As part of an inquiry into the activities of college and university endowments, Congressional Committee Chairmen have sent a letter to 56 private colleges and universities that have endowments over $1 billion, requesting information about the schools' endowment management practices, spending and use, as well as donation and conflict of interest policies.

The letter is signed by Senate Finance Committee Chairman Hatch (R-UT), House Ways and Means Committee Chairman Brady (R-TX) and House Ways and Means Oversight Subcommittee Chairman Roskam (R-IL). It states that they are inquiring into the schools' practices in relation "to the numerous tax preferences they enjoy." The letter cites reports that, despite strong investment returns on the $1 billion-plus endowments, many of the schools have raised tuition "far in excess of inflation." With the stated aim of conducting additional oversight of how the schools are using endowment assets to fulfill their charitable and educational purposes, it requests that the schools answer a series of questions by April 1, 2016.

With respect to endowment management, the letter asks for details about the amounts of the endowment funds that are restricted and the nature of those restrictions. It also requests information about the endowment's market value and investment return, as well as information on any investments outside of the endowment. It further asks about costs incurred in managing the endowments.

As to endowment spending and use, the letter asks how the schools determine how much of the endowment to pay out each year, as well as whether they have any policy regarding spending endowment principal. It further asks about the percentage of the endowment devoted to financial aid, policies regarding accepting restricted funds and the percentage of the endowment invested in real property.

The letter closes with questions on donations and conflicts of interest. Specifically, it asks about the policies of any programs granting naming rights to donors. With respect to conflicts of interests, it asks about policies in place to address any potential conflicts, as well as how board members are vetted and what policies apply when a conflict arises.

Implications

Congress has been holding hearings recently concerning the rising costs of higher education. Some congressional members have questioned the continuation of various tax policies, such as tax deductibility of contributions to endowment funds, and the tax-free treatment of endowment fund earnings.

Endowment funds are essential to the financial stability of many higher education organizations. Limited information about the endowments of many private colleges and universities is available on their annual tax returns, including the balance, earnings and breakdown of investment categories. In an effort to learn more about how colleges operate their endowments and use their endowments to fulfill their charitable purposes, House and Senate congressional committees are requesting additional information from some colleges on how they manage and spend their funds. The congressional committees apparently believe that the responses generated will help them to understand how endowments operate and how the current federal tax law affects the relationship between endowments and the cost of higher education.

Congressional inquiries have often prompted tax-exempt organizations to modify their activities. For example, in 2008, the Senate Finance Committee asked colleges with large endowments questions about their student aid and endowment fund payouts. This apparently led many colleges to shift their student aid packages from loans to grants. In light of this congressional inquiry, private colleges and universities should review their internal practices and decisions regarding endowment management and spending, as well as their decisions regarding tuition. With the increased attention and scrutiny on the use of endowment funds, private colleges and universities should ensure that they are following best practices when managing their funds and using endowment assets.

Please contact your EY professional for further information.

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RELATED RESOURCES

— For more information about EY's Exempt Organization Tax Services group, visit us at www.ey.com/ExemptOrg

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