Wednesday, September 26, 2007

Senators Discuss Endowment Hoarding

By Lynne Munson

CCAP took its message to Capitol Hill today. The Senate Finance Committee held a hearing at which I was invited to speak on the topic of higher education endowment hoarding. Senators Baucus, Grassley, Hatch, Bunning, Lott, Lincoln, Wyden, Roberts, and Salazar were among those in attendance. Many Senators seemed shocked to learn the sums colleges and universities had accumulated. They asked questions about whether the schools had the capacity to withstand a 5% payout requirement and whether such a requirement would make much of a difference. My impression is that we've got them thinking. My testimony follows. Dr. Gravelle, who is referred to twice, is an economist with the Congressional Research Service. She has written a report on the hoarding issue, at the request of the Senate.

Chairman Baucus, Ranking Member Grassley, and members of the committee, thank you for inviting me to testify on the topic of higher education endowments.

I am an Adjunct Fellow at the Center for College Affordability and Productivity, where we conduct research on issues of rising costs and stagnant efficiency in higher education. I served from 2001-2005 as Deputy Chairman of the National Endowment for the Humanities. And I’m also the mother of a one-year-old whose college education will cost a half million dollars if current tuition trends continue.

Senators, our colleges and universities are sitting on some of the largest fortunes amassed by any institutions in the history of our nation. These riches are proof of America’s economic strength and of the boundless generosity of its citizens. But I’m afraid to report that, in too many cases, this wealth is being hoarded instead of shared.

College and university endowment spending practices are stuck in a past when endowments were small, investment gains were marginal, and economic rainy days were frequent. Today higher education endowments are massive and—as we’ve heard today—aggressively invested. Returns often exceed 12% or more year after year. Yet endowment payouts are miserly—averaging just over 4% last year. The situation begs the question: Is the public benefiting enough? Research indicates the answer is “no.”

Dr. Gravelle points out that endowment wealth is concentrated in the upper ranks, much of it at 62 institutions with endowments larger than $1 billion. But just three years ago only 39 schools had billion-plus endowments. That’s a 38% increase in just a few years. In 2006, 125 schools had endowments over $500 million—a third more than in 2002. The number of schools that can count themselves as endowment-rich or super-rich is growing rapidly.

This wealth no longer resides solely or even primarily in the New England corridor. Twenty-six states including Tennessee, Kansas, Minnesota, and Iowa boast institutions with billion-plus endowments. The University of Pittsburgh, Purdue, Michigan State, and little 1500-student Grinnell College each have endowments larger than a billion. A third of the billion-plus endowments are at public institutions, including four of the ten largest endowments.

Some of the most outsized endowments are at elite institutions. Yale has $2.8 million in the bank per undergraduate. But, on average, independent schools with endowments larger than a billion have $432,422 in their endowment per full-time student. And plenty of public schools also have impressive endowment-to-student statistics. The University of Virginia and the University of Michigan bank $322,000 and $150,000 per undergraduate, respectively. And even though the 9-campus University of Texas system currently enrolls just under 150,000 undergraduates, its massive $13 billion endowment contains $90,000 for each student.

What the data shows is that endowment wealth is everywhere—except in the hands of the students who need it today. Last year endowments increased 17.7% on average—those larger than a billion increased 18.4%. Yet, despite double-digit increases stretching back a decade or more —endowment spending is at a nearly all-time low of 4.2%--down from 5.1% in 1994, 6.5% in 1982, and 5.2% in 1975.

Schools often blame low endowment spending on donor restrictions. But 45% of endowment funds are unrestricted at independent institutions—as are 20% at public schools. And financial aid is the number one restriction designated by donors—with 36% of gifts restricted for financial aid use in 2005. Yet spending on financial aid is shamefully small, with many schools putting just a fraction of a percentage of endowment value toward aid.

Dr. Gravelle has addressed the issue of how little additional endowment spending would be required to halt tuition hikes. I will not add to those remarks except to say that stopping tuition increases now is not enough.

Tuition has been going up so rapidly for so long it has reached nearly ungraspable levels. So let me put today’s tuition cost in concrete terms. Senators, what would your constituents say if gasoline cost $9.15 a gallon? Or if the price of milk was over $15? That is how much those items would cost if their price had gone up at the same rate that tuition has since 1980.

I believe that skyrocketing tuition is undoubtedly the biggest “access” problem in higher education. What can possibly be more discouraging to a capable student whose parents are not wealthy than a school with a $45,000 price tag on the door?

Here’s another concrete comparison. The total worth of the top 25 college and university endowments is $11 billion greater than the combined assets of the 25 largest private foundations — including the Gates Foundation, Ford, and Rockefeller.
Private foundations have fewer assets and, in part because they give away more of their money, are growing far less. Yet they are spending more—their payout averaged 7% in 2005 even though they are legally required to spend just 5%.
Yale law professor Henry Hansmann has said that “A stranger from Mars who looks at private universities would probably say they are institutions whose business is to manage large pools of investment assets and that they run educational institutions on the side…to act as buffers for the investment pools.”

Senators, our colleges and universities need to be reminded that they are education institutions first and foremost—and that that is why they receive the enormous tax breaks they do. Their practices, including their handling of endowment monies, should reflect their priorities as educators.

Payout information and other basic higher education endowment statistics must be brought out of hiding—made available, for example, via the Department of Education’s website in addition to making permanent the proposed endowment-related revisions to IRS Form 990. Should this sunshine prove insufficient motivation, Congress should not hesitate to consider a minimum payout requirement—and 5% should be considered a starting point. The 5% number is a dated one—even for private foundations. Many schools have been rolling over so much money for so long that they should easily be able to accommodate a higher rate of payout. Possibly the most significant challenge for policymakers will be to make sure that any newly directed monies actually go toward aid or tuition reduction and don’t become part of a shell game.

