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Endowment Debate Seeps into the States

May 1, 2008

With college endowments a favorite target for politicians in Washington, and many states struggling to find enough tax revenue to make ends meet, it's almost a surprise that it took state legislators this long to start casting their eyes on colleges' funds. But it's perhaps not a shock that if the issue were to emerge anywhere, it would be in Massachusetts, home to the university (Harvard) whose nearly $34.6 billion endowment has become the poster child for higher education wealth.

During debate over the state's budget for the 2009 fiscal year Monday, members of the Massachusetts House of Representatives considered imposing a 2.5 percent tax on assets exceeding $1 billion in any college's endowment (in other words, any amount up to $1 billion would not be taxed). The measure did not win approval, with the House opting instead to ask the State Department of Revenue to study the proposal. But in the meantime, lawmakers engaged in the sort of rhetoric that has been increasingly heard in the halls of Congress in recent months, where U.S. Sens. Charles Grassley (R-Iowa) and Max Baucus (D-Mont.) this spring directed 136 colleges with endowments over $500 million to report on how they were spending those funds.

"Why do we want to tax the poor all the time, but we let off the hook the richest of the rich?" said State Rep. Angelo Scaccia, a Democrat, said during the course of Monday's debate, according to the Metrowest Daily News. "We're not going to break them," he added of colleges' endowment funds. "We just want a little."

The sponsor of the proposal, Rep. Paul Kujawski, another Democrat, said in a telephone interview late Wednesday that "when you realize that you do have some institutions of higher learning where wealth has grown above and beyond where you really wouldn't imagine, you say to yourself, When does a nonprofit stop being a nonprofit? How on Earth can they possibly utilize $35 or $36 billion?" Kujawski, who sits on the House Ways and Means Committee, which is responsible for tax policy, said that "from the standpoint of a responsible legislator, when you are operating in a budget deficit, you have to look towards each and every way there's a possibility of acquiring new revenues. Every type of revenue should be on the table."

Private college leaders in Massachusetts reacted with dismay to the sudden appearance of the issue on the state agenda, even as they acknowledged the economic downturn of uncertain length and depth that Kujawski cites in raising it.

"I think that legislators, and I don't think Massachusetts is unique in this, are simply frustrated by the pressures they're under to solve lots of problems with decreasing revenues" from property taxes and other sources, said Richard Doherty, executive director of the Association of Independent Colleges and Universities of Massachusetts, which represents the state's private colleges. As they are "turning over rocks and stones looking for money," as Robert Brown, the president of Boston University, put it, it's perhaps not surprising that their attention was drawn to college endowments, since "the size of one of our colleges' endowment seems to attract a fair amount of attention," Doherty said, referring to Harvard.

Even if they understood what was driving the scrutiny, Doherty and Brown said they were troubled by the lack of understanding it reveals about the reality of the situation. While Massachusetts may have a disproportionate number of well-endowed colleges -- Kujawski's proposal would have applied to 9 institutions that appear on the National Association of College and University Business Officers' list of 76 colleges with endowments over $1 billion (Harvard, Massachusetts Institute of Technology, Williams, Boston, Amherst and Wellesley Colleges, Tufts University, Smith College and Boston University) -- the median endowment for the state's more than 70 independent colleges is $32 million, one-one-hundredth the size of Harvard's, said Doherty.

Underlying Kujawski's proposal is the idea that private colleges with big endowments are contributing too little to the state's economy because of their tax-exempt status, which shields them from having to pay property and many other taxes that other employers cough up. Such an argument has been made in Massachusetts and elsewhere in the past, and leads some institutions (like Boston University, Brown notes) to make "payments in lieu of taxes" to their cities or towns each year.

But institutions contribute to the state's economy in other important, if less direct, ways, too, Doherty said. While Massachusetts' state budget is roughly equivalent in size to North Carolina's, he said, the state spends just 4 percent of its budget on higher education each year, while North Carolina -- much more dependent on publicly supported institutions -- spends more than 11 percent. That differential amounts to "more than $2 billion annually that Massachusetts taxpayers and the Massachusetts legislature do not have to come up with for higher education services."

On top of those philosophical concerns, Doherty and Brown cited several practical problems with Kujawski's proposal, most pointedly that it would most likely be unconstitutional to tax tax-exempt institutions differently based on their wealth.

And Brown said it was distressing that some lawmakers seemed not to appreciate how much of their endowment funds institutions were spending on the public good, like scholarships for low-income students, and that taxing those funds would almost certainly make less money available for those purposes. "We spend almost $180 million a year on undergraduate financial aid," Brown said. If the endowment tax were to take effect, he said, "it would hit the bottom line and affect that, and come out of all kinds of contributions we make."

Officials at the National Association of Independent Colleges and Universities said they were unaware of the endowment issue having been raised in other states before now.

But the idea could spread to other states, if Kujawski's peers elsewhere are keeping an eye on the goings-on in Washington, as he suggests he has been.

"We read quite a bit about the Congressional hearings about student loans and financial aid, and we've seen that the reactions from some of the colleges have been beneficial for students," he said, referring to decisions in recent months by Harvard, Yale and other institutions to increase their spending on student financial aid, in part, in response to pressure from Congress about whether well-endowed colleges are doing enough to help needy students.

So is the idea, he was asked, that maybe there's more money to be gotten?

"Absolutely," Kujawski said. "We were saying the first billion isn't going to be touched. So maybe more of these schools might provide more funds for their students, to stay under the billion. A billion dollars is a lot of money."

 

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