@ljberkow : Don’t you think it is so stupid how they look at the whole university endowment and then divide by all the students as if the units of a university are equal? lol
Emory (along with Bryn Mawr, Trinity, U of Chicago and Wash U in St. Louis) may escape the endowment tax altogether because of the way the final bill defines the term “student”
http://www.sr.ithaka.org/blog/endowment-tax-provision-counting-students-is-no-easy-feat/
"Following the guidelines of the provision closely, we conducted our own analysis using the most recent year of data on 12-month FTE (2015-16) and the value of endowment assets at the end of the preceding fiscal year (FY 2015, which covers the 2014-15 academic year; the Chronicle used the value of endowment assets at the beginning of FY 2015), both of which can be found on the IPEDS Data Center. We found in our analysis 28 institutions that would qualify for the tax regardless of the student enrollment measure used.[1] Notably, we found five institutions that qualify if full-time enrollment is used and are included in the Chronicle’s list but do not qualify if FTE is used. These institutions are:
Endowment Full-time Enrollment (Fall 2015) 12-Month FTE (2015-16) Endowment/Full-Time Enrollment Endowment/12-Month FTE
Bryn Mawr College $867,728,000 1,616 1,748 $536,960.4 $496,411.9
Emory University $6,787,163,000 12,383 14,521 $548,103.3 $467,403.3
Trinity University $1,192,776,516 2,350 2,487 $507,564.5 $479,604.6
University of Chicago $6,553,570,933 12,980 14,492 $504,897.6 $452,219.9
Washington University in St Louis $6,889,230,000 12,664 14,353 $544,001.1 $479,985.4
Any tax lawyers in the house?
OMG, there’s hope. I know this means these schools will eventually pay but this at least gives them a few years to figure out alternative means of revenue, to ultimately pay or mitigate the tax.
@bernie12 I have no idea why they divide it by number of students as opposed to some other denominator.
@BiffBrown I’m not sure I understand how universities can increase numbers of full-time students based on the measurement year. I don’t understand that. I do think endowments owning blue chip corporate stock (like Emory’s) will gain value because those corporations will be able to retain 14% more of their revenue as the result of the corporate tax rate dropping from 35% to 21%. The value of endowments are going to skyrocket. The group of colleges will go up and not down over the next few years.
@ljberkow The stock market has already discounted the future cash flows from the tax cut at least to some extent. To To say that stock prices will continue to increase in value forever fails to consider that markets already discount future cash flows to present value, especially those that are easily forecast such as savings from tax cuts.
The point of the article I posted about how “student” is defined is that the tax code seems to define “student” to include both part time students and full time students equally. Part time students are seasonal (think executive program MBA students or students who take summer classes at Emory but are otherwise students at other universities). Therefore, setting different cut off dates for the time frame over which “students” are counted will affect the headcount.
Are you saying the original FTEs calculated for Emory include part-time students or that in your specific measuring period example, the FTE would be lower? What you put down measures information from 2015 and not 2017.
Here is the language:
Private endowments tax: The bill includes a 1.4 percent excise tax on investment income at private colleges with an enrollment of at least 500 students and with assets valued at $500,000 per full-time student.
Of course the market won’t go up forever, but this also impacts investment income going forward. With respect to Emory, Coke will either reinvest the 14% delta or dividend it out. Even a if they dividend out 20% of the delta, Emory’s income and tax goes up.
The original analysis (by the Chronicle of Higher Education) defined “students” as including only full time students. Under that standard, Emory’s ratio of endowment to student was high enough to qualify for the endowment tax threshold of $500,000.
A subsequent analysis (which I posted) noted that the final tax bill seemed to define “student” to include part time students. Under this analysis, Emory and 4 other schools had a lower ratio of endowment to student that fell below the $500,000 cutoff for the endowment tax.
If capital markets are efficient, Coke’s current stock price has already “priced in” the increase in future cash flows from the corporate tax cut. Future tax savings can be paid out entirely in dividends but that may impact the stock price negatively because it implies that Coke’s management sees no growth opportunities in which to invest that money. The net effect on the endowment (change in stock price + dividend payouts) from this point forward with the stock price having already priced in cash flows from the tax cuts and having priced in a certain payout ratio is unclear.
Coca Cola already announced it will be increasing its dividend in wake of tax reform. Increased dividends usually don’t negatively impact stock price. That makes no sense.
Maybe Emory can escape the tax under the definition of full-time student. I read this about the two Chicago schools being able to avoid it after looking at the definition of full-time student to include aggregating credit hours of part-time students. If Emory escapes the tax for 2018, it’s probably only temporary. Is the $500K indexed? You are more well versed in this than I am, but nobody can imagine the endowment not increasing, but we know Emory has no great plans for admitting for more students.
Full-time equivalent enrollment counts the raw number of full-time students as well as the number of part-time students whose collective credits add up to a full-time student. It is not the same as student head count and thus is a more fluid metric open to interpretation.
As far as I know, there’s no indexing of the $500,000/student threshold for the endowment tax.
I’m curious to see what happens to this tax going forward. The cutoff might be lowered. The cutoff might be raised. “Students” might be defined differently. The tax might be eliminated altogether. The tax might be imposed on the total value of the endowment. Universities that meet certain goals (e.g. admitting a certain percentage of low income students) might be exempt. And so on.