Again, thank you for inviting me to testify. I’ll be happy to answer any questions.


Robert Blumenthal said...

Lynne Munson has done a great service in speaking and writing on behalf of requiring greater transparency from colleges and universities. I have written to Senators Baucus and Grassley, of the Senate Finance Committee, on the matter of financial transparency. This article contains many of the points I communicated to the Senators:

Robert Blumenthal said...

Here is the text of the article referenced above:

Lift the Veil Off the Finances of Colleges and Universities
Two Senators want to increase transparency in reporting

By Robert A. Blumenthal
August 08, 2007

Editor’s Note: Guest writer Robert A. Blumenthal is Professor of Mathematics at Oglethrope University in Atlanta. He expresses his views here on the problem of making college and university financial reports more detailed and transparent to the public.

Two leading members of the Senate Finance Committee, Sen. Max Baucus (D-Mont.) and Sen. Charles Grassley (R-Iowa), are trying to increase transparency in the financial reporting by nonprofit organizations. Many of the reforms the senators propose – outlined in a May 29 letter to Treasury Secretary Hank Paulsen -- would have a profound effect upon the kind of financial information that colleges and universities are required to disclose to the public.

Colleges and universities are required to file Form 990 annually with the IRS (available to the public through GuideStar). Baucus and Grassley propose a major overhaul of Form 990. They contend that the current form does not adequately encompass information regarding large, complex nonprofits such as universities. They call for more detailed reporting tailored to the specifics of these institutions and for making their financial reporting more transparent.

A major area of concern for the senators is endowments. They want nonprofit institutions to answer the following questions:
• What is the size of the endowment of the institution, and what definition of endowment is being used to arrive at the figure being reported?

• What is the amount and percentage of the endowment being spent?

• What are endowment funds being spent on?

• What endowment funds are earmarked for specific purposes and what are those purposes?

• How are endowment funds being invested?

• What are the costs of the management of the endowment?

The current Form 990 provides very little insight into these questions, and the situation is made all the more opaque by the fact that there isn’t even a uniform definition of “endowment.”

In addition to expanding the scope of the information reported on Form 990, Baucus and Grassley want to ensure that the form is filed and made available to the public in a timely fashion. They point out that extensions for filing are routine and that considerable time passes before the document is actually available.

The senators are to be commended for their efforts to bring about greater openness with regard to nonprofits, and the reforms they propose will increase transparency in the financial operations of colleges and universities. I believe, however, that their reforms do not go far enough. In their letter outlining the reforms to Treasury Secretary Henry Paulson, the senators say that it is time to “open the blinds.” While a step in the right direction, their proposals would still leave the blinds partially closed, excluding much important light from the eyes of the public.

We should require from colleges and universities -- institutions which enjoy tax-exempt status and which are supported by tax dollars in a myriad of ways -- the same level of transparency with regard to financial matters that we require from public companies, a point made by the two senators. Publicly traded companies are required to disclose their audited financial statements, together with the auditor’s notes to those statements. In order to be eligible for federal student aid funds, colleges and universities are required to produce and file a set of audited financial statements with the Department of Education annually. But, unlike the financial statements that publicly traded companies must file, there is no requirement that the financials of a college or university be made public.

All the public gets to see is the Form 990, a very poor substitute. The balance sheet and income statement portions of that form are sketchy at best and are not presented in standard accounting format. Moreover, the 990 includes neither a cash flow statement nor the auditor’s notes. In order to guarantee the same level of transparency that currently exists with regard to public companies, Form 990 should be modified to require that a college or university include its audited financial statements, complete with the auditor’s notes accompanying them.

Moreover, Form 990 should be made available to the public as soon as possible. Currently, it is not unusual for a college or university to post its Form 990 more than a year after the end of the relevant fiscal year. Public companies are required to furnish financial information in a timely manner. Colleges and universities should do so as well. These institutions should be required to annually furnish the necessary financial information within two months of the end of their fiscal year. Extended delay in providing information is not compatible with transparency.

The senators’ call for a uniform definition of endowment is also crucial . For colleges and universities, the term “endowment” can mean whatever the school’s governing board wants it to mean. Institutions are free to decide which of their assets to count as endowment and are free to change this determination whenever they choose. In some cases, “endowment” refers only to invested funds which generate income but whose principal cannot be spent. In other cases, it also includes funds designated by the board as “funds functioning as endowment” or “quasi-endowment funds.” These are funds labeled by the governing board as endowment, but which may be spent at any time at the discretion of the board. Thus, not only is there no consistency from one institution to the next, but there is also no guarantee of consistency within a single institution from one year to the next.

As long as the concept of endowment remains fuzzy, it will be impossible for the public to evaluate the effectiveness of any nonprofit entity. We need to have a clear definition.

The tax-exempt status enjoyed by colleges and universities is a privilege that should carry certain responsibilities with it. Among those responsibilities should be the requirement to provide, in a timely fashion and on a regular basis, a transparent picture of the financial position and operations of the institution. With that information, parents, donors, and public officials will be better able to evaluate the school’s activities.

Anonymous said...

The op ed piece in USA Today was great. I happened to graduate from one of those universities whose endowments is in the Top 10 in the nation. Tuition has nearly tripled in the 17 years since I graduated. I'm guessing from the WEEKLY requests I get from them to donate MORE (both mail and phone solicitations), that if they spent half the money on tuition assistance they spend on fund raising, that education might be a lot more affordable. The reality is, I've determined that with the BILLIONS they have socked away for a "rainy day", they don't need anymore of my money!