Legal Alert

Senate Finance Committee Issues Information Request to Colleges and Universities Regarding Use of Endowment Funds

April 30, 2008

The IRS 2008 fiscal year workplan for the Exempt Organization Division indicated a renewed focus on examinations and projects related to tax-exempt colleges and universities. One special area of interest to the Democratic Senate Finance Chairman Max Baucus and the ranking Republican member of the committee, Charles Grassley, is university endowments and their use (or lack thereof), especially in light of the rising cost of higher education, a cost that has continued to rise more quickly than the general inflation rate.

After months of speeches and threats, Senators Baucus and Grassley have finally decided to take action. On January 24, 2008, the Senate Finance Committee sent a letter to the 136 wealthiest colleges and universities in the United States, requesting information on tuition increases, financial aid, endowment spending, and bonuses paid to college presidents and endowment managers from endowment funds for the last ten years.

Concerned with recent pressure by the Senate Finance Committee to use more of their endowments for financial aid and threats by the Senate Finance Committee to require them to spend a minimum amount of their endowment assets each year, colleges and universities have been scrambling to avoid further federal regulation. In December, 2007, Harvard University, with an endowment of approximately $35 billion, the nation’s largest, agreed to spend more of its endowment on financial aid for those students it deemed to be middle class. Weeks later, Yale University, with an endowment of approximately $23 billion, the nation’s second largest, announced it would follow course.

While the announcements from Harvard and Yale brought appreciative comments from the Senate Finance Committee and the higher educational community throughout the country, it also brought further criticism. The Senate Finance Committee, although pleased with the universities’ decisions, raised concerns that Harvard and Yale did not go far enough and that other colleges and universities would not follow. Others raised concerns that the definition of middle class used by Harvard and Yale would help families with substantial assets, in some cases approaching annual incomes of $200,000 per year, at the expense of poorer applicants. In addition, the higher educational community worried that other colleges and universities would either feel pressure to follow course, be unable to do so, and run into financial difficulties, or would simply announce they could not follow the lead of Harvard and Yale, resulting in the trickle down of poorer students from elite universities to less prestigious ones.

Notwithstanding the actions of Harvard and Yale, however, the recent letter sent to colleges and universities by the Senate Finance Committee clearly indicates that a mandatory spending requirement for college and university endowments for tuition and other student related expenses may be unavoidable. Concerned that 76 colleges and universities have endowments of at least $1 billion, some with annual returns far in excess of the average return in the stock markets, Senator Grassley said that the information gathered in the next 30 days “will help Congress make informed decisions about a potential pay-out requirement and allow universities to show what they can accomplish on their own initiative.”

Although the request for information from the Senate Finance Committee is not a subpoena and recipients are not required to respond, tax-exempt universities generally comply with Congressional requests for information. In the absence of cooperation, however, the Senate Finance Committee does have the authority to issue subpoenas requiring information, or even testimony, from universities.