A not-so-old joke has it that Harvard is best thought of as a hedge fund with a university attached. The money in question is its endowment, a pool of some $35 billion made up largely of donations and retained earnings from investments. Big college endowments are a mostly American phenomenon, the product of a culture of philanthropy, rising inequality and aggressive investment techniques. Endowments also benefit from tax breaks for donors and a tax exemption on a fund’s earnings. Critics, including some members of Congress, are asking whether endowments are doing enough to help students at a time of soaring educational debt — or if the support by taxpayers is just helping the richest schools get richer. President-elect Donald Trump has suggested that some changes might be needed, too.
Trump said during the campaign that he wants to make sure that colleges getting “these special federal tax breaks” are making “good-faith efforts to reduce the cost of college and student debt.” A vice-chair of Trump’s transition team, U.S. Representative Tom Reed of New York, wants to introduce legislation that would force universities with endowments of over $1 billion to spend more endowment income on middle-income students and publish plans for reducing costs. That group of about 100 schools ranges from Harvard at the top to the University of Georgia and related foundations at a little over $1 billion. Reed also wants donors to those colleges to divert 25 percent of their gifts to middle-class tuition relief or their tax deduction would be curtailed. In early 2016, the two most important tax-writing committees in Congress asked the richest 56 private schools to provide details about how they spend endowment returns and pay fund managers. The scrutiny comes at a time when many schools faced investment losses for the year that ended in June 2016 that came on top of lackluster returns the year before. That’s led some to cut back on the amount of endowment money they spend. In the U.K, Cambridge has an endowment of 2.2 billion pounds ($2.8 billion), and Oxford one of 2 billion pounds. Other schools with big endowments include the King Abdullah University of Science and Technology in Saudi Arabia and the National University of Singapore.
Endowments have long played a central role in the rise of some colleges. A $17 million bequest in 1932 from George Eastman, the inventor and founder of Eastman Kodak, helped make the University of Rochester one of the nation’s richest for several decades. Donations of $100 million or more have come in a flurry in recent years, with about a dozen received by universities in 2014 and 2015. Endowments have also grown by adopting aggressive investment techniques. In 1985, 65 percent of Yale’s fund sat in U.S. equities; its asset allocation target for domestic stocks in fiscal 2016 is 4 percent. Its pioneering chief investment officer, David Swensen, described an endowment’s long time horizon as “well suited to exploit illiquid, less efficient markets.” Other universities followed suit, and returns rose. Then came the 2008 downturn, when the lack of liquidity contributed to some big losses. Harvard’s fund declined 27 percent. Today, some schools with big endowments and smaller student bodies, such as Princeton, Amherst and Grinnell, derive about half their operating budgets from endowment income. About 800 U.S. universities had a combined $515 billion in endowment assets as of June 2016, according to an industry survey.
A Congressional Research Service report estimated that taxing endowments’ investment income at a 35 percent rate would have produced $16.2 billion in fiscal 2014, and that the cost of tax deductions claimed by individual and corporate donors to universities amounted to $6.3 billion per year. Both benefits flow largely to elite schools. One advocacy group estimated that the $6 billion a year needed to fund President Barack Obama’s plan to make community college free could be raised by a sliding-scale excise tax of between 0.5 percent and 2 percent on endowments that exceed $500 million. Colleges counter that they can’t spend their funds like money in a bank account. Endowments are comprised of thousands of individual funds derived from gifts, and schools must by law follow the intention of the donors. The latest Congressional inquiry isn’t the first — the Senate Finance Committee raised similar questions before the financial crisis. Around the same time, about 30 of the nation’s richest schools replaced loans with grants in financial aid packages.
The Reference Shelf
- The yearly survey of endowments and investment returns by the National Association of College and University Business Officers.
- A Congressional Research Service report on endowments and tax options.
- Annual reports from the Harvard and Yale endowment managers.
- An American Institutes for Research study suggests taxing large endowments to support low-income students at public and community colleges.
First published Feb. 10, 2016
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