The Endowment Issue

By Richard Vedder

The libertarian in me says government should not mess with college endowments. Universities presumably are trying their best to accomplish their mission, and attempts to force universities to spend X amount out of their endowments infringe on the judgments of university officials, and may force them to pursue policies inconsistent with their long term objectives. A one size fits all national policy is seemingly inappropriate.

Yet the universities have engaged in a spending spree over the decades, with costs rising sharply in spite of increasing private support. Also, they already have gotten into bed with governments prostituting themselves in numerous ways to get taxpayer money. Endowments have accrued because of all sorts of favorable tax treatments -- income given by donors is exempted from federal individual income taxation (including capital gains), and the income earned from the endowments in the form of dividends, interest, and capital gains is not taxable, nor are estate taxes levied on university gifts. Thus, we have given universities a privileged position in society largely because we assume that endowment gifts will be put to productive and efficient use in furthering the quantity and quality of teaching and research efforts.

Therefore, we are delighted to have Lynne Munson with us at CCAP, albeit only in an adjunct capacity. Today, Lynne has written a very nice op-ed piece in USA Today. I recommend it to blog readers.

I have carefully read the criticism of the higher education establishment in response to testimonies given by both Lynne and veteran Congressional Research Service scholar Jane Graville before the Senate Finance Committee, and, for the most part, I think it is misplaced. For example, I do not think the fact that part of endowment monies are earmarked by donors is really a serious obstacle to requiring universities to spend a minimum of, say, five percent of their endowment income. I suspect Lynne and I will become more active on this issue in the coming months. Stay tuned.