Endowments Could Damage The Sector

March 9, 2015       Paul Clolery      

The President of the United States threatens to veto any and all legislation that reduces or even keeps static federal tax deductions for donors. Localities are seeking to strip nonprofits of certain exemptions, particularly property tax relief. It’s only a matter of time before caps are placed on the amounts nonprofits can raise that are eligible to be deductible.

The misguided legislators pushing to eliminate or reduce deductions will only have to point to Harvard University and its endowment as its prime example of what is wrong with the endowments of some individual organizations.

It appears that the $36 billion Harvard University endowment is now investing in California’s wine country and is planning to drill 16 water wells of between 700 and 900 feet deep in a state that might be renamed Dry Gulch. According to the Reuters news service, that’s between two and three times deeper than the average residential well in the region.

Whether it’s a real estate play, entry into the wine business or a cynical water grab in a drought-stricken area, this lavish investing puts the entire endowment industry on the radar of regulators. It could be argued the investment is hubris.

Think of that number — $36 billion. You have to ask at what point it simply is too much and thus a detriment to other charities. It puts a bull’s eye on charitable donations. For that $36 billion, the city of Cambridge, Mass., home to Harvard, could be run for 72 years even if another dime was not raised. The city’s budget is $524 million. Even if you throw in the capital budget of roughly $32 million, that’s still 70 years.

How much is too much?

Harvard’s 2014 budget as posted to the school’s website was $4.2 billion. If it never raised another dime and stopped charging tuition that little nest egg would last roughly 75 years if return on investment is roughly 10 percent annually.

How much is too much?

Harvard is not the only offender. Yale University has a slightly less repugnant $23.9 billion endowment. That school’s expenses ran about $3 billion in 2014, according to financial data on its website. Here’s the best part. The school ran a $51 million surplus from operations.

The City of New Haven, Conn., home to Yale University has a fiscal year 2015 budget of just less than $511 million. That’s roughly 43 years that the endowment could take care of that city without another dime raised and probably a century of free room and board to students at that same 10 percent return.

The State of Connecticut’s fiscal year 2013 budget was $19 billion, $4.9 billion less than Yale has in its endowment. Not all Ivy League schools have more revenue than their home states. Princeton University has a paltry $21 billion in its endowment while the state of New Jersey’s budget is $32.5 billion.

How much is too much?

These are just two glaring examples of why lawmakers have the charitable sector factored in to revenue generation. That doesn’t even touch the donor advised fund issue that many members of Congress have openly been questioning.

You can’t argue poverty or necessity when your funds won’t dry up for 100 years. It is true that you can’t predict economic fortunes 10 years out, let alone 100. But federal, state and local governments deal with the here and now. There is a deep pool of revenue out there that can plug many budget holes.

Many nonprofit financial manager would be thrilled with six months of cash in reserve. The really lucky manager would have a full year as a cushion. A century is a completely different ballgame.

The largest endowments need to begin exercising restraint when it comes to empire building. A one-year moratorium on fundraising would barely be felt many of the major endowments. Community foundations need to push the holders of donor advised funds to push out more of the proceeds on an annual basis.

Politicians can swim pretty well when the buoyancy is cash. They will find the deep end of the pool very quickly and will have no problem diving in. There is no reason the water should be so deep for some endowments. It’s only a matter of time before federal, state and local authorities pass legislation that drowns even the smallest of endowments.

Restraint is needed now before the president asks: “How much is too much?”