A gusher of oil money has made the University of Texas one of the richest institutions in the country—but hardly any of it goes to financial aid.

Nicolas Raymond/Todd Wiseman for the Texas Tribune

In November 2015, the man who led the operations to capture Saddam Hussein and kill Osama bin Laden stepped to the podium in a wood-paneled boardroom in Austin, Texas, to embark on a new and very different mission: launching a public university system into the highest level of prominence and respect.

Former four-star admiral and Navy SEAL Bill McRaven had been hired almost a year earlier, with great fanfare, to serve as chancellor of the University of Texas system, which oversees the University of Texas at Austin and thirteen other college campuses and medical schools. Now, addressing the UT board of regents, he was proposing nine “quantum leaps”—major initiatives that, he declared, “will make us the envy of every system in the nation.”

Some of the “leaps” are things other public universities could only dream of doing, in an era of budget cutting. Ten million dollars for a “UT Network for National Security.” Thirty-six million dollars (so far) to “develop a collaborative health care enterprise.”

McRaven was able to secure that funding because of a mountain of money that few outside the UT system know much about, called the Permanent University Fund. The fund, derived from oil drilling in state-owned land in West Texas, is worth about $20 billion. Two-thirds belongs to the UT system, making up the majority of its $24 billion endowment and putting it in an exclusive club with wealthy private schools. The UT system has more endowment money per student than Georgetown.

And yet, just three months after his “quantum leaps” speech, McRaven once again found himself before the board of regents—this time asking for a tuition increase. “The fact is, we fall well below our peers in terms of national rankings,” he said. To climb in the rankings, he argued, would require spending more money—money that would have to come from students.

How could McRaven propose a tuition hike when the system has a multibillion-dollar oil fund in its pocket? This question has only started brewing at the UT system, but members of the public, and lawmakers, have long been asking wealthy private schools pointed questions along the same lines. Massive endowments at places like Yale and Stanford add up to an enormous public subsidy. Donations are tax-deductible, and universities don’t pay taxes on the investment income endowments generate. Meanwhile, they typically spend only a small percentage of the endowment per year. That has spurred suggestions that universities be forced to spend their endowments on affordability as a condition of those tax benefits.

Shelby Knowles for the Texas Tribune

Even Donald Trump, during the 2016 campaign, told a Pennsylvania crowd that he would “work with Congress on reforms to make sure that if universities want access to all of these special federal tax breaks, and tax dollars, paid for by you, that they are going to make good-faith efforts to reduce the cost of college and student debt, and to spend their endowments on their students rather than other things that don’t matter.”

The tax bills that the House and Senate passed in December finally took action, imposing a 1.4 percent tax on the largest endowments. (As this article went to press, the final bill was still being negotiated.) That move appears to be driven more by a growing Republican antipathy toward academia—the House version of the bill would have taxed the tuition waivers granted to graduate students—than by concerns about affordability. But universities haven’t done themselves any favors by being extremely cagey about how they spend their endowments. When Congress asked dozens of schools to report on their spending in 2016, for instance, Harvard declined to say exactly how much of its $37 billion endowment is paid to the people who manage it. While most colleges did tell Congress what percentage of their annual endowment payout goes to financial aid, they generally didn’t elaborate further—such as on the proportion of aid that’s based on academic merit, which tends to benefit upper-middle-class students, versus financial need.

But there is one institution that serves as an exception to the black box of endowment spending. Unlike most other American public universities, which have miniscule endowments, the University of Texas system is tremendously wealthy, with an endowment more than double that of the next-richest public institution. And unlike private universities, it has to reveal how it spends that wealth.

Thanks to the fracking boom, record-high oil prices, and some smart investing, the oil fund’s value has skyrocketed in recent years. That provides an unprecedented opportunity to examine not just how a wealthy endowment-like fund is spent in general, but also what university administrators decide to do with a sudden windfall of cash.

