Endowment “Hoarding” Draws Congressional Ire

Among universities, too, the very rich are different from the rest. They have bigger endowments. This has inspired Congress to wonder why tuition keeps rising above the rate of inflation while endowments rise to record levels.

The reality of academic finance is that only a small slice of America’s vast higher-education enterprise has any significant amount of invested wealth. But a college degree has become a minimum requirement for getting ahead, and as tuition keeps going up, the cost issue has inevitably drawn hostile Congressional attention, with some effect. In the vanguard of the critics is Senator Charles Grassley, an Iowa Republican who has been pounding on universities to hold down tuition by spending more of their endowments. The political viability of the issue is evident in the oddity of a Republican taking the lead on an issue in a Democratic Senate.

Late last year and early this year, following Senate hearings on academic money matters, several elite universities, led by Harvard and Yale, responded to unmet needs of which, apparently, they were previously unaware: henceforth, they piously announced, wondrously generous financial assistance would be provided for needy students — essentially a free ticket for children from families of modest income.

While congratulating the two schools for “big announcements,” Grassley declared that “more than 60 other colleges and universities with endowments of at least $1 billion are making church mice sound loud by comparison…. Parents and students have a right to expect these universities with big endowments to end the hoarding and start helping with skyrocketing tuition costs. Colleges are tax-exempt, and tax-exemption helps endowments grow.”

In Internal Revenue Service regulation for tax-exemption, Grassley sees a weapon — though scant attention has been given to the likelihood that wielding it could enhance the status of rich private universities at the expense of financially strained public institutions. In faculty salaries, student aid, and a variety of academic amenities, the wealthy private institutions already possess competitive financial advantages over their public counterparts. With more money at their disposal, the competitive gap could widen. Nonetheless, Grassley is calling for bigger payouts from endowment, which would mainly accrue to the benefit of the already wealthy schools.

As tax-exempt organizations under section 501(c)3 of the IRS code, philanthropic foundations are required to spend annually at least 5 percent of their assets. Universities, though also tax-exempt, are free of that requirement, and most spend a bit less, which riles Grassley and some of his Congressional colleagues. Universities have protested that bringing them under the 5-percent requirement would deprive them of financial flexibility and subject them to other misfortunes. They note, too, that large portions of endowment funds are bound by donor restrictions; and besides, they point out, a lot of endowment is already going into student aid. Grassley is unpersuaded, but is holding back on any legislative measures while responses trickle in from questionnaires sent to 136 universities with endowments of at least $500 million.

The lopsided distribution of wealth in higher education was documented last year in a report, “Tax Issues and University Endowments,” prepared by the Congressional Research Service for the Senate Committee on Finance, on which Senator Max Baucus (D-MT) is the chairman, and Grassley is the ranking Republican. In 2006, endowment assets of 765 institutions totaled $340 billion, which produced income of $52 billion. Twenty universities accounted for half of all endowments, and the 62 with endowments of over $1 billion accounted for two-thirds of endowment value. Harvard alone held 8.5 percent of the national endowment value in 2006.

The CRS report states notes that the richer universities generally get bigger returns on their endowments, apparently from superior investment guidance. “For many institutions with large endowments, the higher investment returns earned on endowments could allow higher payout rates while maintaining the real value of the endowment.” Instead, among universities in the billion-plus endowment class, “earnings on endowment retained after payout significantly exceed, on average, both tuition growth and student aid.” Small additional amounts from endowments could “mitigate or eliminate tuition growth and substantially expand student aid for many institutions in the sample.”

Action this late on the Congressional calendar in an election year is unlikely. But with education costs ranking high among public concerns, the 5-percent rule is likely to gain support in the next Congress. And maybe other measures, too, to hold down tuition costs.