In May 2007, Senators Charles Grassley (R-Iowa) and Max Baucus (D-Mont.) started the current debate over college and university endowment spending rates by sending a letter to then Treasury Secretary Henry Paulsen. The senators queried whether educational institutions with large endowments were spending enough of their endowments to merit tax-exempt status.
More recently, on Feb. 23, 2010, the U.S. Government Accountability Office (GAO) issued a report on college and university endowments, based on case studies of 10 institutions, to provide information to policy makers as they consider college and university issues, including the size of endowments, distributions of endowment assets, and restrictions on endowment funds. See Government Accountability Office Releases Study on College and University Endowments.
The IRS also issued a detailed questionnaire to 400 colleges and universities, which sought information on endowment investments and spending rates. The IRS released an Interim Report summarizing the responses on May 7, 2010. See IRS Releases Interim Report on College and University Questionnaire. The IRS Interim Report found that educational institutions have an average targeted spending rate of 4.7% to 5% of their endowments each year.
Meanwhile, Senators Grassley and Baucus continue criticizing what they consider to be low endowment payout rates and pushing for further review of investment and payout policies of college and university endowments. The recent release of the annual study by the National Association of College and University Business Officers and the Commonfund Institute on educational endowments’ investment performance sparked additional comment from Senator Grassley.
On Jan. 26, 2011, the two organizations released the NACUBO-Commonfund Study of Endowments for FY2010 (July 1, 2009 – June 30, 2010), which included data from the 850 participating U.S. public and private nonprofit colleges, universities, affiliated foundations, and community colleges.
The study shows that endowments returned an average of 11.9% (net of fees), which is a marked improvement over the average negative 18.7% return (net of fees) from the previous year. The study also shows, however, that the average annual three-year net return for endowments was negative 4.2%, the average five-year net return was 3%, and the average ten-year net return was 3.4%.
The NACUBO-Commonfund Study also found an average effective spending rate for all institutions of 4.5% (higher than last year’s 4.4% rate), with institutions with assets between $501 million and $1 billion spending the most at 5.6% and institutions with assets of more than $1 billion spending 5.6%. John Griswold, executive director of the Commonfund Institute, warned that such spending rates would be difficult to maintain if long-term endowment returns are less than 4%.
Senator Grassley said he would like to see the recovering return rates lead to higher payouts and expansion of educational opportunities by making college more affordable for more students. He reiterated his concerns that a required 5% payout rate for educational institutions would become a ceiling rather than a floor, similar to the 5% required payout for private foundations. Others contend that an enforced spending rate would push institutions toward more conservative portfolios and away from diversified investing.
Senator Grassley also questioned whether alternative investment strategies were responsible choices for institutions that may not be able to liquidate such investments in response to changing conditions in the economy. He had previously expressed concern about maintaining and accumulating large endowments while using the benefits of tax-exempt financing. At his request, on April 30, 2010, the Congressional Budget Office released a report examining tax-exempt bond financing by colleges and universities.
Endowment spending rates at colleges and universities are determined by each educational institution’s governing body. Some commentators have suggested that payout information and other basic higher education endowment statistics could be made available via the Department of Education’s website, as an alternative to a mandatory endowment spending rate.
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