And if the UT system’s choices are at all representative of well-endowed institutions across the country, we can pretty safely conclude that universities spend their endowments primarily to elevate their status—not to help students afford college.

The typical university endowment begins as a combination of private donations from deep-pocketed individuals, corporations, or foundations. The oil fund is different. In 1876, the authors of the Texas constitution ordered the state to create a “university of the first class,” and over the next few years, 2.1 million acres of land were set aside for that purpose.

It was a huge donation, covering an area larger than Delaware and Rhode Island combined. But for decades, it remained mostly useless brushland where grass was sometimes too sparse even to graze cattle in the dry heat of West Texas. Then, in 1923, a wildcatter named Frank Pickrell struck oil on the land at a well called Santa Rita No. 1. (Its remains are now a monument on UT-Austin’s campus.) From then on, the land became a uniquely lucrative resource for the state’s two largest public university systems.

Texas law has set up the oil fund to operate almost exactly like an endowment. Only a small percentage of the fund’s value—about 5 percent in recent years—can be distributed annually. Two-thirds of the distribution goes to the UT system, while one-third goes to the separate Texas A&M University system. The state constitution generally allows the money to be spent on two broad categories: debt on capital projects, and general administration. But after paying its debts, the UT system can give as much of its share as it wants to its flagship, UT-Austin—which enrolls about a quarter of the system’s students—with no restrictions on how it’s spent.

In 2011, the UT system got $352 million from the oil fund. Thirty-three million dollars of that went to what is referred to in budget reports as “general administration”—a term that includes top administrative offices like that of the chancellor and various vice chancellors. About the same amount, $33 million, went to financial aid.

Then came the fracking revolution and a four-year spike in oil prices. By 2017, the yearly payout to UT had grown to $603 million. So how did the system decide to spend those hundreds of millions of extra dollars?

Not on affordability.

According to the fiscal year 2017 budget, the amount spent on general administration had quadrupled since 2011, to a peak of $143 million. (It has since decreased slightly.) The amount that went to financial aid, meanwhile, had barely budged, inching up to $38 million.

The spending spree really began back in 2011, about three years before McRaven was hired, and as the system was expecting a record payout from the oil fund. That year, the system’s board agreed to devote $50 million from the fund to something called the Institute for Transformational Learning. The institute’s goals were as lofty as the title: to change the landscape of higher education from the world of brick-and-mortar classrooms to one where technology helps make learning more effective and accessible.

But the 2011 cash infusion did not come with any discussion of how that money might be recouped, or how UT students would gain any immediate value from it. The institute’s first big play was a $10 million investment into massive open online courses (MOOCs), which are, by definition, free to enroll in. UT leaders were thrilled, especially because the deal included a partnership with Harvard.

If the UT system’s choices are at all representative of well-endowed institutions across the country, we can pretty safely conclude that universities spend their endowments primarily to elevate their status—not to help students afford college.

In one case, tens of thousands of people signed up for “Energy 101,” taught by famed UT-Austin professor Michael Webber. As with most MOOCs, only a fraction of enrollees finished the ten-week course, and hardly any of them were university students—probably because the course couldn’t actually be taken for college credit. By 2014, the campus newspaper was urging the system to “stop investing millions of dollars on gambles like these.” (Today, officials at the Institute for Transformational Learning say MOOCs are no longer a part of their core strategy.)

Instead of scaling back its ambitions for the Institute for Transformational Learning, the UT system board dug in deeper. In 2014, months before McRaven became chancellor, the board decided to make a “special one-time distribution” of oil fund money, resulting in $130 million extra for the system that year.

Some of that additional money has gone toward cost cutting. The UT system now pays for property insurance premiums and software licenses on various campuses, costs that were previously borne by the individual schools. But a full $48 million of the distribution went to the Institute for Transformational Learning—even though the initial $50 million allocation hadn’t been completely spent.

