’s only growing revenue source. But the foundation hasn’t grown nearly enough to make up for that gap left by lacking state contributions. A study done by the university found that among peer institutions, UW-Madison was last in terms of revenue growth, according to Knetter.

Courtesy of UW-Madison | The Daily Cardinal

In a presentation, Chancellor Rebecca Blank discussed this slide and “worrisome trends” in revenue growth.

“I don't foresee the day when the university says to us ‘Oh, you’ve raised enough money. Why don’t you take some time off?’” said Knetter. “That’s just not going to happen. It’s a big gap right now.”

When private funds outgrow the state’s contribution

While UW will always maintain close ties to the legislature as a state agency, “state funding will never play the role in the future that it has in the past,” Blank said.

Many states in the upper Midwest lost economic ground in the past decade, meaning they have greater financial burdens in areas like corrections and transportation. That diverts state dollars away from funding higher education, which makes it difficult for campuses to keep pace with increasing costs.

“The financial management of public schools has become more similar to the financial management of private schools,” Blank said. “One needs to generate multiple sources of revenue.”

At UW-Madison, the largest source of income is national research grants given to professors, which account for about 30 percent of the total budget. Tuition is the second-largest source, at 19 percent, followed by private giving at 17 percent and state funding at 15 percent. About a fifth of the school’s revenue is from auxiliaries and operating receipts — like dorms and dining halls — a “money in, money out” business, according to the chancellor.

Laura Mahoney | The Daily Cardinal

Private funding is a larger portion of UW-Madison’s revenue than state funding, and is expected to grow.

But what Knetter called “the miracle of the public university” is that these different sources of revenue — the state, students with tuition and private donors — never sat down and declared how much each group should pay.

“At other successful businesses, that is always crystal clear. It’s very hard to have a successful business that's based on voluntary behavior of everyone,” Knetter said. “The way that works well is for everyone to do their best and to have a level of trust in the other partners. When that trust starts to break down, that's never a good thing.”

Of UW-Madison’s revenue streams, private giving is the largest growing revenue source, with in-state tuition frozen and state support declining in recent budget cycles.

Laura Mahoney | The Daily Cardinal
The 2017-19 biennial budget saw in increase in UW System funding for the first time in years. 

Even as the state has decreased support, legislators have pushed more accountability measures, like performance-based funding, in recent biennial budgets.

This is not atypical when the state has less financial influence, according to professor Nick Hillman. He said accountability measures give lawmakers an opportunity to affect the distribution of funding without giving more funds.

“They don't have any new money to put on the table, so they're trying to find other ways to exert their power — their influence — over the system,” Hillman said.

Knetter said part of the foundation’s job is to improve the partnerships between the legislature and other key stakeholders.

“For Wisconsin to be a great university, we really have to do a better job of getting the needs to students and their families, the interests of private donors and the attitudes of legislators on the same page,” said Knetter. “We kind of need to recalibrate: What's our shared vision for this institution, what do we want it to be and who's responsible for what?”

History of the UW Foundation

Because the university functions as a state agency, money in university accounts is accessible by the state. In 1945, a group of donors wanted to give gifts to the school with assurance the state couldn’t pull that money from the university in a budget crisis to be used for another purpose.

They created the UW Foundation, a 501c3 non-profit, to hold and invest endowments on behalf of the university. In its first year, the foundation raised less than $100,000, but by 1948 it had raised $5 million through its first campaign.

As a non-profit, the foundation has to file public tax forms, but is not subject to open records requests. While private foundations have become commonplace for public universities, each state has different transparency requirements for them.

In Minnesota, the university’s separate foundation must make donor information, names and dollar amounts public. And courts in Iowa have ruled that foundations are subject to open records request because they use state employees and assets.

Some schools, like the University of Michigan and its $10.9 billion endowment, are directly combined with the university and overseen by their board of regents.

Morgan Winston | The Daily Cardinal

The foundation was founded in 1945 and merged with the Alumni Association in 2014.

