April 25, 2008

IRS to Wade Deeper Into Debate Over Endowment 'Hoarding'

Washington — Lawmakers on Capitol Hill have recently taken aim at what they see as stingy spending by wealthy colleges of their endowments. Leading the charge has been an influential Republican senator, Charles E. Grassley of Iowa, who has floated the idea of requiring those institutions to spend at least 5 percent of their endowments each year.

Now the Internal Revenue Service is gearing up to be “more aggressive in this area,” said Steven T. Miller, commissioner of the IRS’s tax-exempt division. Mr. Miller told an audience at Georgetown University on Thursday that the IRS was exploring a standard to ensure that colleges and other nonprofit organizations spend their endowments at levels commensurate with their assets, according to his written remarks.

The discussed standard, referred to as the “commensurate test,” has been championed by Senator Grassley. However, Mr. Miller said the IRS would not necessarily develop “inflexible rules” on spending levels, The Chronicle of Philanthropy reported.

“No one wants the service dictating how a charity should do its job,” he said. “But every charity should make responsible and appropriate use of its resources to achieve its charitable purposes.” —Paul Fain

Comments

1. Great to see these levels of possible aid to help students who are now facing a potential problem with loans…THE rich “not for profits” get profitable!

   — CSG    Apr 25, 04:21 PM    #

2. That’s a great final paragraph — almost a summary of modern government behavior: The IRS believes that it shouldn’t tell charities how to do their jobs. Here are IRS instructions for how these charities should do their jobs.

   As long as universities apply their endowments and associated earnings to their primary educational mission, why should the government have anything to say about when or how they spend the money? The free educational market provides (far) more-responsive and -relevant feedback than anything ever dreamt by a senator or secure government bureaucrat.

   — S. Britchky    Apr 25, 04:21 PM    #

3. I find Senator Grassley’s proposal regarding endowments flimsy at best. It’s easy to blame rising college costs on the colleges and indicate that it would be solved by spending 5% of their endowement each year. In 20 years, that would wipe out much of the principal college endowments have painstakingly built over many years. In addition, income produced by the endowment would fall and colleges would be in worst financial straits. This is just political grandstanding by Senator Grassley.

   — DPH    Apr 25, 04:30 PM    #

4. This is a good idea for ALL non-profits, not just educational institutions. Originally they tried to solve this problem with UBIT, the Unrelated Business Income Tax but clearly it hasn’t helped enough.

   These non-profits are supposed to be spending the money they raise to help their ‘cause’, whatever it is. Not hoarding it so they can create a jobs program for others people like themselves.

   It’s about time this issue was addressed and not just for colleges, but for all non-profits.

   Good.

   — NYMOM    Apr 25, 04:41 PM    #

5. The CHRONICLE recently posted a relevant computation. It noted that after 40 years a endowment that was initially $100 million would have paid out the same amount if the draw was either 4% or 5%. But the value of the endowment in the fortieth year would be approximately $200 million more if the draw was 4% instead of 5%.

   The Grassley endowment blather is thus clearly seen as yet additional evidence that politicians take a short range view and are often wrong.

   — harley    Apr 25, 05:04 PM    #

6. University endowments are a pile of private money that is just sitting out there, and it drives politicians crazy that they cannot get their hands on it. All of this is just posturing to create a “crisis” situation to justify the government stepping in and taking control of these funds. As an example, look at the great good that Sptizer and Cuomo have done for students who depend upon student loans. Their greenmail operation has driven the bulk of lenders out of the market leaving students high and broke.

   — Michael    Apr 25, 05:08 PM    #

7. These proposals continue to ignore the reality that most university endowments are restricted and that increasing the payout would not necessarily provide additional resources for student aid.

   — Michael    Apr 25, 05:28 PM    #

8. A payout of 5% in a year when the return on the endowment investments is less than 5% would be a bad rule — those of us at land grant universities know this as “eating your seed corn.” Old money folks (of which I am definitely not one) understand that you “never dip into capital.”

   — Bill    Apr 25, 09:05 PM    #

9. I find it interesting that a commissioner of the IRS thinks that colleges are “charities” — if he doesn’t know the difference between an eleomosenary institution and other kinds of 501c3s, he has no business being in his job.

   Thank you,harley, for reminding us of the Chronicle analysis.

   — Rich    Apr 26, 11:20 AM    #

10. I wonder what agenda has led Sen. Grassley to target institutions of higher education. To be sure, the Harvards and Princetons possess great wealth. But so do many other entities that could also be accused of “hording.” If the idea here is truly a progressive one and meant to encourage the use of private wealth to promote the common good – lower tuition for students and their families – then why limit his proposal to the realm of education? Corporations also have immense capital, and many of them are held privately by individuals or holding companies such as Cerberus. Indeed, individuals and some churches also hold substantial wealth. So perhaps the most logical idea would be to impose a rule that all highly capitalized private entities should be required to dedicate 5% of their total wealth each year to socially beneficial causes. That’s an idea that will do the greatest social good.

    — Chris    Apr 26, 12:19 PM    #

11. Sometimes we agree with the mob; sometimes we don’t. But in modern, poll-driven american politics, the mob always rules. Someday, popular passion —the mob — will be aimed at YOU. When that day comes, and when the poll-driven politicians run to the front of that mob, there may be nothing between you and them.

    Beware of politicians, judges, and media that focus on “social outcome.”

    — Jay    Apr 28, 12:29 PM    #

12. There is no point in spending ones’ endowment – as pointed out above, that will destroy the endowment within a few years. Anyone who actually suggests this has no idea how money works. And if this was actually done, no one would donate to an endowment, as that would result in seeing the money disappear.

    How the proceeds of the endowment are spent is the topic that should be discussed.

    — Al    Apr 28, 01:53 PM    #

13. Senator Grassley is either ignorant or naive. College endowments are supposed to last forever. Prudent management provides this assurance by limiting the spending, normally defined as a % of multi-year market values. For most institutions only a fraction of the endowment spending supports financial aid with the bulk devoted to a myriad of other restricted purposes

    — John S. Ostrom    Apr 30, 03:22 PM    #

Previous: Financial Crisis Forces Illinois Seminary to Make Radical Cuts
Next: Shots Are Fired at Grambling State U., and the Campus Is Locked Down