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.