For College Endowments, More Scrutiny Comes With Better Returns

  • They may be a target for Congress as it seeks new tax revenue
  • Duke: ‘A rising endowment certainly beats the alternative’

Some wealthy U.S. colleges aren’t complaining about the strong performance of their endowments in the last fiscal year that led to record values, but don’t be surprised if they aren’t boasting about it either.

Financial success can bring complications, such as a Congress looking for new sources of revenue as it seeks to overhaul the tax code, parents besieged by sky-high tuition looking for a break, and donors who may question whether their gifts are even necessary.

Dartmouth College, Cornell University and the University of Chicago are among the wealthier schools that highlighted their record endowment values when they reported investment results in recent weeks.

“It might not be a good fundraising strategy,” said Brian Galle, a law professor at Georgetown University who specializes in tax matters. “Academic work, including mine, show donors are willing to give to institutions that have had a tough year, to be supportive for financial aid.”

Investment returns for the year ended June 30 averaged 12.7 percent, according to data from 450 nonprofit institutions collected by Cambridge Associates. That compares with an average loss of 2 percent in fiscal 2016.

Two years ago, after asset values surpassed their levels before the financial crisis, Congress took an interest. They held two hearings on college endowments and sent inquiries to the richest 56 private colleges, with funds over $1 billion. There’s still interest in Washington, according to one of the tax-writing committees that sent the inquiry.

Senate Finance Committee Chairman Orrin Hatch, a Utah Republican, is examining college endowments as part of the tax code review, said Katie Niederee, a committee spokeswoman. College investment returns aren’t taxed, and donors get tax breaks for their gifts to colleges.

Last week, the House narrowly passed a budget resolution to start debate on overhauling the tax code, setting off a sprint to introduce a bill, consider it in committee and vote it through the chamber before the Thanksgiving holiday.

See also: House Opens Race to Major Tax Overhaul With Caution Flags Flying

This year’s endowment performance was led by gains in global equities, and schools that posted the highest one-year results had larger allocations to public stocks.

Other schools like Yale, which invests more than half of its assets in so-called alternatives, such as private equity and hedge funds, did poorer than average. Yale is the second-richest U.S. university with a $27.2 billion endowment, a school record, gaining $1.8 billion in value. Duke University’s endowment also hit a high, growing 16 percent to $7.9 billion, fueled by a 12.7 percent investment return.

Like most endowments, Duke’s tumbled in the wake of the financial crisis, falling as low as $4.4 billion in fiscal 2009. Investment returns and strong fundraising in more recent years drove its resurgence, said Michael Schoenfeld, a spokesman for the university, where the cost of attending for a full year as an undergraduate is almost $73,000. About half of students receive some aid, he said.

“The endowments are perpetual funds and designed for the long term -- they’re not retirement accounts that you draw down to a certain point,” he said in an interview. “Tuition didn’t increase by 25 percent when the endowment lost 25 percent of its value.”

Still, he said, “a rising endowment certainly beats the alternative.”

‘Unfair Narrative’

Just because endowment values are at record highs doesn’t mean schools can spend as they please, said Dennis Morrone, who oversees the national nonprofit and higher education audit practice at accounting and advisory firm Grant Thornton.

Read more: U.S. Colleges Amass Riches as Students Sink in Debt: QuickTake

“The significant growth in endowments, resulting from impressive market performance, particularly over the past year, plays to an ongoing and largely unfair narrative that institutions are generating excessive wealth and not utilizing their resources to lower the cost of student enrollments,” Morrone said.

Princeton University’s endowment hit a record value of $23.8 billion in the fiscal year.

Beyond regular spending, the university said it has allocated an additional $200 million from the endowment over the next few years. The money will help fund an undergraduate expansion, including new buildings such as dorms, and teaching and research in fields including engineering and environmental studies.

Endowments typically base their annual spending on averages of three or five
years of performance. 

If schools do have a strong year, perhaps this is an opportunity to consider spending more, to expand scholarships in a particular year, Morrone said, but “we don’t want organizations to spend too much of their endowment.”

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