Universities looking to defend endowments from Republican tax plan

Some of the richest U.S. colleges are pushing back against scrutiny by Congress over the tax-exempt status of university endowments.

Lobbying disclosure forms show almost two dozen schools such as Princeton University, University of Notre Dame and Cornell University are including endowment tax issues in their federal agenda, along with perennial topics such as student loans and funding for scientific research.

Sen. Orrin Hatch, R-Utah, chairman of the Senate Finance Committee, said Monday that college endowments would be included in a tax code review. The tax-exempt status attracted the interest of Congress at a hearing in October 2015 and remained in the spotlight with initial proposal by Rep. Tom Reed, R-N.Y., for the largest endowments to spend more on tuition assistance. Two congressional committees responsible for the tax code followed with an inquiry on how the funds are managed.

“Endowments are part of that overall trend of things to worry about from Washington,” said Larry Ladd, a director of the higher education practice at Grant Thornton. The accounting and advisory firm included endowments in its annual higher education report, advising clients to “prepare for legislative changes” and expect an increased focus on operations, costs and spending. Endowment investment income isn't taxed.

The term “endowments'' began appearing on more disclosure forms in the quarter following a congressional subcommittee hearing in October 2015 and after the joint Senate Finance and House Ways and Means Committee inquiry into the richest 56 private colleges. Republicans in Congress and President Donald Trump are expected to tackle tax overhaul.

Go make the tax code more efficient, “Congress must undertake a comprehensive and thorough review of the entire statute,” Mr. Hatch said in his statement. “That includes exploring areas of the tax code related to universities and their endowments. I look forward to discussing this topic further with Finance Committee members and the Trump administration.”

Mr. Reed, who represents western New York and was a vice chairman for Trump's transition team, wants the richest colleges to spend more of endowment income on tuition breaks for middle-income families.

Donors receive tax breaks for giving to non-profits including colleges. Under Mr. Reed's plan, which is still being developed, individuals may be able to deduct 150% of scholarship donations that support working-class students while unrestricted gifts would be deductible at 125%. Restricted gifts of more than $5,000 wouldn't be deductible.

“Between what has been said on the campaign trail and what we have seen in Congress in recent months and over the last two years, we know this is an issue that's foremost on some members' minds,” said Josh Farrelman, head of government relations at the University of Rochester, which has a $1.9 billion fund and some hospital affiliates in Mr. Reed's district. “We are trying to do our jobs in terms of educating what these issues are and addressing some of their concerns.”

Schools said that some endowment money is designated by donors for specific purposes and can't be freely spent. Endowments also invest for the long term and help fund university operations for current and future generations of students, educators said.

Lobbying is another avenue to explain that endowments aren't simply savings accounts, said Robert Durkee, vice president at Princeton University, the fifth-wealthiest college with a $22.2 billion endowment fund. “It gives us a chance to say that half of our operating budget is being funded out of earnings from the endowment,” Mr. Durkee said. “We're using the endowment every year.”

Cornell, located in the Ithaca, N.Y., district represented by Mr. Reed, said school officials met with legislative representatives, according to disclosure forms.

“We note that the congressman's goals align with ours,” Joel Malina, Cornell's vice president of university relations, said in a statement. “We just disagree on the most effective way of achieving those goals.”

Mr. Reed has been concerned about rising sticker prices. As the student debt crisis worsens, “it is only fair that we require more transparency to determine whether these schools, which spend millions of dollars lobbying the federal government, are doing so on behalf of their students' best interest or that of their endowments and Wall Street hedge fund managers,” he said in a statement on Monday.

Endowments' tax issues have come up before. Sen. Charles Grassley, R-Iowa, said in a September 2007 Senate Finance committee hearing that he was concerned about endowment growth as college tuition continued to rise. Mr. Grassley later raised the idea that college endowments should pay 5% of their value each year, using the same rule for foundations.

While legislation was never introduced, several of the wealthiest colleges changed their financial aid policies, awarding grants that don't need to be repaid instead of loans. The richest are often the most generous with aid.

Harvard, which has the largest endowment in higher education at $35.7 billion, doesn't ask families who earn less than $65,000 to pay, and some families that make more than $200,000 receive aid. Harvard has included endowments in its lobbying efforts since at least 2014, according to disclosures.

“We report on issues that are under consideration in Congress or the executive branch that relate to the education and research mission of the university,” said David Cameron, a spokesman for Harvard. “Issues that relate to the endowment certainly fall into that category. Our efforts thus far have been to generally provide information and insight into the critical role endowments play in fulfilling our academic mission.”