Tax-Free “Hedge Funds with Universities Attached”: A Sustainable Nonprofit Form?

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April 13, 2016; Fast Company, “Co.Exist”

“Schools have amassed tons of wealth in ways that are really disproportionate to needs, and frankly disproportionate to the imperatives of ‘intergenerational equity,’ which is often the excuse that schools use for not spending their endowment.”

Joshua Humphreys, resident and senior fellow at Croatan Institute

A recent article in Fast Company reviews the issues as responses roll in from colleges and universities defending their endowment funds and spending practices before the April deadline from two Congressional committees. At issue are spending practices related to the more than $500 billion in college endowments in the U.S.

This conversation about the use of endowments by tax-exempt organizations has been simmering since 2008. It may have died down a bit while those pools were affected by the Great Recession, but their value has recovered and more, and the issue is back in full force.

Earlier this year, New York Republican Rep. Tom Reed drafted a bill that would require universities with endowments of more than $1 billion to spend a quarter of their endowment returns on student financial aid. He has a personal story that makes the issue vivid for him:

Being one of 12 kids who was raised by a single mom and having more than $110,000 in student loan debt when I graduated from law school, I understand just how heavy the burden of student loan debt can be for students and their families…It is a disservice to the next generation of Americans to continue to allow them to struggle, when we could so easily address the problem of out-of-control costs by making simple changes to our tax code.

However, the conversation about how endowments are used and when the money is put to work covers much wider ground than just universities. NPQ has covered similar questions about nonprofit health insurers, which continue to raise their rates even while stockpiling reserves far beyond what is recommended. Issues of foundation perpetuity relate, as does the issue of taxability, which is in play with regard to both hospitals and universities.

A lot of money is at stake—and, as Reed points out, a lot of potential human impact. Maybe it is time that nonprofits of all sizes start considering these questions.—Kevin Johnson and Ruth McCambridge