Advocates for affordable education look forward to the debate sparked by growth in endowments

The Baltimore Sun
January 28, 2008

By Matthew Hay Brown

Colleges and universities that are raising tuition costs even as they enjoy double-digit growth in their investment portfolios are drawing bipartisan scrutiny from Congress.

In the wake of a report showing that 74 U.S. schools have endowments of $1 billion or more, the Senate Finance Committee is asking the nation’s wealthiest institutions of higher education, including the Johns Hopkins University and the University System of Maryland, for details on the fees they charge and the financial assistance they offer.

“It’s fair to ask whether a kid should have to wash dishes in the dining hall to pay his tuition when his college has a billion dollars in the bank,” said Sen. Charles E. Grassley of Iowa, the senior Republican on the Senate panel. “We’re giving well-funded colleges a chance to describe what they’re doing to help students.”

Education officials, meanwhile, see the query as an opportunity to clear up misconceptions about college costs.

“The connection they’re making is the growth of the endowments, the spending rates and the rising tuition costs,” said William E. Kirwan, chancellor of the University System of Maryland. “Endowment income is such a small fraction of the operating budget at most public institutions that growth would have little effect on holding down costs.”

With an endowment of more than $810 million in 2007, the University System of Maryland ranked 90th nationwide in the report released last week by the National Association of College and University Business Officers. The Johns Hopkins University, with an endowment of $2.8 billion, came in 25th.

University assets nationwide grew by 24.1 percent last year. But administrators say their endowments aren’t simply bank accounts to fund whatever they would like. Much of the money has been directed by donors toward specific uses, and it must be managed carefully to protect against reversals.

“It’s the pot of money that we rely upon to run the university not only this year but next year and the year after and 100 years from now,” said Hopkins spokesman Dennis O’Shea. “We need to be able to rely on it to support the operations of the university after accounting for inflation, and we need to be able to rely on it after good investment years and after bad investment years.”

Advocates for more affordable education are looking forward to the debate to come.

“Most people agree that college costs are too high, universities are probably not spending enough on financial aid and students are … incurring too much debt, which is affecting their futures when they come out of school,” said Steven Roy Goodman, a Washington-based education consultant. “This is the beginning of a much broader, a much farther-reaching question as to what the role of universities is in our society and how we should be financing these universities.”

The Senate Finance Committee, which has jurisdiction over federal tax policy, has discussed legislation that would force colleges and universities to spend at least 5 percent of their assets each year, as most private foundations are required. Grassley and committee Chairman Max Baucus, a Montana Democrat, asked 136 schools last week for detailed financial information before they decide to proceed on what Grassley called “a potential pay-out requirement.”

“University endowments receive very generous tax breaks under the Internal Revenue Code,” Baucus and Grassley wrote in a letter to the schools, all of which have endowments of at least $500 million. “We want to better understand how these tax benefits for higher education endowments are improving education and making undergraduate studies more affordable for low- and middle-income families today.”

The senators suggest that such talk has already goaded Harvard and Yale – ranked first and second with endowments of $34.6 billion and $22.5 billion, respectively – to expand financial aid. Schools generally have bristled at the possibility of a federal spending rule.

“Colleges and universities are actually doing quite a bit already in the financial aid front,” said Brian Flahaven, director of government relations for the Council for Advancement and Support of Education. “But obviously endowments are not just geared toward student aid. They’re for the long-term support of the university.”

Lynne Munson, a fellow at the Center for College Affordability and Productivity in Washington, says the ballooning endowments of the past decade have caught administrators by surprise.

“They’ve put a great deal of effort into changing their investment and management strategies for their endowments, and obviously it’s paid off wonderfully,” she said. “My complaint is that they haven’t put the same amount of effort or thought into what to do with those monies.”

Johns Hopkins saw 19.1 percent growth in its endowment last year. Undergraduate tuition and room and board at the private university come to nearly $47,000 this school year.

O’Shea says Hopkins has spent more than 5 percent of its assets in five of the past six years. Sixty percent of undergraduates this year are receiving need-based financial aid, according to university figures.

“Student assistance is extremely important to us,” O’Shea said. “We want very much to do what we can to ensure that any student who gets into Johns Hopkins has the assistance he or she needs. … We’re not persuaded that it makes sense to have a federal policy about how colleges and universities should have to spend their endowment with a specific target rate.”

Munson said schools generally could spend 5 percent of their assets annually. But she is not yet calling for a federal requirement.

“I’d like to see a two-step process where, first, we shed a great deal of sunshine on this issue,” she said. “Colleges and universities still can keep most information secret. They don’t have to tell anyone how much they’re paying out of their endowment. They don’t have to tell anyone what they’re spending any of that money on. So there needs to be a sea change in that area.

“I would hope that exposure would compel through public pressure a higher rate of spending. If it did not, I would recommend that Congress examine that option very seriously. And I think a number like 5 percent really should just be considered a starting point.”

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