Relationship to the university; regulation and restriction

Knetter emphasized that the higher profile of private funding in no way means that UW-Madison is a private university. The WFAA remains an entirely separate entity despite a close partnership with the school; they must abide by all state regulations and regent guidelines for university-foundation relationships.

Earlier this year, UW-Oshkosh officials were found to have violated these policies when university officials influenced purchasing decisions and illegally transferred money.

Money is only allowed to flow from the foundation to the university, not the other way around. After a lawsuit was brought against UW-Oshkosh, the UW System ordered an audit of all system foundations.

It found that UW-Madison made no illegal money transfers but that it had 26 “questionable” transactions where donors had mistakenly made out a check to the university instead of the foundation. However, when a donor’s intent is unclear, the university is supposed to keep the money instead of transferring it back to the foundation to be added to the endowment.

After the audit, the vice chancellor for finance and administration released a statement that read: “We are working collaboratively with UW System and the Foundation to implement improvements in documentation or other processes identified by the review.”

Setting goals

While funds can only flow one way, conversation between the entities is free-flowing and constant. The chancellor and college deans work directly with WFAA to set and track fundraising goals.

“We work with the university because we believe that the donors ultimately want to invest in the things that the university most needs,” Knetter said of matching donors interests to university interests. “And we need to be able to communicate those needs to them.”

The chancellor sets university-wide priorities for donations, and Knetter meets with deans quarterly to discuss each college’s needs and priorities.

Soyeon Shim, dean of the School of Human Ecology, called UW’s foundation partnership “critical” and said it exists to further the mission of the university.

“You don't want to raise money for the sake of raising money and do what donors want you to do,” Shim told The Daily Cardinal while on a trip to network with donors in San Francisco. “You have to have your own vision and bring in donors whose vision is similar and perfect for what you want to do.”

The foundation has also placed development specialists within each college to work on fostering alumni connections and clearly communicating. They work with the dean and department chairs doing “a lot of work behind the scenes,” such as coordinating trips like Shim’s.

“Anything you want to do to expand your program comes from private support,” Shim said. “Raising money is for raising the margin of excellence. Private support is to make it even more outstanding.”

Shim said about a third of her time is spent fundraising and networking with donors. For, Dean Ian Robertson from the College of Engineering said working with donors was part of what attracted him to the position.

For multi-million dollar gifts — like Mary and Todd Kneller’s from homecoming weekend — that give to the mission of the general university, Blank will meet with donors. Over time, Blank said these relationships sometimes develop into friendships and she can more clearly articulate where the university is headed and what is needed.

“I don't know a university or college president who doesn't spend a lot of their time on fundraising,” she said. “You don't get multi-million dollar gifts without the chancellor involved.”

When the 2020 Forward campaign began, only months after Blank was hired, she worked with the foundation to establish overarching goals, namely faculty support and support for individual students in the form of scholarships.

How does the Foundation manage $3.5 billion?

The foundation currently manages $3.52 billion in total assets, according to their latest tax return — a long way from its first $5 million in the 1940s.

Nearly 5,000 individual funds comprise the university’s endowment, according to a recent audit. Each of these donations come with a gift contract established between the donor, the foundation and the university.

This contract dictates how the donation, and all investment returns from it, are to be used. It may be a scholarship for a marketing student in the business school, a chaired professorship or a gift to a specific research lab. One donor even gave the university a yak farm.

“We really decide almost nothing about where the money goes once the donor, the foundation and the university sign a gift agreement,” said Knetter. “That way everyone’s aligned whenever we do something. It’s not like the foundation ever takes a gift from a donor the university doesn’t want.”

Knetter, a UW-Eau Claire graduate and former business school dean, is a donor himself and signed his own gift agreement.

 

Jeff Miller | UW-Madison University Communicat
Michael Knetter raised millions of dollars while serving as the dean of UW-Madison’s business school, before being asked to take over as the foundation’s president.