During McRaven’s tenure, the institute’s budget has exploded, all with money from the oil fund. It has grown almost tenfold, to $25 million, with a staff of fifty, in the last academic year. (It’s a major reason that the UT system’s overall administrative budget has risen so much.) But enthusiasm is starting to wane. One much-hyped product, the “TEx” platform (for “Total Educational Experience”), was abandoned by a UT campus in South Texas after a failed pilot there. The institute had invested millions of dollars into the platform, which had promised to deliver “a beautiful, engaging mobile-first learning environment.” (A new version, TEx 2.0, is in the works.)

What caused the unraveling may have been another large expenditure—even bigger than the cost of the

institute—that put McRaven on the defensive. It was the last of his nine “quantum leaps”—which, McRaven said at the time, were all “about improving the human condition in every town, every city, for every man, woman and child.” The system, McRaven announced, would buy 300 acres of land in Houston, where it would build . . . something. That’s right: the system spent $215 million to buy a vacant lot without any plan for what to do with it. More than a year later, the land still sat empty. Would it be a campus? Would it be a research center? No one knew.

In 2015, the UT system announced a plan to buy 300 acres of land in Houston, where it would build . . . something. It spent $215 million to buy a vacant lot without any plan for what to do with it. More than a year later, the land still sat empty.

That purchase seems to have been a bridge too far. After backlash from legislators, McRaven backed down and has agreed to sell the land. But he defended his original decision to lawmakers by stressing the need to take “a risk and a gamble” to launch the UT system into national prominence. “Too often, university systems are forced to maintain the status quo,” McRaven told a panel of angry state senators at the Texas capitol in early 2017. “If you don’t do something big, bold, you don’t become a great University of Texas system.”

Lawmakers from both parties didn’t buy it. Some have even started to take their own look at exactly how the system is spending its oil money; in January 2017, Republican State Senator Kel Seliger noted that $1.5 million is set to go toward “branding.” In fact, the money is for a study on how the UT system could brand itself in the future; doing the actual branding will probably cost a lot more. “It looks to me like an entity that has more money than it knows what to do with,” Seliger said.

(Update: after this article went to press, McRaven announced that he would be stepping down in May.)

When asked why they only spent $38 million out of last year’s $603 million oil fund payout on financial aid, UT officials point out that there are legal restrictions on how the fund can be spent.

This is a common refrain among wealthy universities. Harvard, for instance, claims that a full 84

percent—$31 billion—of its $37 billion endowment is earmarked for uses dictated by donors. The question, of course, is whether university fund-raisers make any effort to encourage donors to direct their gifts to uses that directly benefit students.

In the case of the oil fund, it’s true that the Texas constitution only explicitly identifies two ways the UT system can spend the money: paying the debt on capital projects, like the $215 million empty lot in Houston, as well as new buildings, labs, and classrooms at all the UT schools (that’s how the system spends about a quarter of its oil fund share); and paying for system-wide administration, which includes initiatives like the Institute for Transformational Learning.

But if the UT system’s leaders really wanted to give more of the oil fund money directly to students, they could propose amending the state constitution. This is not quite as difficult as it sounds: in the last three elections, voters overwhelmingly approved twenty-three constitutional amendments. Yet the system has never called for such a change, and, in fact, McRaven said in a written statement that the “current design” of the oil fund serves the state “exceptionally well.” (He declined multiple requests for an interview.)

Moreover, recall that the state constitution already allows the UT system to direct essentially as much of its yearly cut of the oil fund as it wants to its flagship, UT-Austin, with absolutely no restrictions on how that money is spent. In fiscal year 2017, that no-strings-attached payout totaled nearly $300 million. That’s enough money to cut tuition for all its students—graduate and undergraduate—in half. Or to provide free tuition for almost all in-state undergrads.

Of course, the flagship university did not do that. Last year, while it spent just $38 million of its oil fund share on financial aid, UT-Austin reported more than $244 million in unspent oil fund money, much of which is reserved for hiring around 100 new faculty members.

