Nonprofit Endowments Under Scrutiny

April 14, 2016

safeA question that has been asked with some regularity over a long span of time is –”When will the size of our endowment attract the interest of the IRS?” or “Is there a point at which our tax-exempt status may be threatened?”

Although the issue has come up occasionally there is no current limit on how large an endowment may be. The endowment of Harvard University was $37.6 million as of their 2015 financial statements and I am not aware of any case where an organization’s exempt status has been revoked for that issue alone.

Of course now that the need for tax revenue is greater and the size of endowments has increased, Congress and others are starting to pay more attention. Most of their focus is on large university endowments.  Also at play in that community is the student loan debt crisis which has people thinking that more money should be spent on endowments. Victor Fleischer, a law professor at the University of San Diego, wrote an opinion in the New York Times describing how Yale University paid nearly three times the amount to its private–equity managers in 2014 than they paid out of the endowment for tuition assistance, fellowships and prizes. House Republican Congressman Tom Reed of New York is supposedly drafting a bill to require universities with endowments of more than $1 billion to spend more on student tuition or face potential tax or other penalties.

The perception is that universities hoard and grow their endowments instead of utilizing them more currently on their missions. This criticism is natural when people see endowments growing to astronomical levels like at Harvard, Princeton, Yale, and so forth. Of course, telling an organization to “spend” their endowment is not so easy. Also according to Harvard’s 2015 financial statements, about $31.4 million of their $37.6 million endowment  was either temporarily or permanently restricted. This means that the University must spend the money for the purpose it was given or in the true endowments or permanently restricted funds they may not spend the corpus at all.  This will clearly be an issue to watch in the future.