Tax-free Money Machines

Top Colleges Rake in Big Bucks,

Yet Host Cities, Towns Suffer

                              By Edward Shanahan

 Years ago as a newspaper reporter wandering through office building lobbies in Winston-Salem, N.C., I was  surprised by the large number of foundation addresses posted on the tenant directories.

 Many of the names were familiar, such as various Reynolds family foundations that sprung the local cigarette and tobacco industry as well as Hanes foundations that drew on the resources amassed by branches of that well-known textile family.

  Over time I tracked down nearly 40 foundations in that one community and wrote a series or articles about the genesis and purpose of so many tax-exempt enterprises.

 My interest was piqued by legislative activities in Washington being conducted by the Rep. Wright Patman, a fierce populist from Texas, who was trying to rein in the proliferation of foundations that in many cases were created merely to shelter resources of the well-to-do from taxation, without any intent of distributing assets or income through grants to advance the public good.

 Beginning in 1961, Patman was singled-minded in his effort to expose the excesses of foundations, which, in his view, were not being adequately scrutinized by the IRS. He was concerned about the rapid growth in the assets and economic power of foundations. Furthermore, some foundations were being used only to provide tax breaks for their principals. In addition, self-dealing trustees were channeling foundation money to themselves, relatives and even friends.

 It took Patman until 1969 to push through the first major regulatory controls over foundations, which have been watered down somewhat since then. In addition to a host of regulatory restrictions, the Patman reforms consisted of a 2 percent excise tax on foundation investment income and a required  pay out of  5 percent of their assets in annual grants.

 According to a 1998 publication of Foundation News and Commentary, between 1913 when Congress first exempted foundations from taxes, and despite four congressional investigations of abuses, it was not until 1969 that true regulatory controls were imposed.

  This brings us to the current low-level interest in Washington in the enormous, even unimaginable tax-exempt endowments created by the largest and most prestigious private US colleges and universities.

 Consider the public subsidy involved when you measure the tax exemption provided to the donors to the endowments, on top of the tax-exempt income generated by these staggering sums.

  In fiscal year 2007, Harvard had an endowment of $34 billion, Yale’s was $22.5 billion, and Stanford’s was $17.2 billion. Often attributed to English lexicographer Samuel Johnson (1709-1784), the expression  “rich beyond the dreams of avarice,” could be an apt description for these institutions. Haven’t we been taught that avarice is one of the seven deadly sins?

  In fact, some 75 colleges and universities can claim an endowment of at least $1 billion, although those sums might be down a few million here and there in light of recent volatility of the stock market.

  Closer to home both Smith College and Amherst College  are happily members of the $1 billion endowment club.

 It used to that such institutions proudly trumpeted their relentlessly mounting wealth, but in recent months such boastings have yielded to more acceptable announcements. These schools are now competing with each other to see which one can be more generous than their counterparts in aiding students from families earning less than $75,000 annually by eliminating all tuition requirements. Good.

  As if to underscore the way the bucks keep rolling in, Amherst College announced recently it had received two windfall gifts that totaled more than $80 million.

  Still the colleges have delusions of poverty, witness the latest increase in the combined fee at Smith for tuition, room and board of more than $48,000, a sum not earned by many families with two wage earners, and a 5.5 percent increase over the current fee, which is above the current rate of inflation. Yet, graduates and their families are continually dunned for more and larger donations, the tin cup is never full enough.

  Northampton resident Sally Rubenstone, in a recent letter to the editor of the Daily Hampshire Gazette, made this same point. “While I’m all for grateful grads giving back to their alma maters, I find something unjust, even vaguely obscene, in the figures I’m seeing so much lately,” she wrote. She wondered why more of this money could not be directed to “the struggling institutions in your purview and the organizations that support them (e.g., the Northampton Education Foundation here in Northampton).”

 Without mentioning names – Harvard, Yale, Stanford, Smith and Amherst come to mind – it appears that many private colleges behave as if they don’t live in the world that most of the US population inhabits.

 It is especially galling to see these islands of wealth and privilege coexisting in our local communities where services are being reduced or eliminated for lack of funds.

 What are we to think about the potential $2 million deficit in the upcoming budget for the City of Northampton, which could mean employee layoffs and the possible closing of an elementary school while the largest non-profit institution has at its disposal $1 billion in tax exempt assets, more or less.

We can’t pretend that is fair or right or defensible, anymore than we can justify the CEO who is paid $250 million annually in salary and stock options while the company staggers under unsupportable debt and hovers on the precipice of bankruptcy.

 College and community should not be separate and unequal in their status.  One enhances the other. Take Amherst College out of the town of Amherst and move it to Leominster and see how prestigious and desirable it remains or how lively and historic the town of Amherst would be.

 Same if Smith College was plunked down in Haverhill – good luck to it and woe to the city of Northampton for its loss.

  Belatedly, the issue of bloated college endowments is beginning get some attention in Congress where questions are being asked about the purpose of these large tax-exempt hoards of cash. Are they merely bragging rights for the schools or is there some greater public purpose as well?

  What a surprise to find that the Senate Finance Committee is considering possible legislation that would require universities to spend at least 5 percent of their endowment each year.

 Thus a college with a $1 billion endowment would be required to expend $50 million of it each year.

 Where have we seen that approach before? It was when it came time to curb the abuses of the unregulated foundations.

  The university lobby is a strong one, and such a proposal is unlikely to gain much traction soon, although this is just the beginning of the debate, not the end.

  Well-heeled colleges and universities in struggling communities might buy some breathing space if they displayed a little more hometown spirit.

  It may be time for these wealthy colleges to rethink their attitudes toward local governments, social service agencies and other charitable community endeavors, which contribute so much toward making Northampton and Amherst just the kind of places where you might want to operate a first-class educational institution.

 Why not invest endowment dollars in community as well as in education? They belong together.