A recent CRS
report is advising Congress on their “options for changing their tax treatment”
in order to increase federal revenue and to “encourage additional spending from
endowments on specific purposes” such as tuition assistance. This
administration has promised free tuition and it must find ways to fund that
promise. http://www.fas.org/sgp/crs/misc/R44293.pdf
The policy
options discussed were as follows:
1. “A payout requirement, possibly
similar to that imposed on private foundations, requiring a certain percentage
of fund be paid out annually in support of charitable activities; (distributing
more financial aid to students)
2. A tax on endowment earnings;
3. A limitation on the charitable
deduction for certain gifts to endowments; (some of the endowment money is
spent over a long period of time yet the donor takes the entire tax deduction
immediately)
4. A change to the tax treatment of
certain debt-financed investments in strategies often employed by endowments.”
(off shore investment for example)
The report
did not discuss the ever-escalating cost of higher education but it did mention
Senator Chuck Grassley’s and Representative Peter Welch’s 2008 round table
discussion, “Maximizing the Use of Endowment Funds and Making Higher Education More
Affordable.” http://www.finance.senate.gov/newsroom/ranking/release/?id=38a762b5-0fc7-4a9c-a130-3ddf23812279
A hearing of the House Ways and
Means Committee focused on “The Rising Costs of Higher Education and Tax Policy”
is also mentioned. http://waysandmeans.house.gov/event/39840295/
A university maintains a fund
called endowment in either cash or property. Income from any endowment can be
used to cover the operating costs and capital expenditures, to fund special
projects, or to reinvest. Universities can have hundreds or thousands of funds,
based on special agreements made with various individuals who donate with
strings attached such as how the fund is to be used, when, and how the principal
or the income earned are to be used.
Some endowments are dedicated to
scholarships and others to faculty support. A true endowment is a permanent endowment. When a period of restriction
expires, the university can use the funds as they wish – these are considered term-endowments. General gifts and
bequests are considered quasi-endowments.
Congress is looking at all three types of university endowments.
Endowments are tax-exempt because
they are part of tax-exempt 501(c)(3) organizations or the endowment itself has
a 501 (c)(3) tax-exempt status. Any contribution to such endowments is tax
deductible to a contributor under the Internal Revenue Code Section 170.
Additionally, any investment earnings of an endowment are also tax free. A
university is considered charitable and educational in purpose and it is thus
tax exempt.
According to the writers of the CRS
report, “College and University Endowments: Overview and Tax Policy Options,”
dated December 2, 2015, “If the return from endowments of colleges and
universities were taxed currently at 35%, the revenue gain is estimated at
$16.2 billion for FY2014. If only private universities and colleges were
subject to a tax, the gain would be estimated at $11.1 billion, since public
institutions are responsible for 31.7% of assets.” (p. 7)
The data for this report was
collected from the U.S. Department of Education, the National Association of College and University
Business Officers (NACUBO), and the Internal Revenue Service. The report lists 25
private colleges with the highest per student endowments. The top ten listed
are Yale, Princeton, Harvard, Stanford University, MIT, Rice, University of
Chicago, Pomona College, Swarthmore College, and Amherst College. (pp. 11-12)
The CRS report also lists the top 100 colleges and
universities with large endowments and their cumulative share. (p. 28)
Statistics show that the average
endowment per student in 2014 at private doctoral-granting universities was
$214,300 and the median was $70,900. (p. 12)
The total college and university
endowment for 2014 was $516 billion, with assets concentrated with 11 percent
of institutions holding 74 percent of endowments. Yale, Princeton, Harvard, and
Stanford held each more than 4 percent of total endowment assets. (Summary, p.
2)
The average payout rate
(spending) from endowments was 4.4 percent and endowments earned a 15.5 percent
average rate of return in 2014, resulting in income of $79 billion. (p. 16) According
to the CRS chart, the payout rate has oscillated between 4.2-5.1 percent from
1998 through 2014. (p. 14)
College and university endowments
make investments in equities (buying
stocks in a company, derived dividends, and capital gains from the sale of the stock),
fixed income (U.S. Treasuries, money
market instruments, mortgage and asset-backed securities, and bonds), and alternative investment strategies
(hedge funds and private equity).
College and university endowments
could be a potential cash cow for the federal government in need of additional
revenue to add to its spending ceilings, exacerbating the $18.8 trillion in
national debt.
From reader Carmel:
ReplyDelete"This is an important research paper done with careful expertise. Do send it on to the college admits of your choice as they'll need to be prepared... Wash DC is broke and they're skimming from everywhere to continue paying their double crossing media and Czars and Muslim appointments."