US House Committee on Ways and Means and US Senate Committee on Finance issue joint letter to colleges and universities with endowments greater than $1 billion.

On February 8, the US Senate Committee on Finance and the US House Ways and Means Committee issued a joint letter to 56 colleges and universities with endowments greater than $1 billion. The letter seeks information about the schools’ endowments as part of a larger US Congressional inquiry into the activities of colleges and universities in relation to the “numerous tax preferences they enjoy under the Internal Revenue Code.”

Background

The joint letter comes in the wake of increasing public scrutiny regarding the size and management of college and university endowments. On October 7, 2015, the Ways and Means Subcommittee on Oversight held a hearing on the rising costs of higher education and tax policy. Following that hearing, the Congressional Research Service (CRS) published a report (College and University Endowments: Overview and Tax Policy Options) on December 11, 2015, which discussed tax policy options such as imposing a minimum payout requirement on endowments (or a tax on endowment investment earnings), limiting the charitable deduction for certain gifts to endowments, and changing the tax treatment of certain offshore investment strategies that endowments employ.

In January 2008, the Senate Committee on Finance sent a similar letter to 136 colleges and universities that had endowments of $500 million or more. The 2008 letter focused specifically on endowment management in the context of making college more affordable for low and middle income families, with several questions devoted to schools’ tuition costs and financial assistance programs.

Purpose and Scope of the Current Inquiry

The recent joint letter continues in the same vein as the October 2015 hearing and subsequent CRS report, citing concerns that many colleges and universities have raised their tuition rates “far in excess of inflation” despite the large and growing size of their endowments. The stated purpose of the letter is to gather information, in addition to what is already publicly available, to better understand how schools are using endowment assets to fulfill their charitable and educational purpose.

The 13-part request seeks information from the past three tax years (and the current tax year, to the extent available) on the following four topics:

• Endowment management
  In addition to more general questions regarding the size, nature, and growth of endowments, the letter requests specific details regarding external fee arrangements for investment advice and asset management, including amounts paid and the recipients of such fees. In contrast, the 2008 letter’s inquiry on investment advisor arrangements was limited to a school’s general methodology in determining and reviewing fees.

• Endowment spending and use
  Schools are again being asked to provide information on payout policies, data on projected and actual payout percentages, the percentage of an endowment devoted to providing student financial aid, and details on restrictions on endowment assets. In addition to what was asked for in the 2008 letter, the current letter requests disclosures about real estate holdings and any payments in lieu of taxes (commonly known as PILOTs).

• Donations
  The letter asks schools to provide information on their naming rights programs and the extent to which naming rights donations are used for tuition assistance. Naming rights were not addressed in the 2008 letter.

• Conflicts of interest
  Finally, schools are asked to provide their policies and vetting processes with respect to financial interests in endowment investments, specifically focusing on potential conflicts between and among internal employees, board members, and trustees responsible for overseeing the endowment, and external asset managers. As with donations, this topic was not addressed in the 2008 letter.

Practical Considerations

The scope and detail of the questions posed by this joint letter impose a significant administrative burden on colleges and universities that receive it. In light of the growing chorus of challenges to the tax exemption of endowments of all kinds, colleges and universities can use their responses as an opportunity to better explain and support their perspectives. Institutions that did not receive the letter are advised to continue monitoring legislative developments in this area.