Money from solicited donations flows to the foundation, which pools all the funds into the $2.52 billion endowment to be invested by a team. The largest portion of that endowment is invested in publicly traded stocks.

Last spring, the UW System Student Representatives and the Associated Students of Madison passed legislation asking the foundation to divest from fossil fuels. They argued that as UW-Madison is at the forefront of innovative research, it should also lead the way on environmentally responsible and sustainable investment practices.

However, the foundation was clear its priority would remain maximizing profit and the impact donors’ gifts can have.

“When somebody wants us to invest in a way that is about anything other than ‘what the best return we can get for the level of risk we are taking’ — we are not interested,” said Knetter. “We don't peruse any third party’s social agenda in our investment strategy. We just say no to all of that because that's just a slippery slope.”

Knetter said the foundation would only consider changing their investment portfolio if market trends changed and energy became a bad investment. And in fact, between December of 2015 and June of 2016 their investments in gas and oil increased by $22.3 million.

All investment policies are overseen by a 50-person board of directors comprised of UW-Madison alumni and Knetter. They set guidelines for the investment team employed by the foundation.

On the foundation’s website, you can find a breakdown of types of endowment investments.

The investment team doesn’t choose each individual stock the foundation purchases. But they do decide how much of the endowment will be put into each kind of investment — large U.S. companies, small U.S. companies, developed markets, emerging markets, and others. Then outside managers are hired to invest that portion.

Once the foundation has collected the return on their investments — paced to about 4.5 percent growth per year over the last decade — they transfer money to designated accounts at the university. Then it becomes UW-Madison’s job to distribute the funds as directed by the donor contract.

Jade Sheng | The Daily Cardinal
Money flows from donors to the foundation to be invested before being transferred to UW for distribution.

Beside UW-Madison, the foundation also invests money for UW-Stevens Point, UW-Stout, UW-Green Bay, the Wisconsin 4-H Foundation, the Wisconsin Intercollegiate Athletic Conference Fund and UW Hospitals and Clinics.

However, these groups only invest their money with UW-Madison’s endowment. The foundation doesn’t cultivate relationships with their donors or facilitate fundraising efforts, they just invest those funds with the endowment.

Accountable to donors, not to shared governance

Last spring saw multiple divestment movements, demanding the university and foundation divest from certain companies. However, this legislation highlighted misunderstandings of how UW funds are handled and the ability of students to influence the private foundation, which is outside of shared governance.

Amid the controversial debate, former ASM Representative Omer Arain proposed creating a subcommittee committed to working with WFAA.

“This [divestment campaign] was really about transparency. We didn’t really know what UW foundations invest in and that’s first and foremost what needs to be done,” Arain said at the time.

“I realize these organizations can be mysterious,” said Knetter, who added that he was frustrated no one reached out to understand why the foundation operates as it does before making demands.

“We understand that to keep this going that we need people’s trust, but we probably do prioritize having to steward the people who give us the money,” said Knetter. “We care about the recipients, that's why we're raising the money.”

There’s only so much time in the day, Knetter explained. And even when they spending their days focusing on donors, foundation officials already feel they aren’t raising enough money for the university.

“I don't really feel like we need to steward the recipients of our generosity,” he said. “It doesn't occur to me that’s something I need to work into my day.”

The foundation’s responsibility is to the donors who give them the money, Knetter said. Donors get regular updates on how their investments are doing in reports from the foundation, and those people want to see the foundation and university doing well.

“If at some point you don't begin to pay attention to what the private donors think about how this is going, you may not be able to sustain that kind of revenue,” Knetter said.

Over the last five years, the university’s endowment has grown over $600 million and the 2020 Forward campaign has generated over 1,000 new scholarships for students.

Blank said there isn't a university in the country that could survive without gifts from alumni and friends. And she added that while the school has does a good job securing private funds, UW-Madison still needs to do better.

“The challenge is financial. As state dollars continue to drop, we have to figure out how to maintain the excellence of this university,” she said. “And I do think that is a very, very real challenge.” 

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