Endowment Spending Mandate Bill on Tap

Posted by: Louis Lavelle on October 9, 2008

The debate over endowment spending that has occupied much of the higher education world for more than a year looks like it may be coming to a head. The Harvard Crimson and Yale Daily News are reporting that Rep. Peter Welch (D-Vermont)is planning to introduce legislation in January mandating a 5% annual endowment payout, just as the era of runaway endowment returns is about to come to a end.

What does this mean to you? Well, if there’s a college education in your future (or you have rapidly-approaching-college-age children) it may mean stabilized tuition or increased financial aid as bigger endowment payouts provide funds for those things. That’s a big maybe, though. Higher education has one of the most powerful (and free-spending) lobbies in Washington, and this mandatory payout bill is far from a done deal. Meanwhile, college tuition continues its upward trajectory.

For those of you who haven't been following the debate, let me recap. For many years now, during the recently deceased bull market, college endowments have been growing by double digits, and every year they've been spending about 4.5% (give or take) on college operations, everything from professor salaries to paper clips. Critics, most notably Sen. Charles Grassley (R-Iowa), say that's not enough, and that endowments, like other philanthropic endeavors, should be required to spend at least 5% a year. Grassley has been talking about a legislative mandate, and the IRS has hinted at the possibility of stripping endowments of their tax-exempt status. Meanwhile, the schools--particularly those with really big endowments--have been attempting to put all this talk of mandates to rest by being really, really nice. Starting last year, many have replaced loans with grants, made tuition free for families earning below specific cutoffs, and other such steps to make themselves more affordable for the middle-class. It didn't work. The spending mandate train kept chugging along. And sadly, the big boys are really the only ones who can afford such generosity, so hope for college to become more broadly affordable is, well, nil.

The big endowments say a mandate is a bad idea--they're made up of hundreds or thousands of individual earmarks, so it's not just a matter of cutting a bigger check, and in times of economic turmoil schools need more flexibility to manage their finances, not mandates. To some extent, the bill contemplated by Rep. Welch gives them flexibility--it won't require a hard-and-fast 5% payout every year, but 5% over rolling 3-to-5 year periods. Still, the endowments aren't happy.

I suspect students and parents probably support a spending mandate, if it will make college more affordable for everyone. This is especially true now, with everybody's college fund fast disappearing amid all the economic turmoil, and with the biggest endowments now totaling well north of $10 billion, even $20 billion.

But I really don't know--what's everybody think?

Reader Comments

maybe

October 10, 2008 9:20 AM

I believe this is just the tip of the iceberg. Why do NPO's get tax breaks, when they simply vehicles of politican agenda.

Beth

October 10, 2008 5:16 PM

As a recent Ivy alum saddled with debt, I've been glad to hear about the increases in financial aid, though they're too late for me. Pegging the amount at 5% seems odd in light of increasing and decreasing returns, though. What about pegging the percentage to the average returns of certain types of stocks? I know next to nothing about the stock market, but varying the goal with the ups and downs of the market seems to make sense.

I think the universities' real goal with the endowments isn't so nefarious: it's to have amounts large enough so that they can sustain certain programs by spending the interest alone, and decrease their dependence on donations, which fluctuate and which will definitely go down in the next few years.

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