Lawmaker Has Broad Vision for College Endowment Bill

For over 50 years, Bloomberg BNA’s renowned flagship daily news service, Daily Tax Report® has helped leading practitioners and policymakers stay on the cutting edge of taxation and...

By Colleen Murphy

Sept. 13 — Rep. Tom Reed (R-N.Y.) continues to expand the scope of the bill he is working on to require the wealthiest colleges to put part of their endowment income toward helping working-class families with tuition.

“I want to do a bill that not only takes care of the endowment issue per se, but also sees the endowment issue to what I always saw it to be: a bridge to getting the college cost issue under control in America,” he told Bloomberg BNA on Sept. 13. The legislation would require the richest schools—those with endowments topping $1 billion—to put a percentage of endowment income, potentially 25 percent, toward grants for working-class families (112 DTR G-4, 6/10/16).

The bill may also include new Form 990 disclosure requirements and address lush compensation packages for employees who manage endowment funds, Reed said. Those two areas were discussed in a House Ways and Means Oversight Subcommittee hearing on the topic, part of lawmakers' broader interest in how colleges use endowment funds. Investment returns and any donations to colleges and universities are tax-exempt, which has drawn scrutiny as the cost of college has outpaced inflation. Schools should be using endowment funds to lower costs instead, some say (176 DTR G-1, 9/12/16).

Sliding Scale

Reed said the bill would likely be introduced after the presidential election in November, though he isn't working off a strict timeline and it could come sooner. The House will recess at the end of the month until after the election.

“We’ve got the skeleton and we’ll keep building it out,” he said.

Reed said the bill will institute a “multi-year sliding scale” of excise tax penalties for schools that fail to meet the scholarship target. Non-compliant schools would face a 30 percent tax on the undistributed payout that should have gone to students in the first year, and a 100 percent tax after the second year. A school that remains non-compliant would lose its exemption after three years, according to a summary of the bill. The penalty amounts aren't set in stone because Reed's staff is still working on the bill.

Many schools with large endowments pay out a certain percentage every year, though that amount isn't enforced through the tax code, unlike the 5 percent payout requirement for private foundations under tax code Section 4942.

The scale will “start from ‘OK, you’re on the radar, you didn’t meet the threshold. Now we’re going to watch and if you continue down that path, there will be enhanced penalties for each and every year you do that,” he said.

‘Widen the Aperture.'

The subcommittee’s chairman, Rep. Peter Roskam (R-Ill.), has praised Reed’s efforts in developing the bill.

“Congressman Reed is taking a serious look at a serious issue, and he’s taking the time to inquire and explore and probe and craft the best piece of legislation that he can,” Roskam told Bloomberg BNA after the hearing.

But he declined to endorse or quibble with specific provisions Reed has been considering. Instead, Roskam said policy makers must keep in mind indirect as well as direct benefits from endowment funds for student aid, a point he also raised during the hearing.

“We’ve got to widen the aperture on our discussion to make sure that we’re getting this just right,” Roskam said.

Roskam also suggested exploring the idea of additional incentives for donors who contribute to scholarships instead of other areas. Currently, donors can get an 80 percent tax deduction for donations to nonprofits, according to Section 170(l).

Let's Tax Them

On Schedule D of Form 990, the tax return for tax-exempt organizations, realized earnings and losses should be distinguished from endowment gains, and schools should have to detail endowment management costs, among other changes, Mark Schneider, a vice president and institute fellow at the nonprofit American Institutes for Research, testified at the hearing. The form should also use exact dollar amounts for different endowment fund categories, such as restricted and permanent funds, instead of percentages, according to his testimony.

Several lawmakers, including Reed, agreed the Form 990 should be adjusted to require more transparency.

“I'd love to figure out a way to shine a bright light on education uses on that Form 990. We've got to figure out a way to do that,” Rep. James Renacci (R-Ohio) said at the hearing.

Schneider, whose organization describes itself as one of the world’s largest behavioral and social science research organizations, also proposed a tax scheme for schools with endowments above $500 million. An excise tax ranging from 0.5 percent to 2 percent could incentivize schools to allocate a larger share of their endowments to student aid, he said.

The tax would be offset by the amount of aid the school sets aside for students who are eligible for Pell Grants, federal need-based grants for low-income students, and the existing charitable deduction would remain. Revenue raised from the tax should be funneled to support community colleges, according to Schneider's testimony.

With assistance from Aaron E. Lorenzo in Washington.

To contact the reporter on this story: Colleen Murphy in Washington at cmurphy@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

For More Information

Text of Mark Schneider's testimony is at http://src.bna.com/ixd.

Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.