Urgent Governance Concerns at Penn State
September 11, 2024
Dear Representatives and Senators of the Pennsylvania Legislature & Gov. Shapiro,
Penn State has an endowment worth approximately $4.57 billion which is invested through the University's Long Term Investment Program under the supervision of a small group called the Penn State Investment Council. The activities of the Penn State Investment Council are very closely held, with even most of Penn State's Board of Trustees being provided only summary information about the underlying investments in the University's endowment.
According to Penn State's own financial reporting, the University paid 1.86% in investment expenses and advisor fees on its endowment in 2022-23 -- or approximately $85 million. Moreover, last year's 1.86% expense rate is actually a significant decrease from the 2.49% rate the University was paying when it first began reporting its investment expenses using normalized industry metrics in 2019 (see Exhibit A-1 on p. 25). From at least 2008 onwards, the expenses the University has been paying for its investments have consistently been an order of magnitude or more greater than the best publicly available rates for passively managed investments (e.g. a publicly available no-load S&P 500 index fund from Vanguard has a 0.04% expense ratio).
The high expenses the University is paying might be worthwhile if they yielded superior investment returns, but this has not been the case. For comparison, if the University had invested its endowment in a simple S&P 500 index fund instead of the investments in the University's Long Term Investment Program since 2008, its endowment would now be at least $2.3 billion (i.e. 50%) larger than it actually is.
Penn State Alumni Trustee Barry Fenchak has requested information about the investment holdings of Penn State's endowment so he can assess whether they are suitable for purpose and free from conflicts of interest. Addressing these questions are part of the fiduciary responsibilities assumed by every Penn State Trustee upon taking office. Nevertheless, the leaders of Penn State's Board have repeatedly denied his requests for basic financial information, and it has become necessary for Mr. Fenchak to file a lawsuit based on non-profit law against Penn State's Board to obtain the information necessary to do his job. Penn State is now using University resources to defend against this lawsuit and keep the investment holdings of Penn State's endowment fund secret.
Penn State's extreme secrecy regarding this basic financial information is concerning by itself, but it is even more concerning in light of a pattern of deliberate steps the University has taken in recent years to reduce its transparency and accountability. In 2017, after losing another lawsuit that forced the University administration to disclose to the University's own Trustees information that it had wanted to keep secret, the University changed its bylaws to prevent reimbursement of legal fees to Trustees who sue the University to obtain information - even if a court determines the University was in the wrong. Earlier this summer, the University made further changes to its bylaws which eliminate the independence of the Alumni Trustees altogether by requiring Board approval of Alumni Trustee candidates before they can appear on the election ballot, prohibiting Trustees from speaking in opposition to Board decisions outside of Board meetings, and effectively enabling the Board's leaders to unilaterally remove any Board member who opposes them. After Mr. Fenchak's lawsuit was filed, the University prohibited Mr. Fenchak from attending Board meetings in person. Earlier this week, citing the recently updated bylaws, the Board's governance committee voted unanimously to recommend removing Mr. Fenchak from the Board.
Additionally, Penn State's Board has been plausibly accused of regularly conducting University business in off-the-record meetings, potentially in violation of Pennsylvania's open meetings law.
Penn State is Pennsylvania's foremost public University, and its leadership should exemplify best practices in integrity and governance. All of Penn State's Board members must have unfettered access to the University's records to properly fulfill their oversight responsibilities. Additionally, the activities of Penn State's Board itself must be thoroughly transparent to Pennsylvania's lawmakers, citizens, and taxpayers.
Changes to restore transparency and accountability to Penn State's Board must be enacted now, before the current Alumni Trustees are replaced by others who have been hand-picked by the Board's leadership. Ultimately, replacing the entire membership of the Board may be the only way to restore public confidence in the University's leadership.
Penn State President Bendapudi and the senior leadership of Penn State's Board have repeatedly shown they have no interest in making these reforms on their own. I have personally attempted to engage with Penn State's senior leaders on numerous occasions over the past several years to address issues of widespread community concern. On the rare occasions when we actually received a response from the University leadership, the response has consistently been nothing more than a perfunctory dismissal of our concerns. In retrospect, this is not surprising, because the leaders we are seeking to engage are the same people who have devised and established the policy changes that are reducing the Board's transparency and accountability.
Penn State receives substantial amounts of taxpayer money from the state each year. This year, the University is requesting a $40 million increase in its state appropriation for initiatives said to be focused largely on student welfare.
Penn State's endowment already supports student welfare. The University should not be asking the state for $40 million more in taxpayer money when it could very plausibly restructure its own endowment fund investments to have lower costs so it can meet this need and more with its own resources. If the University really requires additional taxpayer funds to meet the needs this request ostensibly addresses, its leaders should be required to disclose the investments held in the University's endowment fund to prove to the public why their additional tax funding is truly necessary.
Moreover, Penn State should not receive any taxpayer funding from the state at all unless it restores the transparency of its Board and the independence of the Alumni Trustees. A public institution like Penn State receives special privileges and taxpayer funding from the government, and it has a corresponding duty to use those privileges and taxpayer funds responsibly and for their intended purposes. It must operate transparently so the public can know that everything at the University is taking place in accordance with the University's duties. Penn State's leadership needs to operate in such a way as to avoid even the appearance of possible impropriety.
Please use all of the powers of your office to make Penn State's receipt of any additional state funding contingent upon the University restoring the transparency of its Board and the independence of its Alumni Trustees.
Thank you.
Sincerely,
Andrew Shaffer