Many universities, especially the top research universities in the country, have large endowments that have grown by double digits over the last few years. Yale's endowment has gained 28% so far in 2007, growing to a staggering $22.5 billion dollars, against an average for endowments of over $1 billion of about 18%. At the same time, Yale's tuition has increased exponentially--undergraduates pay about $45,000 annually, an increase of 4.5% this year. Tuition has increased 49% over the last decade, even while Yale's endowment has increased 300%. See Thomas Kaplan, Senator Proposes Mandating Greater Use of Endowments, Yale Daily News, Oct. 19, 2007.
At hearings in the Senate Finance Committee last month, two witnesses suggested that Congress should mandate a minimum expenditure from endowments of tax exempt organizations like Yale to parallel the required expenditures by private foundations. See JJ Hermes, Senators Weigh Idea of Requiring Payout Rates for Large University Endowments, Chronicle of Higher Education, Sept. 27, 2007. Lynne Munson said that the wealth of these universities is being "hoarded" rather than being used to offset tuition increases with financial aid. Kaplan, op. cit. Jane Gravelle of the Congressional Research Service informed Congress that universities with endowments could increase spending from the endowment by just one-tenth of one percent and completely eliminate the need for tuition increases. Hermes, op.cit. She based her statement on a report for the Congressional Research Service, available here. Institutions with endowments over $1 billion had an average return of more than 15% but average payout rates of less than 5%. id. A few institutions reap the most benefit from the tax-exemption for endowment incomes--a benefit that exceeds the annual cost of the charitable contribution deduction. Id.
Senator Grassley thinks the 5% required spending proposal belongs on the table as part of any higher education legislation this year.
The proposal isn't new. See David Kirkpatrick, College/University Endowments: How High is Up?, EdNews.org, Oct. 25, 2007 (noting that there were only 17 universities with endowments of more than $1 billion a decade ago, and now there are more than 60; Harvard's was only about $18 billion when a proposal for mandatory spending was introduced and now is about $35 billion). the Kirkpatrick article explains that Harvard could provide a free undergraduate education to every single one of its undergraduates indefinitely--the $300 million it would cost annually is less than the $700 million a month the endowment earned in 2006.
Universities with big endowments have not taken kindly to the proposal. Princeton, Harvard, Brown and others have objected that they should not be required to spend more than they determine is wise, since they need to develop cushions to protect from the vagaries of the economy. The American Council on Education, a lobbying coalition of research universities, protested that the federal government should not get involved in regulating how universities determine their budgets.
Of course the universities like their educational endowments' tax exempt status (also provided by the federal government) that allows them to accumulate big gains without taxation. And they increasingly reap the benefit of investments in nontaxed offshore hedge funds.
Hedge-fund investments are tax-free for nonprofit organizations, unless endowment managers use debt-financed assets to increase return rates, a common practice. To avoid taxes, many colleges invest debt-leveraged hedge funds in overseas tax shelters. See Paul Fain, Colleges' Offshore Hedge Fund Investments Draw Senate Scrutiny, Chronicle of Higher Education, May 10, 2007.