Congress & the Myth of Big Endowments

BY BRIAN C. MITCHELL

Not clickable: Congress Subcommittee Review of Tax-Exempt College University Endowments

On September 13, a House subcommittee holds a hearing that, according to Janet Lorin in Bloomberg , “is set to look at how colleges, through their tax exempt endowments, are trying to reduce tuition.” The subcommittee hearing features testimony from policy experts and college officials.

It’s an interesting time to examine college endowments. As Ms. Lorin reports, most endowments are expected to post investment declines for fiscal 2016.

The House Ways & Means Subcommittee on Oversight  will also look at how endowments intersect with the tax-exempt status enjoyed by colleges and universities. As Lauren Aronson, a spokeswoman for the House Ways and Means Committee, relates: “This is another step that the committee is taking to understand what colleges are doing to address soaring college costs through their endowments and nonprofit-tax status.”

The committee’s hearing is separate from its joint inquiry with the Senate Finance Committee, whose members requested data in areas such as endowment spending, fees paid to investment managers, and rules on naming rights for donors from the 56 wealthiest private colleges last February.

For argument’s sake, let’s not take a position on whether this is information gathering or a Congressional witch hunt fueled by consumer polling. We can all agree that the effort to provide debt relief to Americans is a good idea.

It’s not so much the noble aspiration but the approach that should raise eyebrows. Words and actions are always important. How you do it – and how you convey your intent – matters even more in these settings.

Most Colleges Have Little or No Endowments

Let’s get real, Congress, and establish the facts:

  • The 56 wealthiest private universities do not reflect the rest of American higher education, not even remotely. They are large research complexes scaled and identified by purpose as distinct and different from undergraduate colleges, teaching universities, and community colleges.
  • Most colleges have little or no endowments, are heavily tuition-dependent, and are in deep debt for capital improvements. Many are, effectively, open admissions institutions with escalating tuition discounts.
  • Tax exemption is a broader issue than its relationship with endowments. The federal government granted tax exemption because colleges and universities serve a public good. They still do.
  • Tax exemption assists private colleges especially because it bridges the gap between public and private colleges, with public colleges also receiving additional state subsidies. It essentially levels some of the playing field among institutions in a decentralized higher education system.
  • State support over the past 20 years has decreased for public colleges and universities, with many now re-characterizing themselves not as state-assisted but as “state located” because of shrinking government support.
  • Congress must be certain to review government support across all programs for colleges and universities, whether public or private, as part of its fact-finding effort. Is it possible that the decline in government support has contributed to rising tuition sticker prices? Is the government really blameless in this debt crisis?
  • How many federal regulations affect colleges and universities? Is it likely that the cost of these reporting requirements also jacks up tuition substantially? Most colleges and universities are almost entirely dependent on tuition revenue, yet are encumbered by across-the-board government reporting mandates, regardless of their size.
  • For those colleges with endowments that actually contribute to their bottom line, the rule on spending is often something like a draw down of 5% on a trailing 12-quarter average. When endowments drop due to market conditions, is it really feasible for Congress to deny them the flexibility to manage prudently in bad times over the long term?

American Higher Education is Not Monolithic

It is a fundamental mistake to paint American higher education as though similar conditions apply across the broad diversity of institutions that comprise it. What would be helpful is for Congress to assume less and learn more before it holds its hearings, given the idiosyncratic nature of the information it recently requested.

To do so, Congressional hearings must begin with the right questions. And they might do so by approaching higher education not as an arrogant, bloated industry in need of “big stick” political discipline.

There’s plenty of blame to go around for high tuition sticker prices. It’s time to make the pillars of federal policy more clear rather than creating artificial linkages among endowments, tax exemption, and tuition as a popular if insufficient explanation of why college costs so much.

This post first appeared on the Edvance Foundation blog

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