October 06, 2009
The Taxing and Spending of University Endowments
Posted by Gordon Smith

Those of us who make a living in higher education have been reading about (and sometimes living with) dramatic budget cuts, even at our nation's most prestigious universities. Peter Conti-Brown wonders, "why are [the nation’s wealthiest universities] making such dramatic cuts to their operations budget, rather than simply spending down more of their cash reserves in order to stabilize their budgets?"

Good question. The answer, he argues, is not the result of legal or financial restrictions on endowment spending, but rather the result of cultural norms of university endowments:

I argue that the culture that has arisen surrounding university endowments has placed the goal of protecting the value of that endowment one of the elite university’s central goals. In this sense, maintaining a large university endowment may have become important not only as a means to an end—that is, having the financial resources to support other important university functions—but as an end in and of itself. Spending down the endowment in order to maintain budgetary stability would have meant further endowment reductions beyond the market loss of 25 - 30%. University presidents have already made it clear that, in budget cuts, they are unwilling to compromise on universities’ “core university principles.” Endowment preservation—at least in part—may have become part of that overall core mission.

This is a fascinating paper about a topic on which I knew almost nothing. Conti-Brown focuses on the five largest private-school endowments as of 2008 (Harvard, Yale, Stanford, Princeton, and MIT), though he suggests that the arguments in the paper may be extended to other university endowments. A couple of interesting points ...

First, endowments are tax-exempt under § 501(c)(3) of the Internal Revenue Code, and prior to the recent economic troubles, Congress was making noises about mandating minimum endowment spending or revoking the tax-exempt status if universities didn't use some of their largesse to make higher education more affordable. Now, all of that talk seems to have faded in most circles, though Felix Salmon was incensed enough by Conti-Brown's findings that he wanted to reinvigorate the idea: "There never was much reason for university endowments to exist at all, let alone to exist in the ultra-bloated form that we see at Harvard and Yale. If these institutions aren’t going to spend the money in their endowments on providing educational services, they should pay tax on it."

Second, cultural explanations are always tricky, but Conti-Brown makes a nice start at the problem in this case. I was particularly intrigued by his explanation of the difference between the legal endowment ("donor gifts that are restricted for some period of time, usually in perpetuity") and the popular endowment ("all of the university’s capital reserves"). A big portion of the difference, for you accounting types, is retained earnings. While universities have long (always?) treated the legal endowment as "sacred" -- beyond the reach of university spending -- universities have come to treat the popular endowment as sacred, too. Why? Because "endowments are representative of the power and prestige of the university as a whole. A cut to the endowment is therefore akin to a cut on the university’s own prestige and reputation."

It's a provocative and plausible idea. And a paper well worth reading.

Education | Bookmark

TrackBacks (0)

TrackBack URL for this entry:

Links to weblogs that reference The Taxing and Spending of University Endowments:

Recent Comments
Popular Threads
Search The Glom
The Glom on Twitter
Archives by Topic
Archives by Date
January 2019
Sun Mon Tue Wed Thu Fri Sat
    1 2 3 4 5
6 7 8 9 10 11 12
13 14 15 16 17 18 19
20 21 22 23 24 25 26
27 28 29 30 31    
Miscellaneous Links