http://college.usatoday.com/2016/02/15/bu-receives-letter-for-additional-examination-on-endowment-spending/
I am not against colleges having money as a safety net or for growth. but if you gave 100 trillion to most schools they would not only not use it for the school, they would not even stop fund raising. (100 trillion is not literal) if they are going to sit on 10-20-30 billion dollars they should have to spend x % a year on research, tuition ,new bathrooms in the dorms or something to protect the tax status…in my opinion.
The complaining BU students chose to go to one of the most expensive universities in the country.
It’s rational for a school to hoard its endowment capital, and I have nothing against it.
But what gets me riled is when a school has, literally, an endowment larger than the GDP of half the countries in the world (look it up; I’m not exaggerating) with enough income from the endowment to pay for free tuition more than twice over annually for all its students, and still most of the students are upper income kids paying full tuition. Then the school is still receiving taxpayer charity???
There’s something really wrong with that picture…
FYI, the GDP of all the countries in the world:
https://en.m.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)
I agree, @GMTplus7! I think the tax free status should cap out at some threshold.
“Then the school is still receiving taxpayer charity???” Not sure what you are referring to here, do you mean federal financial aid that students can get? That ‘charity’ is going to the student, to help them pay for an education, it isn’t going directly to the school. That doesn’t mean I am not critical, NYU (which I happen to be an alum of) is one of the biggest rip offs out there, they give very little financial aid and they these days have a huge endowment, that they use on things like buying townhouses for 10 million to attract some superstar professor. The ivies have large endowments (Harvard’s is some ungodly figure), but they also are pretty generous with aid, even if you aren’t dirt poor.
There are rules about endowments, the way endowments work is they are supposed to use the return on the endowment being invested to use for spending on things like teacher salaries, student aid, stipends for grad students and so forth, they generally don’t spend the capital itself. There are federal tax regulations involving these, and if they don’t spend a certain amount of their endowment each year they can get in trouble.
The other problem is with endowments, sometimes the universities hands are tied, they often get ‘targeted endowments’ that can be used, for example, to put up buildings with a benefactors name or be used to endow a chair to fill some desire of the donor, but can’t be used for financial aid or running costs. I have heard of money being endowed that schools literally cannot use the principal or investment return on anything, because the terms were that restrictive.
That said, as my comment about NYU above shows, I agree that someone should be asking questions about how these schools are operating. I will add that with endowments, you also have to be careful, because they also can be paper monsters, for example, if stock is donated to the school, and that stock’s price plummets, like after 2008, you will see the value of the endowment drop significantly. Unfortunately, endowment money often seems to be used on vanity projects, like a new building with some donor’s name, or as I noted on purchasing expensive things for the use of school administrators or star faculty, so I think these are questions that should be asked, I just think we also need to be careful of assuming that somehow a big endowment means they could operate on a tuition free basis. One thing they always claim is that the cost of tuition alone does not pay for the total cost of educating a student, that one I have never had totally proven out to me, I kind of wonder what kind of slight of hand the schools use with that one.
If you take $37.6B and assume a VERY modest 4% return on it, that works out to $1.5B income per year. If u divide $1.5B by 6700 undergrads, that works out to $224k per year.
Even if you divide by 21,000 total undergrad+grad students, that works out to $71k per year. And keep in mind that 4% return is waaaaay lower than what these “hedge funds w schools” are achieving.
This is a red herring. Money is fungible.
Caitlin attended a private prep school in Maryland…I wonder if she told the head of that school the same thing? 
Most schools take a 4% or 5% payout on endowment, typically based on a 3-year rolling average of endowment assets (in some cases longer) so as to even out the sharp ups and downs based on market volatility.
The thing you need to keep in mind, though, is that the endowment isn’t a giant slush fund of free money. At most universities, “the endowment” is actually a collection of separate endowments–one for the medical school, one for the law school, one for the business school, etc. And within each endowment, many of the funds are restricted, so some can only go to medical research, some only to support named faculty chairs, etc. So you can’t just assume all that money is available to replace undergraduate tuition; most of it isn’t. And you can’t just assume the university could pay for all its operations on tuition revenue alone, or on endowment payouts in lieu of tuition; large parts of the university’s expenditures aren’t supported by tuition revenue at all, in fact, much of it is already supported by payouts from endowment. Take my alma mater, the University of Michigan. It’s got a hefty $10 billion endowment, tenth largest among all colleges and universities, public and private. At a 5% payout per year, that should produce about $500 million annually, a handsome sum (though in fact it’s a bit less because Michigan uses a conservative 6-year rolling average of endowment assets, so in rising markets its endowment payout lags endowment growth, and in falling markets it doesn’t face wrenching cutbacks in endowment payout which would force deep cuts in current spending). But the university’s total budget is now around $6 billion annually. Obviously, endowment payout is important. Just as obviously, the university can’t pay for everything with endowment payout alone.
But then don’t those schools claim to spend over $90,000 per student per year? (Of course, whether all of that spending actually does increase the educational value to the students, as opposed to “extras”, is another story.)
I agree. Tax-free should be capped at some point. It’s laudable wealthy individuals leave their estates to charitable causes until we realize that taxpayers are matching one to one (almost) to their donation. Would you match all theit causes one to one if it were out of your pocket?
“Tax-free should be capped at some point. It’s laudable wealthy individuals leave their estates to charitable causes until we realize that taxpayers are matching one to one (almost) to their donation”
Not sure I follow this, how are taxpayers matching this one on one? While the amount that they donate would be involved with estate taxes (assuming it is high enough), the estate tax is not 100%. I don’t recall what the estate tax is, let’s say it is 10% to make it simple, if the guy donates 10 million to Harvard in his estate, the amount lost in taxes is 1 million, not 10 million, which in theory would have to be made up by the remaining taxpayers.
I do think that there are a lot of questions about tax free status across the board, not just charities, but things like 501c4 donations (the infamous ones supposedly used for supporting social causes, that ends up funding politically aimed campaigns). For example, if something that is tax free spends 90% of what they pull in on administration costs, executive directors, and fund raising, should that all be tax free? Should a university that is using endowed money to build a mansion for the head of the school, or a guest house for potential donors, be able to claim that as tax free? Should a football program that is pulling in 25 million + a year from tv revenue (not to mention other sources), be able to claim that is tax free income? There is something to be said for using tax policy as a carrot and stick, if a football program is paying its coach 7 million a year and collecting those kind of revenues, and that money is staying in the football program, maybe they should be taxed, whereas if the ‘excess’ money goes towards scholarships and such in the academic side, it would still be tax free.
Isn’t the estate tax 40%? If so, $100B estate left to heirs will pay $40B in tax and heirs will get $60B. At that level estate tax exemption makes not much difference. When they give up $100B to charity, they are actually giving up $60B and taxpayers $40B. Okay so not one to one, 1.5 to 1.
According to their financial report, Williams College spent $220 million last year for 2,045 undergrads ($108k per student), of which $93 million (42% of budget) came from the endowment ($45k per student) and $79 million (36% of budget) came from net tuition ($39k per student).
http://controller.williams.edu/files/williams_financial_statement_2015.pdf
@bclintonk hit the nail on the head.
Another example is Harvard 's endowment, which is actually made up of more than 12,000 different funds (many of which are restricted to specific purposes) and $1.5 billion was disbursed from the endowment in 2013:
http://www.harvard.edu/about-harvard/harvard-glance/endowment