Posts Tagged ‘Yale University’

From Bloomberg (May 14, 2010)

By Michael McDonald and John Lauerman

(Bloomberg) — An Internal Revenue Service survey, which led to audits of Harvard University and more than 30 other colleges, shows that the wealthiest schools should spend more of their endowments, according to U.S. Senator Charles Grassley.

The IRS survey found that 344 institutions had an average spending target of 4.7 percent to 5 percent of their endowments each year on operations. The agency canvassed a cross-section of private nonprofit and public U.S. colleges and universities, including 159 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 he’s concerned that 5 percent has become a “ceiling” for colleges and that wealthier institutions should be spending more. The finance committee held hearings in 2007 on rising tuition costs and growing endowments at colleges including Harvard University in Cambridge, Massachusetts, and Yale University in New Haven, Connecticut, prompting the institutions to provide more financial aid.

Investment Recovery

Colleges are recovering from record investment losses. The median foundation and endowment fund gained 32.2 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, an investment manager in Wilton, Connecticut.

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 in Princeton, New Jersey, 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 its $12.6 billion fund, the fourth-largest in the U.S. and Canada.

Yale Raises Target

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.”

The IRS mailed 400 questionnaires to nonprofit colleges and universities in October 2008, seeking data on endowments, compensation and income from businesses unrelated to their missions of teaching and research. It picked more than 30 institutions to audit on the basis of answers and is reviewing an additional 13 that failed to respond, the agency said.

Questionnaire Responses

The IRS said in the interim report that it “expects that the information learned from the questionnaire responses and examinations will identify issues and areas that warrant additional guidance and further scrutiny.” The agency previously conducted a similar review of nonprofit hospitals.

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 in Austin, Texas A & M University in College Station, 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.”

Attention to Governance

Sarah Hall Ingram, the IRS commissioner of tax-exempt and government entities, said last month that the agency will be giving more attention to board governance of tax-exempt institutions that fail to file required IRS documents.

“How you go about building good governance around that is incredibly important to us and to your donors,” Ingram said at a conference sponsored by Georgetown University in Washington last month. “It will be part of all the audits that we do and all the studies that we do.”

The IRS is also concerned that nonprofits are failing to pay taxes on revenue from operations unrelated to their tax- exempt missions. Nanette Downing, director of exempt organization examinations, said last month in Washington that as much as 60 percent of institutions that filed a form for unrelated business income reported no income or a loss.

The agency collected $280 million of unrelated business income taxes from 5,700 religious, educational, charitable, scientific and literary organizations in 2006, according to its most recent data. The nonprofits had gross unrelated business income of $6.5 billion that year, according to the data.

“Why are charities willing to sustain these losses?” Downing asked at a panel at the Georgetown University-sponsored conference. “And why are so many charities reporting zero income or a loss?”

–With assistance from Oliver Staley and Janet Lorin in New York. Editors: Jerry Hart, Pete Young

To contact the reporters on this story: Michael McDonald in Boston at mmcdonald10@bloomberg.net; John Lauerman in Boston at jlauerman@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net.