Recent congressional focus has intensified on the largest endowments of private colleges and universities, with a focal point being the significant growth of these endowments over the past 10 years. First, a research report ordered by Congress and published in December 2015 provided recommendations about endowments, including requiring a minimum annual payout percentage, imposing an excise tax on earnings, limiting donors’ charitable deductions to institutions with the largest endowments, and modifying the tax treatment of debt-financed investments. Following the report, an inquiry letter — jointly authored in the Senate and House — went out to 56 private colleges and universities with endowments greater than $1 billion. Then in fall 2016, a House Ways and Means subcommittee held hearings to review tax-exempt college and university endowments as a whole.
Congressional attention seems to be centered on prevailing views of limited accessibility for students at the largest institutions, rising tuition costs, despite little or no growth in inflation, and the seemingly low percentage of endowment spending to offset operating costs and provide financial aid.
Contributing to this perception is insufficient communication by colleges and universities in their financial statements and elsewhere about programs and expenditures dedicated to enhancing student accessibility and affordability. In addition, the reporting requirements of IRS Form 990, a primary data source available to the public, are relatively inflexible; the form does not afford institutions the opportunity to explain the ways they are using their endowments to promote accessibility. As a result, there is a widening presumption that these institutions are more interested in endowment growth than in using their assets strategically to broaden channels of affordability and increase scholarships.
Be ready for legislative action. It will likely include a more prescriptive definition of what constitutes “endowment spending,” imposition of an excise tax on true endowments and/or quasi-endowments, and modifications to Form 990. Changes may accelerate in the first year of the new administration, which promised scrutiny of costs, and with both parties in Congress calling for reform. Read the full article
to learn more about changes to expect in the next few years, proactivity to consider and the value in communicating reality vs. perception.
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