Washington
A U.S. senator with influence over federal tax policy may now be setting his sights on a longstanding cornerstone of colleges' financial practice: paying for new and renovated buildings by borrowing money with tax-exempt bonds.
The attention comes as a result of a just-released report from the Congressional Budget Office. The report, "Tax Arbitrage by Colleges and Universities," questions the merits of allowing nonprofit institutions to rely on taxpayer-subsidized debt while they also benefit from investing their assets to earn them more than what they pay out in interest on the debt.
The report says such a practice allows many universities to benefit from what it describes as "indirect tax arbitrage" because "holding those assets while borrowing on a tax-exempt basis is, in effect, equivalent to using tax-exempt proceeds to invest in those higher-yielding securities."
College advocates say the broad definition of tax arbitrage the report uses reflects an economic argument on the merits of tax-exempt financing but doesn't take into account the social good that colleges provide or the current financial pressures they face.
Sen. Charles E. Grassley, who requested the budget-office analysis in 2007 as part of a broad look at tax-exempt organizations, said in a statement on Friday that the report raises questions "for parents, students, and taxpayers about universities issuing bonds and going into debt when they have money in the bank."
The study estimates that allowing colleges and universities to borrow using tax-exempt debt will cost the federal government about $5.5-billion in forgone revenue in 2010.
In his statement, Senator Grassley, a Republican from Iowa, highlighted several concerns: "Issuing bonds costs money on interest and management fees. Does the expense of debt service take money away from student aid or academic service? Do bond issuances occur even as universities raise tuition and build investment assets?"
But it is unclear whether the senator, who is the senior minority member of the Senate Finance Committee, intends to propose any changes in law in response to the report. In the statement released on Friday evening, he says, "These are further questions to explore."
Charles A. Samuels, a lawyer for the National Association of Health and Educational Facilities Finance Authorities, a group of organizations that help private colleges issue bonds, said current law already restricts colleges and other organizations from directly profiting from their tax-exempt bond issues, or tax arbitrage. (To avoid tax arbitrage, a college that raises money from tax-exempt bonds can reinvest it only temporarily, and even then only in investments earning about the same as the cost of the debt.)
"Now would be a very bad time to make it more difficult for nonprofit organizations in this country to borrow money," Mr. Samuels said in an interview on Sunday.
He said the Congressional Budget Office report is "an 'academic' study in the worst sense of the word" and added that he hoped it would not result in some new limits on tax-exempt financing.
"It isn't going to really help the cost of higher education to restrict financing" that saves colleges money, he said.
Comments
1. knmeyer - May 03, 2010 at 07:31 am
Richard - fyi
2. jyoungblood - May 03, 2010 at 09:08 am
Universities have tried to be businesses, make a profit and pay the managers huge salaries. The article explains what is to be expected when not for profits forget the mission. Of course the argument is always that you have topay exhorbitant amounts to everyone or one will not attract "talent." If that is the case then there should be no category, "not for profit."
3. davi2665 - May 03, 2010 at 10:38 am
This is not an issue about administrative salaries, although some readers try to turn almost every news item into yet another excuse to complain about them. This is an issue of universities using their public status to snooker the taxpayers into subsidizing their borrowing, while investing an equivalent amount in higher yield financial instruments, thereby scamming the system through a convenient laundering scheme. It needs to be stopped.
4. lfp98 - May 03, 2010 at 10:55 am
Hate to admit it, but the Senator has a point. It's just another symptom of our overfinanced society. Why pay financiers to issue the bonds, and then pay yet other financiers to invest and manage the endowment? In a rational world the university would just "invest" in the building. It's only the tax system that skews everything toward using debt. It's the institutional equivalent of homeowners who own large investment portfolios but keep the house mortgaged to near full value, just to take advantage of the tax benefits of both. In effect, it's a hundred-billion $ (at least) government subsidy to the financial services industry.
5. dpsinha - May 03, 2010 at 11:06 am
A large number of public universities, include my own, draw less than 10% of their budget from state funds. Now some want to sniff out and eliminate any possible subsidy, especially through the tax code? That only makes sense if you don't believe that colleges and universities provide a public good - in particular, that access to an affordable higher education makes for a more productive workforce and a citizenry better capable of making sound decisions. The short-sighted rhetoric I read makes it all the more clear that we are losing the latter.
6. jerrywoods - May 04, 2010 at 10:43 am
The Congressional Budget Office report uses an expansive, and useless, definition of "arbitrage" by including funds not related to tax exempt bond funding. Applying such a definition would likely undermine the financial stability of public and private nonprofit colleges and universities.
It's disappointing to see the CBO engage in such politically driven analysis.
I wonder if Sen. Grassly has ties to the for-profit education industry...
7. marka - May 10, 2010 at 07:43 pm
Having read comment ## 5 & 6, I now appreciate ## 2-4 even more!
Just because something is labeled 'nonprofit' does not mean it is superior - morally or otherwise -and hence entitled to all sorts of subsidies. For example, many hospitals & health care insurers are formed as 'not-for-profit,' but that doesn't necessarily mean they are any better for the public than 'for profits.' And, by the way, many entities formed 'for profit' don't necessarily make a profit - hence our bankruptcy laws.
The activity in question is more like robbing Peter the taxpayer to pay Paul the professor. Should we allow 'nonprofits' to 'profit' from floating 'public' bonds, and then reinvesting these 'nonprofit' proceeds in the 'for profit' markets? Doesn't make any particular sense to me. Why should a 'nonprofit' 'profit' from such a scheme?