Congressional Research Service Releases Tax Policy Options on College Endowments

Educational institution endowments have come under attack from all sides lately. Whether it is the new excise tax on net investment income, a Congressman intent on forced spending to reduce the cost of higher education, or dedicated Congressional hearings, colleges and universities have had to remain on constant pivot to fend off attackers. Now, the Congressional Research Service ("CRS"), a nonpartisan public policy research service of the U.S. Congress, has added to the salvo.

On May 4, the CRS released "College and University Endowments: Overview and Tax Policy Options," a report based on data from a variety of sources that notes:

  • In 2017, college and university endowment assets totaled $566.8 billion;
  • 75% of endowment assets (roughly $425 billion) are held by just 12% of all institutions, with four universities holding over 16% of all endowment assets;
  • Over the past 20 years, the average endowment spending rate was 4.4%; and
  • In 2017 endowments assets earned an average rate of return of 12.2%.

While the CRS report makes no specific recommendations on which policies Congress should enact, it does discuss a number of policy changes that could be accomplished by additional endowment legislation. Depending on legislative and policy objectives, the CRS submits that:

  • The new 1.4% excise tax on net investment income could be reduced or eliminated in exchange for policy objectives like increased spending on financial aid to low- or middle-income students, or increased use of minority- and women-owned asset management firms.
  • Endowments could be a revenue generator for the federal government, something long discussed but rarely reduced to writing by a government agency.
  • Charitable donations not immediately used for charitable purposes may not be fully deductible to individuals on a dollar-for-dollar basis (e.g. only a percentage of a restricted gift to a college or university endowment would deductible on an individual's personal income tax return).
  • Endowments could be required to make a minimum annual payout. Private non-operating foundations are currently required to distribute a minimum of 5% of their assets annually and many in Congress view endowments and private foundations as functional equivalents.
  • Current laws incentivize the use of offshore debt-financed investments and hedge funds. The CRS suggests Congress could disallow blocker corporations or create "look through" rules in an effort to bring parity between domestic and offshore investments.
  • Increased data reporting, either via a new filing requirement or via the current Form 990 could be utilized to bring greater transparency to college and university endowments.

Fair or unfair, the numbers and ideas floated by the CRS are bound to draw attention. With higher education costs rising and some legislators accusing colleges and universities of "sitting" on what has now been quantified as over a half a trillion dollars' worth of assets, calls for endowment reform are only likely to increase. Additionally, endowment reformers are likely to point to the 4.4% expenditure rate as evidence that colleges and universities are not doing enough with their money. Finally, while most policy change suggestions from the CRS are not particularly new, with both Representative Reed and former Representative David Camp mentioned in the report, the CRS brings many of these ideas back to the forefront of legislator's minds.

The fight over endowments is far from over, but colleges and universities would be well served to get out in front of this report and ensure their legislators understand the impact of endowment reform.

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