Following the University’s recent announcement that its endowment had risen to a record-high $23.9 billion, University administrators and officials praised the Investments Office. But not everyone was pleased.
As Yale announced its fiscal year 2014 endowment returns of 20.2 percent, Yale’s unions learned from newspapers that jobs lost as a result of budget cuts during the 2008 financial crisis would not be restored. And on Sunday, the New York Post published an op-ed criticizing the tax-exempt status of large university endowments, such as Yale’s and Harvard’s, amid rising college tuition fees nationwide. The columnist Jonathon Trugman said that rather than targeting corporate tax evasion through inversions, Washington should focus on taxing the “largest tax dodge on the globe … [the] $500 billion of tax-free pool of cash housed in Universities across America.”
However, finance professors and outside experts interviewed said that tax exemptions for university endowments are necessary for their growth and institutional operation.
“There is this concern that university education is becoming less and less affordable,” Massachusetts Institute of Technology Professor of Finance Andrew Lo said. “[Trugman’s] issue is this elitism, and I think what the author misses is the fact that it is university endowments that are fighting against elitism.”
According to Lo, Yale’s sizeable endowment covers a significant portion of the University’s operating budget and provides the University with support for its need-blind admissions policy. The policy allows all students, regardless of financial background, to attend. If Yale’s endowment were taxed, he added, the University’s ability to provide need-blind financial aid, in addition to funds for research and teaching, might be jeopardized.
William Jarvis ’77, Managing Director of the institutional investment firm Commonfund, noted that the ability of endowments to grow under a tax-free status is a consistent source of support for a university’s operating budget. Furthermore, he said it is crucial to furthering the institution’s educational mission. Endowments allow universities to be free from the “vagaries of the economy” and to plan for the long-term, he said.
He added that if endowments were subject to income tax, they might grow more slowly or may not be able to grow at all in real terms after inflation, which might significantly impact research and endowed professorships.
Still, others supported taxing university endowments.
Last April, U.S. Congressman David Camp, who chairs the powerful Ways and Means Committee in the House of Representatives, introduced a tax reform bill that called for a tax on investment income earned by private colleges and universities.
Harvard Law School Professor Daniel Halperin, author of the 2008 paper “Does Tax Exemption for Charitable Endowments Subsidize Excessive Accumulation,” said he supports taxing endowments because tax-exemption is inconsistent with income tax policy.
He recognized that large endowments are good for organizations and public welfare, but from a policy point of view, Halperin said the current size of endowments may be excessive. He referenced the focus of many university administrators on growing endowments to boost their reputations as an example of irresponsible wealth accumulation.
“One person not getting anything out of this is the taxpayer,” he said. “Therefore, why should they be subsidizing endowments?”
Halperin added that universities like Harvard and Yale can use greater proportions from their endowments to fund their operating budgets than schools with more limited resources. It is not in the interest of federal taxpayers to perpetuate this inequality among institutions, he said.
In light of rising tuition bills, the New York Post article also called for the government to require larger tuition disbursements from endowments. In 2008, Congressman Peter Welch introduced a bill mandating that universities spend 5 percent of their endowments over three to five year periods. Yale spends about 5 percent of its endowment each year.
However, Halperin, said he does not think the policy would solve the larger issue of excessive accumulation by endowments. If universities were required to disburse a higher percentage of their endowments, they could easily accumulate more donations, he argued.
According to Jarvis, mandated spending from college university endowments might even discourage donors from giving.
“The idea of mandating spending is interference with the private contract between the donor and a private university,” he said.
Jarvis added a mandated spending rate would significantly jeopardize an endowment’s ability to retain purchasing power and thus decrease its attractiveness to donors.
Local union leaders were also displeased that the University’s strong endowment growth would not translate into reduced budget cuts.
According to Local 34 President Laurie Kennington, who runs the union for Yale’s clerical and technical workers, budget cuts over the past five years have left many positions unfilled and have restricted services provided to students and faculty.
“Today we have the assumption that when Yale grows, so do the good jobs in the community,” Kennington said. “We’re disappointed in Provost [Benjamin] Polak’s position that the budget cuts will not be reversed.”
Local 34, Kennington said, will convene next week to plan a formal response.
Yale has the second-largest endowment of academic institutions in the world.
Correction: Oct. 2
A previous version of this article incorrectly stated the name of Daniel Halperin.