Tax Hikes, Funding Freezes Threaten University Endowments

Industry observers note that even a tax hike of 10 percent would cripple universities’ ability to maintain their operations, fund research, and provide financial aid.

Views Of Yale University As Ivy League Pay Soars

Craig Warga/Bloomberg

Endowments are navigating an increasingly hostile environment as colleges and universities face attacks on multiple fronts. With schools losing federal funding, universities including Harvard are implementing hiring freezes, while others such as Johns Hopkins are laying off thousands of employees.

In addition to slashed funding, lawmakers are also pushing to increase taxes on endowment donations, potentially raising the rate from 1.4 percent to as high as 35 percent. Industry observers note that even a potential tax hike of 10 percent would cripple universities’ ability to maintain their operations, fund research, provide financial aid, and support academic programs — and could have other unintended consequences.

Charles Skorina, an executive recruiter who specializes in foundations and endowments, said significantly taxing endowments could “destroy” what he believes is “one of the U.S.’s greatest competitive advantages.”

“It takes centuries to build endowments and universities,” Skorina said. “So why would you tear down what we’ve built better than most other countries?”

Harvard argues that if it were taxed at a 10 percent rate on the $5.1 billion it earned last year, it would owe roughly $510 million in federal taxes — far more than the $71.5 million it pays under the current 1.4 percent rate implemented in 2017. Such an increase would force Harvard to dedicate 8 percent of its 2024 operating budget to cover the tax burden.

John Griffith, a director at Hirtle Callaghan and former CFO at Bryn Mawr College, said that a 10 or 21 percent tax hike would not only hinder schools’ ability to provide financial aid — particularly the mid-sized colleges — but it would also force CIOs “to rethink their asset allocation.” And even rebalancing would be unlikely to generate enough returns to cover the added tax.

A Revenue Grab

Endowment investment officers are worried about the uncertainty and magnitude of the changes. Losing federal funding while paying additional taxes could force endowments to make higher payouts or incur special drawdowns, which would then require portfolios to be rebalanced.

However, without clarity on what’s ahead, allocators are unsure how to proceed. Some investors have suggested that endowments may need to rebalance out of hedge funds and into more tax-efficient passive equity strategies, but the move to stocks will add volatility.

Skorina called this “a revenue grab” from the White House — and he’s not the only one to suggest this. “Endowments are easy targets,” he said, adding that there’s also “have almost a religious zeal to attack any school that doesn’t conform to a particular ideology.”

Griffith added that university endowments are “currently politically out of favor.”

Taxing endowments would also break a fundamental promise. The U.S. university system was built on private donations, incentivized by tax breaks, and the endowment itself essentially free from taxes. Reversing that agreement, Skorina argues, could weaken universities’ financial foundations. Once the government starts, he warns, there’s no telling where it will stop. “This is the finger being removed from the dike,” he said.

Not Entirely Blameless

But the recruiter argued that universities are not blameless in this conflict, having been “sloppy” with how they’ve generated and reported income, noting that when schools can charge students up to $100,000 a year, people are right to be skeptical, if not downright angry.

“I don’t think there’s a lot of support for keeping hands off of endowments because schools are run so poorly,” Skorina explained, adding that they have also done “a terrible job of articulating” why the government should keep their “hands off donor money,” although some schools like Princeton are beginning to speak out.

One chief investment officer for a state university admitted that schools have done a poor job of policing themselves and have displayed hubris responding to pressure to take political stands on divisive issues. That said, he noted that there’s a lot of misinformation out there — some intentional, some not — about how endowments work. Tuition dollars don’t go into the endowment; rather, the endowment helps keep tuition lower than it would otherwise be.

“That’s a lot of money to be tax free, so I can see some people going, ‘enough is enough,’” the allocator told II. “But there’s no student in the country at any major institution whose education is not subsidized by endowments.”

While some schools are hiring Trump-connected lobbyists to represent them in Washington, there’s not much that allocators can do except wait and see how this all plays out. The state university allocator added that if university endowments start becoming significantly taxed, then they need to be savvier about their tax strategy. “We’re going to be acting more like family offices,” he said.

Hirtle Callaghan Charles Skorina John Griffith Bryn Mawr College Trump
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