The American Spectator

Political Hay

Radio news yesterday morning announced that the Massachusetts legislature had "moved a step closer" to passing a 2.5% tax on college and university endowments of more than $1 billion.

The Commonwealth of Massachusetts is in debt, and the pols won't stop spending money. They've looked around and seen that university endowments, like other giant invested funds, have grown very well since the Reagan tax reductions of the mid-eighties. So "they're just going take it," as one investment pro said.

Not that the colleges and universities couldn't see a tax coming -- that and much else. On January 25, the chairman and ranking member of the Senate Finance Committee (the U.S. now, not just Massachusetts), Max Baucus and Charles Grassley, released what could only be called a threatening letter "to 136 colleges with endowments of $500 million or more, pressing for additional details on their finances and signaling an interest in legislation that would require colleges to use more of their endowments to keep costs to families manageable." (USA Today, Jan. 24.)

The letter, along with its demands for colleges to spend more of their endowment money to "provide real relief for students from low- and middle-income families," made all the big media outlets, and inspired an immediate reaction in academe.

It is not too much to call that reaction "panic."

MIT President Susan Hockfield's office churned out a thousands-words-long statement on March 3 under her name, protesting that MIT had to serve demanding technological needs, already spent lots of money to help students, etc., etc. Tucked in the middle of a distant paragraph, Hockfield laid bare the real source of endowment managers' consternation:

"While investments have performed admirably for much of the last two decades," Hockfield wrote, "the experience of several long troughs during the previous 50 years dictates prudence and cautions against favoring short-term needs."

In plain words: We've had a good 20 years, but you can't count on any one year to keep up that performance. Indeed, one university endowment lost five percent last quarter, performance probably typical in today's credit-smacked financial markets.

ENDOWMENTS ARE POOLS OF DONATED MONEY from which colleges and universities generate income for operational expenses. Unlike pension funds, which may sometimes lose money in down market years, so long as they stay ahead of their benchmarks, endowments must generate income every year, regardless of market conditions. It's a tough investing assignment.

As a result, schools tend to spend their endowment earnings carefully. According to an article in the American on Feb. 14, endowments' average spending in the U.S. is about four percent. Bigger funds can spend less, percentagewise. Yale will spend 3.8 percent this year, for example. Senators Baucus and Grassley want colleges to spend more like the five percent required of private foundations.

Harvard leads all endowments with assets of $34.9 billion. Yale has $22.5 billion, MIT $9.9 billion. Thereafter, endowments fall off steeply to amounts ranging in the millions to somewhat more than a billion. Boston College, for example, has $1.75 billion, and there are three other schools in Massachusetts with more than a billion: Smith, Tufts, and Wellesley.

An endowment's investment officers, answering to a board of directors, parcel out the money to various money managers. Harvard uses thousands of such managers; most other funds, dozens. Making the task even more complicated, some gifts to endowments come with specific uses tagged to them -- i.e., they have to be invested in certain ways, or spent in certain ways.

NEVER MIND THE COMPLEXITY, it sticks in lawmakers' craws that endowments get substantial tax breaks. For one, contributors can give endowments pre-tax dollars. For another, the endowments themselves are not taxed. (At the local level, universities don't pay property taxes, so in the unkindest cut of all, the Cambridge City Council is also considering taxing Harvard's and MIT's endowments.)

Put that together with the sheer size of the big endowments (Harvard's, as more than one commentator has pointed out, is bigger than the GDP of many countries), and you start lawmakers scheming how to get some.

Rep. George Peterson of Grafton, a Republican in Massachusetts' House of Representatives, put it plainly, as quoted in the Metro West Daily News April 8:

"What I found somewhat disheartening was that it got into, 'You're rich, and we're going to tax you because we need the money,'" he said of the debate.

Colleges and universities have fallen all over themselves trying to head off the legislative juggernaut aimed their way. It probably won't work. Tuition costs have risen at double or triple the rate of inflation during exactly the same period that endowments have been making so much money. And academe, securely cosseted by government grants, scholarships, and subsidized loans, will find it hard to defend itself when government decides the bill has come due.

topics:
Taxes, Education, Law, NATO