Bloomberg News
BOSTON -- An Internal Revenue Service report shows that the wealthiest colleges and universities should be spending a greater percentage of their endowments, according to Sen. Charles Grassley, R-Iowa.
The IRS found in a survey that 344 institutions had an average target of spending 4.7 percent to 5 percent of their endowments each year on operations. The agency said it canvassed a cross-section of both private nonprofit and public U.S. colleges and universities, including 159 institutions with fewer than 5,000 students each and 91 with more than 15,000, according to an interim report released last week.
Grassley, the ranking Republican on the Senate Finance Committee, said in an e-mail to Bloomberg News that he is concerned that 5 percent has become a "ceiling" for colleges and that the wealthier institutions should be spending more. The finance committee held hearings in 2007 on rising tuition costs and growing endowments at colleges including Harvard and Yale, prompting the institutions to provide more financial aid.
Colleges are recovering from record investment losses. The median foundation and endowment fund gained 32.23 percent in the year ended March 10, according to the Wilshire Trust Universe Comparison Service. University funds lost on average 19 percent in the year ended June 30, the biggest drop in 35 years, according to the National Association of College & University Business Officers, based in Washington, and Commonfund in Wilton, Conn.
Some colleges expect to make higher payouts this year because the value of their endowments fell faster than officials cut contributions to their operations. Harvard, the wealthiest university, said in September that it will spend 6 percent of the fund in the current fiscal year, the most in 40 years and "well in excess of our targeted range" of 5 percent to 5.5 percent. The university had $26 billion under management on June 30, down from $36.9 billion a year earlier.
Princeton University President Shirley Tilghman said in a letter in September that the Ivy League institution also anticipates a payout of 6 percent, which is "outside the band," even as it cuts the amount of money it uses for operations from the $12.6 billion fund, the fourth-largest in the United States and Canada.
Yale increased its target payout to 5.25 percent in 2004, from 5 percent, and last year spent $1.15 billion of its endowment to subsidize operations, accounting for 43 percent of its budget, according to Yale's website. Tom Conroy, a spokesman, declined to comment on the 2010 payout.
Forcing universities to spend more of their endowments would discourage diversified investing and push them toward more conservative portfolios, said James K. Hasson Jr., a lawyer at Sutherland Asbill Brennan in Atlanta, who represents tax-exempt institutions.
"A mandate would remove flexibility and creativity from the tools available to colleges," Hasson said. "There doesn't seem to be a crying need for a legal mandate."
Harvard said earlier this year it was being audited as a result of the survey, as did Suffolk University in Boston, the University of Texas, Texas A M and Lamar University in Beaumont, Texas.
The audit "isn't necessarily a bad thing," said Larry Acker, a spokesman for Lamar.
"I liken it to a fire inspection," Acker said in a telephone interview. "They want to go in and make sure everything's operating well in case of a fire. We're pretty confident about the things we're doing."