@BiffBrown make no mistake about it. This tax is gratuitous and will hurt universities and students as endowment income makes up a large percentage of a university’s annual budget. I hope they don’t try to make some of this up with tuition increases. Emory diversified out of most of its Coca Cola stock through the years, which is too bad because the increased dividends would have helped Emory. This tax won’t be so easy to reverse. Right now, the Republicans control the House, Senate, and White House. All would have to flip.
Some negative complications and loopholes in the new tax law for universities:
https://www.politico.com/story/2017/12/22/harvard-tax-college-endowments-252892
Some negatives
- Colleges and universities, meanwhile, are also worried that the tax overhaul would reduce the incentives for charitable giving to their campuses. Doubling the standard deduction, for instance, means that millions fewer taxpayers would itemize their taxes and be eligible for the charitable deduction.
- Under the changes, nonprofit organizations would now have to account separately for each business unit that produces “unrelated business income” rather than combining them all together. The shift would mean, for instance, that a university’s profits from its dining facility could not be offset by losses in its housing operations — which could increase its tax liability.
A loophole
Some schools hovering around the threshold of the new tax are in the dark about whether they’d end up having to pay. That’s because it’s up to the IRS to issue regulations that spell out exactly how it would measure the university assets that qualify a school for the new tax. The legislation, for example, excludes endowment funds that are used to carry out a college’s tax-exempt purpose but doesn’t define what that is.
But it’s not yet clear how the IRS will define the term — and whether it will include, for example, building a campus library, or whether it applies only to money spent directly on student aid.
All of the above adds to the uncertainty about how to define full time equivalent students.
A good article examining many unknowns of “endowment” tax and how institutions might be affected and/or might avoid the tax through legal strategies:
“It says net investment income will be taxed, but it remains unclear how, specifically net investment income is to be calculated. The bill also carves out some assets from being used to calculate the $500,000-per-student limit asset trigger – those “assets which are used directly in carrying out the institution’s exempt purpose” – but experts don’t know exactly which assets will end up being exempt.”
“The excise tax isn’t even necessarily limited to endowments. While it’s been referred to publicly as an endowment tax, the bill does not use that term. It refers to an “excise tax based on net investment income,” experts pointed out.”
"The bill says that the number of students “shall be based on the daily average number of full-time students attending such institution (with part-time students taken into account on a full-time student equivalent basis).” But Ithaka S&R pointed out that the Integrated Postsecondary Education Data System “collects both fall FTE and 12-month FTE, but it’s unclear which method the provision recommends.”
“Universities on the brink of tipping over the tax’s per-student limits are publicly acknowledging that they are likely to have to pay it in the future. Take the case of two Chicago-area research powerhouses, the University of Chicago and Northwestern University. Some analyses point to the University of Chicago having to pay the tax but Northwestern coming in just below the per-student cutoff. Others have questioned those calculations, and even officials for the universities told the Chicago Tribune they aren’t sure whether they will have to pay the tax next year. But Northwestern anticipates having to pay the tax “if not next year then in later years,” a spokesman told the Tribune.”
The income used to go back into scholarship funds or classroom buildings (I would argue housing too) should be exempt. The tax exempt purpose is educating students. Harvard just uses theirs to buy up Boston.
Wall Street’s computations show that Emory should escape the endowment tax (for now):
https://www.wsj.com/articles/which-colleges-will-have-to-pay-taxes-on-their-endowment-your-guess-might-not-be-right-1516271400
Escaping the Bill
Some of the private schools with endowments greater than $2 billion may avoid a new tax on investments because they are worth less than $500,000 per student.
Emory University
$475,355
Wash. Univ. in St. Louis
454,729
Duke University
444,632
Univ. of Pennsylvania
442,601
University of Chicago
422,389
Northwestern Univ.
383,791
Vanderbilt University
329,822
Columbia University
326,273
Brown University
316,565
Cornell University
201,677
Boston College
163,403
Johns Hopkins Univ.
143,707
Univ. of Southern Calif.
117,551
New York University
73,1
Do these number reflect the $400 million gift Emory received from the Woodruff Foundation less than two weeks ago? This is good news for now, but for how long? Thanks for that link. Note - do not directly hit that link because it will bring you to a subscribe page to read the article. Instead, under google, hit a phrase from the article. " which colleges will have to pay WSJ"
@ljberkow
No it doesn’t. But I sure the gift won’t be included in the numbers. At least for this year. Emory will have to pay up eventually so it’s better for them to make as much money as possible to pay any taxes, then try to meander and manipulate data to avoid it.
@VANDEMORY1342 Yes, Emory gets a reprieve for a year. That gift was huge. Emory could always provide more aid to students 
as a means to eliminate the tax. Hopefully, this law gets modified at some point. Emory is not Harvard, who just uses its endowment to buy up property all over Boston.
@ljberkow Yes, Emory may have a handsome endowment, but we don’t Harvard money.
Not to be argumentative, but what happened to “the rich aren’t paying their fair share”? Apparently that is true unless we (Emory) is defined as rich…
It’s not clear whether the Woodruff gift is being paid all at once or spread out over several years. I can’t tell from the Emory press release. I doubt the Wall Street Journal computations accounted for this gift which wasn’t announced until 2 weeks before the WSJ published this article. Again, the Emory press release doesn’t say payment schedule for the gift.
It is noteworthy that the gift is being used in significant part to construct two new buildings, which would not generate the type of investment gain taxed under the endowment tax for those institutions that meet the $500,000/student threshold.