University officials argue that spending big money to recruit faculty will make UT-Austin more attractive to students from all over the state, country, and even the world. Marquee professors can help attract revenue, too, in the form of competitive research grants. And they can draw other well-known academics to campuses, in turn bringing in even more top students and more revenue, and so on in a virtuous cycle.

This is ultimately how UT leaders see the oil fund—not as a way to offset a decline in state funding, or to make college more affordable, but to boost the system’s prestige and bring in even more money. “The key word here is, we want to spend that money on ‘excellence,’ ” UT-Austin’s chief financial officer, Darrell Bazzell, said in an interview. His counterpart at the UT system, Scott Kelley, added that the purpose of the oil fund should be maintaining “a level of excellence and competitiveness” that lets UT “compete with any institution nationally.” Bazzell was right—the word “excellence” came up constantly in interviews with UT officials. The question is: Can the system continue to spend its oil fund money on that goal at the same time that it asks for more from students?

UT-Austin is the state’s premier public university; one of its main reasons for existence is to enrich the minds, and improve the prospects, of young Texans. But Texas is on its way to becoming a majority-Hispanic state, and nearly 60 percent of its grade-schoolers are considered economically disadvantaged. Right now, poor and minority students are drastically underrepresented in the UT-Austin study body. If the university is going to truly provide opportunity for all, financial aid will have to play a major role.

But when Chancellor McRaven asked for tuition increases in 2016, he had a different priority in mind: staying competitive on the national stage. UT-Austin was only number 52 in the U.S. News & World Report rankings, he pointed out. Those rankings heavily weight factors like admission selectivity and faculty resources. (The Washington Monthly publishes alternative annual rankings that emphasize affordability and upward mobility.)

“There are a lot of folks that do not like the U.S. News & World Report,” he acknowledged at the time. But, he said, “the fact of the matter is, it is the industry standard. It is about, to some degree, the quality of the university.” He added that UT-Austin’s annual in-state tuition, about $10,000, is far lower than higher-ranked public flagship peers such as UCLA, where tuition is around $13,000.

UT leaders see the oil fund not as a way to make college more affordable, but to boost the system’s prestige and bring in even more money. “The key word here is, we want to spend that money on ‘excellence,’ ” said UT-Austin’s chief financial officer.

But tuition doesn’t tell the whole story. Despite its higher sticker price, UCLA’s average “net price”—

a measure of the actual cost of attendance for a full-time undergraduate who receives at least some financial aid, when considering aid, room and board, and other factors—is lower. According to the most recent federal data, UCLA’s average net price is around $14,200, compared to $16,000 at UT-Austin. (These numbers are for in-state students.) Not surprisingly, UCLA enrolls a much higher share of low-income students.

How can UT-Austin’s net price be higher than UCLA’s, when its tuition is so much lower and the cost of living in Austin so much less than in Los Angeles? A lot of it comes down to financial aid. The average UCLA aid package includes around $10,700 in institutional grants and scholarships, compared to about $5,300 for UT-Austin. (California students also get more in-state and local grants.) The upshot is that the University of California system boasts far higher-ranked and more affordable schools on average than the UT system—and the UC system has no oil fund.

Still, UT’s leadership insists it needs to raise more money if it’s going to realize McRaven’s dream of “excellence” and rise in the rankings. Indeed, the flagship in Austin recently announced a new fund-raising drive. Instead of using the oil fund, or hitting up wealthy alumni, the new drive solicits donations from a less traditional source: current students. As of this writing, thirty students have donated. But money may not be the point. Getting graduating seniors to donate a few dollars is a way of upping the rate of alumni giving. And that’s a U.S. News ranking metric.

*Correction: due to an editing error, a previous version of this article mistakenly stated that the “Energy 101” MOOC cost $400,000 annually. In fact, that was a one-time expense. The article also said it generates no revenue. In fact, while the course is free to enroll in, the software costs $50.