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The problem is not that universities have high profits, but that they have high operating expenses.

Standard non-profit grift-- you can't take profits out of a non-profit directly, but you can give particularly robust salaries for yourself and your friends, use the funds to build powerful influence networks by directing projects, build prestigious glittering facilities, etc.

It's difficult to control because an outsider isn't in a position to know the best way to allocate funding. The best control is to not provide funding in absence of performance, which it sounds like this rule is all about.

another possibility to combat grifting would be to have competition. another university comes up and provides the same service as the wasteful university at a smaller cost, and thus displaces the wasteful university. the advantage is that we don't need performance measurements and similar things that can create distorted interests / be gamed (just like the proposed profit limit). that's the theory, at least

Who does the choosing?

Today it's the students but they significantly don't pay the cost, so competition can be gamed by wasting money on student perks.

This is generally a problem that comes up when the party that pays isn't the party that gets the benefit-- it breaks competition's utility for getting good results.

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