NEW YORK — Strip away tradition, ivy-covered walls, fancy laboratories, gray-muzzled scholars and what's left at the foundation of all great universities is the same thing: money.
That's the stuff that made Harvard, Yale and Princeton great over the past couple of hundred years. It's what Stanford spent lavishly in the '60s to build a world-class faculty and its reputation.
And it is the stuff that in a relatively short time has transformed New York University from a mediocre commuter school into one of the nation's premier private universities--one with enough allure to attract thousands of students from California each year.
NYU's make-over is emblematic of a resurging interest in urban education nationwide that has come with falling crime rates and a shift in what students want out of college.
For other urban universities trying to rise into the top tier--USC, for example--NYU's success is also a powerful challenge to conventional wisdom about how to manage money.
Unlike competitors that squirrel away money in endowments and live off the interest, NYU has taken the $2 billion it has raised in private donations since the late 1970s and gone on a Manhattan-style spending spree.
The school has spent about 85% of the money it has raised, putting only 15% in its endowment. By contrast, USC, a comparable institution in many ways, has saved about half of the $1.5 billion it has raised in its current fund-raising campaign.
NYU's endowment stands at about $1 billion. USC's is nearly double that amount.
But in exchange, NYU has enticed top-notch professors from Ivy League and other elite institutions with lucrative offers--often including subsidized apartments in expensive Manhattan neighborhoods. It has tossed about scholarships to attract ultra-bright students. It has cobbled together a new urban campus in artsy Greenwich Village.
"We've simply done in 20 years what it took other universities a hundred and fifty years to do," said L. Jay Oliva, NYU's president. "There's no way to get excellence, other than buying your way into it."
Other academics have watched with a mixture of envy and astonishment as NYU has broken all the conventions that keep university money managers a tightfisted bunch.
To some degree, NYU has upped the ante for university leaders who rejoice at their ever-growing nest eggs, yet at the same time tell faculty to scrounge for their own research dollars and students to pay ever-spiraling tuition.
Professors and other academics increasingly point to NYU's success as an example to bolster the argument that universities ought to spend more today rather than save for tomorrow.
Rules Dictate University Spending
Does Harvard really need a $14-billion endowment? Does Yale need $7 billion? Do Princeton or Stanford need $6 billion?
Universities slavishly follow rules to spend only a fixed percentage of their endowments--usually between 3.5% and 5.5%--based on the endowment's earnings. So even in the best of times, the biggest endowments provide less than 10% and more often less than 5% of the $1 billion-plus a year needed to run a major university.
Henry Hansmann, a Yale law professor who has studied college endowments, believes that all the hoarding diverts universities from their core mission of educating students and making breakthroughs in science and other fields.
"They can contribute more to society by building a great university than they can by building a great endowment," he said. "Yet it's as if universities were set up to maintain a steady growth investment fund and run an educational institution on the side."
Administrators at other colleges are critical of NYU's free-spending practices. They say NYU largely missed the bull market of the 1990s by managing its relatively small endowment too conservatively. And they often bring up the folk tale of the grasshopper and the ant. NYU is foolishly consuming everything now, while they are industriously saving for leaner times, the critics say.
"Most people think it's a pretty risky strategy," said Morton Owen Schapiro, a higher education economist and USC vice president. "There's a lot more security when you have a big endowment, especially in the next economic downturn."
Yet stockpiled cash rarely gets used in downturns. Instead, when the economy slows, universities generally cut education and research programs to make sure the hard times don't threaten the portfolio.
Hansmann and his allies argue that administrators are wrongly making a fetish of the size of their universities' endowments.
"Saving is worthwhile only if you have a better use for the money in the future than you do now. I'm not sure NYU would be a better university if it saved more money instead of hiring better faculty, luring better students and building more buildings," Hansmann said.
That way of thinking has won some converts.