June 5, 2008
Business Week Debates College Endowment Payout Requirement
Business Week Magazine's Debate Room has published a short but interesting debate regarding the extent to which colleges and universities should be subject to a mandatory endowment payout, at the pain of losing their tax exempt status. Here is a snippett from the pro side:
Wealthy universities, such as Harvard with its $35 billion endowment, are part hedge funds, part universities. Tax policy should reflect this. Rich colleges should have to prove they’re not hedge funds in disguise by spending most of their investment profits on research and education. Or perhaps, as some Massachusetts legislators desire, all colleges with $1 billion-plus endowments should pay taxes. If not—and colleges can continue to accumulate vast endowments without negative tax consequences—expect some hedge fund to get tax exemption by starting a university and redesignating its investors as faculty and students.
Here is a snippett from the con side:
The nation’s 785 educational endowments have assets that exceed $411 billion, and the biggest, like Harvard’s $34.6 billion, get the headlines. But the vast majority are quite small—more than 400 have assets totaling less than $100 million. Any spend-down rule could have a disproportionate impact on the smallest endowments, which typically have the lowest investment returns.
Unlike foundations, which are designed to raise and spend all their funds for charitable purposes, endowments are meant to serve the financial needs of their institutions in perpetuity. They do that by investing their funds wisely, spending a small portion of their assets each year, and squirreling away the rest for the future. Requiring them to spend more than necessary diminishes the endowment’s size and ability to meet future needs of the institution.
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