Senator proposes mandating greater use of endowment

Citing the soaring endowments of many American universities and the increasing cost of tuition, Congress has drafted a proposal mandating that universities spend more of the money they make off their endowments — something Yale and its peer institutions say could lead them into financial turmoil.

Last month, Yale announced that its endowment grew 28 percent to a staggering $22.5 billion in fiscal year 2007, beating out the average American university endowment above $1 billion, which grew 18.1 percent over the last year, according to Bloomberg reports.

As America’s institutions grow richer, Iowa Sen. Chuck Grassley, the ranking member of the Senate Finance Committee, is raising the issue of why universities continue to raise tuition every year when they could just tap into their wealth.

Grassley’s proposal has drawn harsh rebukes from leaders in higher education, including officials at Yale and its peer schools.

“We’d much prefer to keep the matter one of private regulation rather than public regulation,” Yale President Richard Levin said in an interview Thursday. “We think that we’ve been very responsible in promoting access to the best possible education.”

More than a third of Yale’s $2.4 billion operating budget this year will come from the endowment, according to budget documents provided to the News. But because the University’s endowment has soared in value so quickly, that $843 million represents only 3.7 percent of the total endowment.

Grassley’s proposal would require colleges with endowments exceeding $500 million to spend at least 5 percent of their endowments on an annual basis. Such a requirement would increase Yale’s endowment spending by more than $280 million this year, potentially allowing the University to freeze tuition or increase financial aid. Undergraduate tuition and fees rose by 4.5 percent this year to $45,000 and has increased 49 percent over the last decade.

Yale’s endowment, meanwhile, has grown more than 300 percent over the last decade.

“Parents across the country worry about how they’ll pay for college and their kids being crushed by student loans as college costs continue to skyrocket,” Grassley said in a statement to the News. “At the same time, some universities are sitting on endowments worth billions of dollars. … Why aren’t the schools using that wealth to make college more affordable for families and students?”

But officials at Yale and other schools said doing so is not that easy. The University aims to spend 5.25 percent of its endowment annually, Yale Deputy Provost Charles Long said. But because of the volatility of the investment market, the University’s spending rules protect against quickly increasing or decreasing spending based on a very favorable year for the endowment, or a very unfavorable one. The true spending from the endowment each year is based on a complicated formula that weights the previous year’s endowment spending, adjusted for inflation, against the current market value of the endowment.

With a 5 percent mandate, the University budget could increase and decrease following general economic conditions, Long said. And he said the University would be vulnerable when the endowment stops posting such impressive returns.

The issue of endowment spending was first raised in a Senate Finance Committee hearing last month when two witnesses suggested to the committee that the tuition increases at schools across the country were needless given the rise in endowments.

Lynne Munson, an adjunct fellow at the Center for College Affordability and Productivity in Washington, D.C., characterized financial aid spending as “shamefully small.” The wealth of universities like Yale “is being hoarded instead of shared,” she said.

If Yale and Harvard were to increase spending from their endowments by roughly one-half of 1 percent, they could completely eliminate tuition increases and double undergraduate aid, according to statistics presented by Congressional Research Service expert Jane Gravelle to the committee.

Ultimately, Munson and Gravelle proposed that colleges should have to spend at least 5 percent of their endowments annually, as is required by law of private foundations — a decision which prompted outrage from university officials and higher education experts. Princeton University submitted a statement to the committee earlier this month aimed at correcting the “incomplete and misleading account of the operation and uses of university endowments,” and the proposal has also drawn rebukes from officials at Harvard, Brown and the University of Pennsylvania, among others.

The testimony at the committee gave the impression that endowments are akin to automated teller machines from which universities can simply withdraw money at any point for any reason, said Steven Bloom, the assistant director for government relations for the American Council on Education. The ACE is a lobbying group that represents 1,800 institutions, including Yale.

The idea of forcing universities to spend a certain share of their endowments “would be incredibly rigid and would mark a huge change in the way that the federal government relates to higher education,” Bloom said.

“For the first time, it would get the federal government engaged in the budget decision-making of higher education institutions, and we don’t think that’s a good thing,” he said.

Last week, ACE and three other associations of universities and colleges submitted a statement to the Finance Committee responding to the “inaccurate picture of college and university endowments” presented at the September hearing.

Grassley, a Republican, has not introduced his proposal as legislation but believes his idea “should be under discussion,” said Jill Gerber, the press secretary for the five-term senator.

The Finance Committee is expected to examine legislation addressing education tax issues later this month. Grassley believes a provision regarding university endowments “should be in the mix” when lawmakers consider the tax-related legislation, Gerber said.

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