Hoarding Wealth

The leaders of the Senate Finance Committee are considering an intriguing proposal that is certain to infuriate higher-education leaders but could be beneficial for low-income students: requiring some colleges and universities to spend a minimum percentage of their endowments each year.

Unlike foundations, which must annually disburse five percent of their holdings, educational institutions and similarly-designated public charities can legally amass and horde vast sums of wealth. Witness Harvard Universitys endowment, which at last tally had swelled to $30 billion, the "single most obscene number in higher education," Jack Maguire, a former college administrator and founder of Maguire Associates, an educational consulting firm, recently told Currents magazine, a publication of the Council for Advancement and Support of Education.

Where endowment payout rates are concerned, the wealthiest universities tend to have the most miserly spending policies.

Much of this is a matter of law. The Tax Reform Act of 1969 codified the distinction between the two types of 501c3 nonprofit organizations and the relative tax benefits that accrue to each. The law confers to public charities tremendous tax advantages that are unavailable to foundations.

Charities are exempt from tax on net investment incomes and excise taxes, and they are subject to less stringent reporting requirements. They enjoy fundraising advantages, as well. Foundations, by comparison, are forbidden from engaging in acts of self-dealing and from having "excess business holdings."

Moreover, grants made by foundations are exempt from taxes only if they are awarded to public-charity-type organizations or if the foundation agrees to exercise due diligence and oversight called "expenditure responsibility" to insure that the money is being used for charitable purposes, and not for private gain or political activities. Those rules virtually guarantee that a large portion of foundation grants will be made to charities --primarily churches, educational organizations, hospitals and medical research organizations.

The government holds public charities to less stringent standards to make it easier for easier for them to pursue "inherently public activity." That is to say, churches are welcoming places that generally minister to wide swaths of society, hospitals treat patients from all walks of life, and institutions of higher education, well

The "inherently public" function of colleges and universities has become considerably more muddled of late.

On the one hand, higher education clearly contributes to the public good. College graduates tend to be more productive citizens who contribute a much greater amount in taxes. Fewer depend on unemployment and other welfare programs; and fewer commit crimes. Graduates also tend to be more active participants in civic activities, including volunteer work and voting.

Then again, the public function that is a prerequisite for colleges special tax status seems to be diminishing in some corners of higher education, where institutional self-interest appears to be trumping the public good. The shift is most apparent at elite institutions determined to maintain their lofty status and at less-vaunted colleges and universities determined to crack the upper crust.

"Its important to ensure that these organizations receiving tax-exempt status earn it on a daily basis, and keep their activities and policies in line with the special status conferred on them by the tax code," wrote Senators Max Baucus (D-Mont.) and Charles Grassley (R-Iowa), the chair and ranking member of the Finance Committee, in a letter they sent to Treasury Secretary Henry Paulson in May. "The point of giving [to charities] is to help the community and those in need and not to help a charity build an even bigger bankroll."

How then do charitable institutions of higher education justify the practice of increasing spending on merit aid at the expense of need-based financial aid on their campuses? The strategy, which has quite a number of adherents, essentially seeks to raise or maintain institutions status by buying well-credentialed students who dont need the money. Funds that could help academically-qualified poor kids to enroll in good schools are instead being used to entice affluent students with fat GPAs and high SAT scores, the raw material (along with endowment figures, graduation rates, and other quantifiable factors) upon which institutional status is built.

The disparity is made worse at a time when students from low-income families -- one of the fastest growing segments of college-age young people -- are finding it increasingly difficult to afford college at all. Many of those financially-needy students who make it to college are being forced to take on unmanageable levels of debt, including higher-priced private loans, as a result of these policies.

Would it serve the public good to compel wealthy colleges to spend a minimum percentage of their endowments each year? We think so. Currently, 62 colleges have endowments of at least $1-billion and they control the vast majority of higher education endowment assets, according to the National Association of College and University Business Officers. Perhaps the lawmakers should focus the proposal on those institutions and any others that eventually reach the $1-billion mark -- that way they can't possibly be accused of endangering colleges that are anywhere near the financial brink.

How should this increased spending be allotted? We can think of no better way to promote the public good than requiring these institutions to significantly increase their investment in need-based grant aid so that they can substantially expand their enrollment of students from the lower half of the countrys family income distribution.

To quote Charles Dickens, a man who knew a thing or two about privation, charity begins at home.