Cash-Strapped States Eyeing Endowments

May 26, 2016       Andy Segedin      

A storm is brewing over universities’ rainy-day funds. State and federal government are eyeballing schools’ endowments, with forced spending and taxation among potential mandates to be levied.

The latest salvo is in Connecticut and the semi-official target is Yale University. The Connecticut General Assembly’s Finance Committee held a hearing to discuss SB 413. The bill would require all institutions of higher learning in the state with endowments in excess of $10 billion to report gains as unrelated business taxable income.

The proposal is being touted by supporters as a means of encouraging universities to reinvest gains. Yale University is the lone institution in the state with an endowment exceeding $10 billion, totaling a reported $25.6 billion. The university reported $2.6 billion in investment gains between June 30, 2014 and June 30, 2015.

Down I-95 on Capitol Hill in Washington, D.C., Rep. Tom Reed (R-NY) is drafting the Reducing Excessive Debt and Unfair Costs of Education Act, better known as the REDUCE Act. A draft outline of the bill targets universities and colleges with endowments in excess of $1 billion. It would require 25 percent of endowment earnings to be put toward grants for working-family students to aid with cost of attendance.

Working families are defined in the outline as earning between 100 and 600 percent of the federal poverty line. The federal poverty line for a family of four is $24,300. That would put eligibility at up to $145,800 for a household of four.

In cases in which earnings exceed the cost of attendance for working-family students, remaining funds would go to benefit low-income students. Penalty for the first year of noncompliance would be a 30-percent tax on undistributed payout. Taxation of 100 percent of undistributed funds would come with a second year of failure to comply. Universities would face loss of tax-exempt status after a third year of noncompliance, per the draft.

The REDUCE Act is far from the first time that Congress sniffed around schools’ piggy banks. The House Ways and Means Committee sent inquiries regarding endowments to 56 universities earlier this year. The committee is specifically looking into the tax preferences afforded to private colleges and universities to understand the extent to which they are serving their charitable purpose, according to David Pasch, communications director for Rep. Peter Roskam (R-Ill.). Roskam serves as chair of the committee’s Oversight Subcommittee.

Pasch pointed out that the cost of attending a private, nonprofit school has increased 146 percent when adjusted for inflation during the past 30 years, from $12,716 in 2014 dollars in 1984-1985, to $31,231 in 2014-2015. The committee set an April 1 deadline for university responses. Information regarding compliance with the request was not available at press time.

It is possible that legislation could result from responses, with suggestions including instituting a minimum endowment spending requirement, further defining how endowment funds can be used and limiting strings-attached or “naming rights” donations.

According a spokesman for Reed, the bill’s language is still in a developmental phase and that the congressman plans to continue gathering input from stakeholders and examine the Ways and Means Committee’s findings before introducing legislation.

The federal bill is not intended to relate to or affect Connecticut’s proposal. It is focused on benefitting working-family students as they are often left on the outside looking in when it comes to financial aid. Reed, raised by a single mother, indicated that he understands firsthand the burden of student loan debt.

“It is a disservice to the next generation of Americans to continue to allow them to struggle when we could so easily address the problem of out of control costs by making simple changes to our tax code,” Reed said via an email. “We care about ensuring fairness in higher education and ensuring that we can allow every child to succeed in higher education and not be held back due to costs.”

The spokesperson emphasized that the details of the bill are fluid and, when asked whether the $1 billion floor might be changed, responded that it will be a matter of what is successful in making college affordable for working class families.

The National Association of College and University Business Officers (NACUBO) in Washington, D.C., has identified 92 American colleges and universities with 2015 endowment funds in excess of $1 billion. Reed’s staff has been in contact with two of the potentially impacted universities located near his district in western New York, Cornell University and the University of Rochester, to discuss his proposal and means of lowering college costs. That dialogue continues. The REDUCE Act is being considered as one component toward reducing college costs, not a silver bullet, according to Reed’s spokesperson.

Massachusetts and Texas have the most institutions that would be affected by Reed’s proposal, nine each. Independent Colleges and Universities of Texas (ICUT) represents six of the schools – Rice University, Texas Christian University, Southern Methodist University, Trinity University, Baylor University and Baylor College of Medicine.