Endowments Under Fire Again

House Republicans question endowment spending and executive compensation in what may signal another round of federal scrutiny over tax benefits flowing to wealthiest universities.

October 8, 2015

WASHINGTON -- The nation's wealthiest colleges and universities may want to brace themselves for another round of federal scrutiny over their endowments and executive compensation, if a congressional hearing held Wednesday is any guide.

House Republicans sharply questioned how universities with billions of dollars in their endowments spend that money, with particular criticism directed at executive pay and administrative costs on campuses. They pointed to rising tuition at colleges and universities as a driving factor behind those concerns.

And some GOP lawmakers on the House Ways and Means Oversight Subcommittee floated the idea of scaling back the charitable tax benefits nonprofit colleges receive.

Representative Peter Roskam of Illinois, the Republican who chairs the panel, said his goal was to “consider whether this nation's tax policies are partly to blame” for the rising price of college.

Roskam noted that 42 private college presidents made more than $1 million in 2013.

“One way schools can justify their compensation as ‘reasonable’ to the IRS for the purpose of favorable tax consideration is to show that similarly situated institutions pay comparable salaries to their executives,” he said. “That method points in only one direction: up. It allows schools to increase their compensation year after year because others are doing it, too.”

Roskam floated the idea of an excise tax on executive compensation that exceeds a threshold such as $1 million, which is the maximum amount of an executive's salary that publicly traded companies can generally deduct from their taxes.

Other lawmakers questioned whether the nation's wealthy universities -- the 90 institutions that have $1 billion or more each in an endowment -- are spending enough of their investment returns.

Representative Tom Reed of New York, a Republican, called university endowments a “resource” that could be used to address the “crisis” of student loan debt.

Reed said he is working on new legislation that would force universities with endowments exceeding $1 billion to spend more of their investment returns. The goal is for the endowments at those institutions to allow students to “pay zero dollars in tuition,” he said.

One such requirement in the bill, he said, might involve requiring wealthy universities to put 10 percent of their endowment earnings toward reducing student tuition.

Reed also suggested that he wants to change the tax benefits of charitable contributions to universities so that unrestricted gifts are treated more favorably than gifts from donors who direct their money to a specific purpose. That might give university donors an incentive to provide institutions with financial gifts that the university can be free to spend directly on students, he said.

If Wednesday's hearing portends new attention from members of Congress on how wealthy universities spend, or don't spend, the returns on their endowments, it would be reminiscent of efforts in 2007 and 2008 to crack down on such institutions.

Those efforts, led by Senator Charles Grassley of Iowa, a Republican, produced little in the way of actual legislative or tax changes but are widely credited with helping to prod the nation's super-wealthy universities to adopt far more generous, no-loan financial aid packages for low- and middle-class families.

As university endowments plummeted in value during the recession, congressional scrutiny of them largely dissipated. Universities' investment portfolios have now largely rebounded, though, and a string of high-profile large donations to universities like Yale and Harvard appears to have renewed an appetite to revisit the issue of how those institutions operate as charitable organizations under the federal tax code.

Democrats at Wednesday's hearing, for their part, appeared uninterested in joining the fray to criticize college and university endowments and executive pay.

Representative John Lewis of Georgia, the top Democrat on the subcommittee, said he was “concerned that we're focusing on side issues.”

Other Democrats criticized their Republican colleagues for holding Wednesday's hearing on college costs while supporting budget proposals that would cut federal student aid.


Back to Top