One Last Look at Those Questions Congress is Asking About Endowments

In early February, a joint letter from the Senate Committee on Finance, the House Committee on Ways and Means and the Oversight Subcommittee of the House Committee on Ways and Means was sent to 56 academic institutions. The letter asks a total of thirteen questions dealing with such subjects as endowment management, endowment spending and use of funds, donations, and conflicts of interest. I have obtained a copy of the letter. In this blog I will discuss question #9 through #11 dealing with endowment spending and use. In a previous post, I discussed the questions #6 to #8 on this subject.

Question #9: What percentage of your endowment does your college or university devote to financial aid for student tuition? How much for other forms of student financial aid? Please specify the types of non-tuition financial aid provided.

You can see from this question that Congress is especially interested in student financial aid and the impact it has on bringing down the cost of education for students.

This is a difficult question to answer because money is fungiblecash is cash, and where it is specifically spent cannot be exactly documented. Institutions will, of course, have some endowment money that is restricted to financial aid. Probably all institutions use 100 percent of that money every year. The difference between the sticker price for tuition and the amount charged is financial aid. Whether that is because endowment income made up the difference or the institution simply granted a “discount” to a student, it is all a form of financial aid.

If an institution took all of its operating costs divided by the number of full-time equivalent students, the resulting figure is likely larger than the tuition sticker price. In that respect, all students are enjoying a discounted productall are receiving financial aid. Endowment earnings that are used for heating, snow plowing or running the athletic department all contribute downward pressure on the amount of tuition needed to run the institution. Is it possible, therefore, for an institution to answer the first part of this question by claiming that 100 percent of endowment earnings are devoted to financial aid? I think so.

The second part of the question asks how much the institution provides for other forms of financial aid. This makes me think that the first part of the question is really asking how much of the annual endowment spending policy appropriation is earmarked for tuition reduction. And the second part of the question is asking how much other tuition reduction the institution provides. In addition, the questionnaire asks if the institution is providing other aid to a student that is not related to tuition.

If you are uncomfortable claiming that 100 percent of the endowment income provides tuition reduction, then you will want to specify the amount of endowment spending earmarked for tuition reduction in the first part of the question and in the second part of the question report the additional tuition reductions granted in the form of unfunded discounts and other cost reductions provided to students. (In every institution I have worked with, the difference between the number of students times the tuition sticker price, less the tuition income received, was only partially covered by endowment income. The rest was unfunded financial aid.)  Are the below-market dining hall meals provided to students a form of financial aid?

Regardless of how you interpret Question #9, I recommend that you clearly communicate that all of your endowment income has the effect of lowering the tuition income necessary to run the institution. I fear that congress is asking simple questions about a complex subject.

Question #10: Does your college or university have policies regarding whether it is allowed to accept funds restricted to a specific purpose? Has your college or university ever declined a donation because it was restricted to a certain purpose? If so, please describe those specific scenarios in which your school rejected a donation.

In my background reading for this subject I have learned that there are some in Congress who believe that restricted giving is less useful to the institution than unrestricted giving. Some have even suggested that the restricted gift may be undeserving of the charitable contribution deduction. Of course, most everyone involved in fundraising will be able to defend the value of the restricted gift. It is easier to convince a donor to give for a specific purpose than for a general undesignated purpose. It is easier to increase a donor’s gift amount for a specific purpose than for an unrestricted purpose. No one wants to see restricted giving curtailed in any way.

And, again, cash is fungibleso donations restricted to the athletic department reduce the amount of tuition revenue that must be allocated to athletics. Your response needs to hammer away on this point. On average, college and universities relied on their endowments to fund 9.7 percent of their operating budgets in the year ended June 30, 2015. This included both restricted and unrestricted endowment spending. Institutions should realize that their response to this question may be helping to defend the tax deductibility of the restricted gift.

Does your institution have a policy regarding accepting restricted gifts? The answer to this should be “yes.” Your policy is that you do not accept a gift restricted to something the institution does not need or want. As obvious as that may seem, do not let it go unsaid.

Has your institution ever declined a restricted donation? The answer to this is probably also “yes,” although you may not recall any declined donations because the fundraising process likely terminated when it was evident that the donor and the institution were not on the same page regarding use of the proposed donation. While the question asks for the specific scenario when a donation was rejected, I think it is fair to merely indicate that proposed donations that the institution could not use have been rejected but that specific records of these potential gifts have not been maintained.

Some of those involved in this investigation are convinced that institutions simply amass as much wealth as possible by accepting all donations regardless of the potential to use them. This misunderstanding of how the institution actually works should be addressed in the response to Question #10.

Question #11: How much and what percentage of your college or university's endowment is invested in real property (not including REITs or other publicly traded securities)? Please list and describe your college or university's real estate holdings, including real estate held by the college or university, the endowment, and all related entities. If the college or university has made any Payments in Lieu of Taxes, please provide the date and amount of the payment.

In the first part of this question, congress is probing to see if there are endowment assets that are invested in places that are not producing current income available to the institution today. If parts of your endowment are invested in non-income producing assets such as real property, but you are calculating your spending on the total endowment value (which you should be doing) then this should be explained in this answer.

Some are concerned that institutions are manipulating their investments to reduce the amounts available for financial aid and accumulating more wealth than they would otherwise. Here is where you need to dispel that notion.

Listing and describing all of the institution’s real estate holdings has nothing to do with the endowment. Note that the current or book value of the real estate holdings is not required. I assume that a listing of real estate by acreage and building size (square footage) and a small description (class room building, dormitory, administration building, sports complex, etc.) will be sufficient here.

Obviously, reporting the amount of Payments in Lieu of Taxes (PILOT Payments) has nothing to do with endowments. Again, my background reading points to a trend of both state and local governments looking to institutions, which they believe have accumulated a great deal of wealth, to share that wealth with the local government(s). Latest to make the news, here, is the City of Hartford, Connecticut looking to Yale University for significant sums.

PILOT payments that reimburse a community for community services used by the institution (police, fire, etc.) are one thing. But looking at wealthy institutions as an income opportunity is something else altogether.

It would not be a wasted effort to refresh yourself on the value that the institution brings to the community in both tangible and intangible ways, and to work that into your response to this question. Communities originally granted tax breaks to not-for-profit institutions because they would rather have those institutions in their communities than someplace else. Occasionally, it is necessary to remind people of this fact.