Haves And Have Nots

September 3, 2015       The NonProfit Times      

It’s time to officially recognize sector’s economic differences

Higher education endowments are often looked at jealously by nonprofit leaders whose organizations live in endowment-free zones. It’s not that they want to live there. It just worked out that way. It is the nonprofit equivalent of the other side of the tracks. Think Julie Andrews in Victor Victoria with her nose against the restaurant window. It seems that major colleges and universities are daily announcing seven- and eight-figure gifts and nine-figure endowment campaigns. The major gift unveilings are met with cheers and scorn.

The money that rolls in goes into a deep pool of cash that often is managed as a hedge fund. Those funds are more and more becoming targets for analysts and regulators. Executives at rank and file nonprofits, even those on the higher end of the scale, are going to want to start distancing themselves from higher education fundraising and those endowments.

Higher education’s pots of cash are under regular scrutiny in the media. The March 1 edition of this column warned: “Endowments’ cash might drown the sector.” The usual target is Harvard’s massive hedge fund/endowment at $36 billion. “You have to ask at what point it simply is too much and thus a detriment to other charities … 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.”

The great Rick Cohen recently wrote about how bank trustees are allegedly exploiting foundations, suggesting it is for personal gain. Cohen wrote about the role of bank trustees who control a significant slice of the assets of large private foundations.

More recent was a column in The New York Times by Victor Fleischer of the University of San Diego. His research showed that Yale paid roughly $480 million to fund managers to handle one-third of the school’s $24 billion endowment.

According to his research, of the $1 billion the endowment contributed to Yale’s operating budget, only $170 million was earmarked for tuition assistance, fellowships and prizes. Private equity fund managers also received more than students at four other endowments he studied: Harvard, the University of Texas, Stanford and Princeton. There are calls for more scrutiny of charities, such as Sen. Charles Grassley (R-Iowa) demanding information from the American Red Cross after stories in the media questioned — in many cases unsubstantiated — its Haiti response.

These headlines are not good during an election cycle. Each of the presidential candidates will be rolling out a tax plan and pet projects for funding. Those pet projects will take money the government doesn’t have available. The candidates will seek changes in the tax code that will bring in additional revenue.

Hillary Clinton, currently the frontrunner on the Democrat side, suggested a cap on deductions. She declined to be specific, although it seems to be across the board, which would hurt the charitable deduction.

It is time for leaders at service delivery groups to put distance between their organizations and higher education. Perhaps it is time for increasing the deduction for direct contact human service organizations and capping the deduction for organizations that are little more than investment vehicles, including donor-advised funds. The deduction shouldn’t be eliminated, just reduced to the 25 percent to 28 percent level while increasing the gifts for direct aid to 40 percent or more.

The sector’s great economic minds can work out a formula for this idea. Cash that lays dormant should not get the same treatment as gifts immediately put to work. There should be a greater incentive for handling the nation’s immediate needs, rather than saving for a Super Collider. An endowment that’s many multiples of an annual operating budget without specific target projects is a hedge fund and should be taxed as such or the deduction significantly reduced.

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