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Compensation scandals seem to garner more publicity when the public sees some symbol of extravagance. That makes New York University’s current controversy about vacation homes potentially problematic.

June 19, 2013

In his years as president of New York University, John Sexton has weathered more firestorms than most presidents.

There have been controversies related to academic freedom at the university’s campuses abroad, the “busting” of a graduate student union, contentious building projects in New York, the revelation of large compensation packages for top employees, and multiple votes of no confidence from faculty groups.

While many of those stories captured major headlines -- in part because the university is located in the same city as most national media outlets -- they generally faded away after one or two news cycles. But the revelation this week that the university provided large loans with often-favorable terms to particular employees, including Sexton, to help them purchase vacation homes might be different.

News outlets picked up the story with a rabidity typically reserved for college sports scandals. The online magazine Slate said “NYU Neatly Embodies Everything Wrong with Higher Education in America.” Numerous outlets have tied the practice to the large loan burdens with which many NYU students graduate. Even Stephen Joel Trachtenberg, a regular defender of presidential compensation, said NYU’s practice might be a little excessive. “I think you have to be able to pass a red-face test,” he told The New York Times.

“The idea that even a small portion of [students’] loan payments is directly funding the Fire Island getaways of the school's well-paid faculty and administrators is the kind of picture that NYU probably wants to avoid,” The Atlantic Wire wrote Tuesday.

While the public has shown a high tolerance for many executive perks, including steep compensation, modest presidential housing, some travel expenses and cars -- which institutions often argue are necessary for presidents to do their jobs properly -- many tend to draw a line at a certain level of extravagance. For higher education institutions and other nonprofits, the idea that a university is spending beyond what is necessary – with the bill falling on tuition-paying students or federal and state governments – can generate significant ill will.

Costly renovations of presidents’ houses, maintenance of a university-owned yacht and the purchase of multiple residences all became symbols of excess that captured the public imagination and led to past presidential firings or resignations. And such symbols have often proven more problematic than pay packages whose value can greatly exceed the value of the luxury benefits provided.

Giving loans to employees is not a new practice, nor is NYU the only institution that regularly engages in the practice. Oftentimes such loans are made to help individuals relocate to expensive areas, and institutions such as Boston University, Pepperdine University and Butler University have all at some point provided loans to employees

New York University's practice of giving loans to faculty members and administrators has received some publicity in the past, but it came under more significant media and governmental scrutiny earlier this year during the confirmation hearings for Treasury Secretary Jacob Lew, a former top administrator at NYU, for a mortgage Lew received through the university to help him buy housing in New York City. 

U.S. Sen. Chuck Grassley, a Republican from Iowa, has expressed concern about the way the university is compensating administrators. "During the confirmation of Jack Lew, I became aware that New York University awarded Mr. Lew subsidized mortgages and gave Mr. Lew a $685,000 severance payment when he took a higher paying private sector job with Citigroup," he wrote in a letter to the university in March asking for more information about the university's practices of giving out loans. "This led me to examine more closely whether NYU uses its tax-exempt status primarily to benefit its students or to compensate university administrators."

But the loans for second homes are something new, higher education officials said this week, and play into a narrative of institutions providing lavish compensation and perks that faculty members and students say are driving up the cost of a college degree. NYU has defended the practice, saying it is an important tool for luring top talent, particularly in an expensive real estate market.

The concern that universities are using their tax-exempt status to provide large compensation packages for administrators has been raised multiple times in the past few decades amid scandals that often center on some extravagant expenses.

In the 1990s, Stanford University President W. Donald Kennedy resigned amid a controversy about the university’s overbilling of the federal government for research expenses that investigators said cost the federal government more than $200 million, though the university paid much of it back. Many of the charges had little connection to actual research. While accounting for only a small share of the total cost, a few “luxury items” captured headlines, including maintenance of the athletic department’s yacht, upkeep of the president’s residence, and a $17,500 reception to introduce Kennedy’s wife to people on the campus.

Other universities that had overcharged the federal government for indirect expenses saw some scrutiny, but not at the same level as Stanford. They also did not face the same kind of administrative turnover. "We got made an example of,” Kennedy said at the time. “Our treatment in the media was rough."

Peter Diamandopoulos, former president of Adelphi University on Long Island, was driven out of his job after an investigation uncovered a series of perks, including the second-highest compensation in the country, an $82,000 Mercedes and a $1.4 million condominium in New York City.

American University President Benjamin Ladner resigned in 2005 amid a controversy over his personal and travel expenses that totaled about $500,000 over three years, including an engagement party and “professional development” trips for his personal chef in Paris, London and Rome.

Housing has often proved controversial. Kenneth Keller, former president of the University of Minnesota, resigned in 1988 amid a controversy over a $1.5 million renovation to his house and renovations to his office that totaled $200,000.

And Keller is far from the only president to see significant criticism related to the price of upgrades to his residence. Longtime North Dakota State University President Joseph Chapman resigned in 2009 after a state audit found that a home-construction project originally slated to cost $900,000 swelled to more than $2 million. At the University of Connecticut, Michael Hogan faced criticism for a lavish inauguration ceremony, a $475,000 renovation of the president’s office, his decision not to live in the house provided by the university (instead asking the university to rent and renovate a separate residence), and his purchase of life-sized cutouts of himself to place around campus. Amid criticism, Hogan left that job to run the University of Illinois system. (That did not end well, either.

Extravagance without the symbol has often been more manageable for presidents.  

Outgoing Ohio State University President E. Gordon Gee saw repeated coverage of his compensation, which exceeded $1 million annually and was generally higher than that of most public university presidents. He also saw scrutiny of his travel expenses and discretionary spending, including thousands on bow-tie cookies and pins (to acknowledge his preferred mode of sartorial splendor). But none of those expenses became the kind of stand-alone symbol that felled other presidents.

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Kevin Kiley

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