Financial Plan - Cornell University Division of Budget & Planning

Tuition, Financial Aid & Endowment7%. The overall payout ratio on educational institutions’endowments fall below this level. One option would beto require a payout rate; or to require a payout rate (ora higher rate) for institutions as long as their per studentendowment is above a fixed amount. Alternatively, onecould relate the payout rate to the earnings rate so as topreserve the real value of the endowment and perhapssome small growth, but not allow it to grow so rapidly.Another option, if the public policy concern is aboutaffordable education, would be to impose a tax on theendowment for schools with tuition increases over apre-determined threshold.IRS Tax-Exempt ConcernsThe Internal Revenue Service (IRS) has also expressedapprehension over the same issue. As reported recentlyin the Chronicle of Philanthropy, 2 Steven Miller,the commissioner of the Tax Exempt and GovernmentEntities Division of the IRS, said that the IRS was concernedthat many organizations are not making effectiveuse of their assets, given their tax-exempt status.“Is providing a peppercorn of public benefit enough fora tax exemption?” Mr. Miller asked. “How much savingsis too much savings? Should we insist on behalf of thepublic that the charity provide a public benefit that iscommensurate with the charity’s financial resources andwith the tax subsidy it receives?”The article describes Mr. Miller as saying that:…the IRS may want to consider a payout requirementfor charities that is similar to the annual requirement forprivate foundations, which must distribute 5 percent oftheir assets each year. He said the agency may also useits enforcement tools to crack down on charities thatare hoarding assets without providing much benefit tothe public.“We should review existing tools and explore whether wecan hold organizations to a standard of commensurateuse of assets, at least in the most offensive or egregiouscases,” Mr. Miller said.He said the IRS may review how foundations are complyingwith the requirement to spend at least 5 percent oftheir assets each year. Critics have suggested that somefoundations include too much administrative overheadin meeting the 5-percent threshold.“It may be time for us to review what is being spent andcounted,” Mr. Miller said.2 Gose, Ben, “IRS Official Says Tax Agency May Step UpEfforts to Identify Ineffective Charities.” The Chronicle ofPhilanthropy (Nov. 12, 2007). http://www.philanthropy.com/news/updates/index.php?id=3441The article noted that some who believe that the IRSmay be moving beyond its legal mandates viewed Mr.Miller’s comments with concern.Marcus S. Owens, a Washington lawyer who is himselfa former commissioner of the IRS’s tax-exempt division,urged the IRS to be cautious before stepping into newareas. …“I would urge the IRS, as it begins to contemplatethe concepts of efficiency and effectiveness, and of goodgovernance, to keep in mind that some of those wordsare not found in the Internal Revenue Code,” he said.Despite these cautions, it is evident that there arethose in the federal government who are concernedwith the issues of tax-exempt advantage, endowmentgrowth, tuition-setting and payout policies, cost control,accountability, and transparency.Near the end of his speech, Mr. Miller praised nonprofitorganizations for the work they are doing to figure outhow they can be more accountable, but he concludedwith a warning: “I would ask you not to let those effortsfalter, or you may end up with the service or theCongress stepping in.”Testimony of Educational AssociationsThe Senate Committee did not invite any higher educationofficials to testify at its September 2007 hearing.To provide a clarification of the issues raised byMunson and Gravelle, written testimony was submittedto the Committee on October 10, 2007 on behalfof four higher education associations. 3 This documentnoted that testimony by Gravelle and Munson:…created the mistaken impression that endowmentsfunction like simple savings accounts for colleges anduniversities that can be spent by an institution howeverand whenever it chooses. This is simply inaccurate. Infact, an endowment typically consists of hundreds—andin many cases, thousands—of individual funds providedby charitable gifts, as well as some institutional fundsthat are invested to support the institution’s mission inperpetuity.This testimony observed that there are legal considerationsgoverning payout, including the maximum thatprudent fiduciaries may authorize:Donor restrictions are included in the legal documentsthat establish an endowment fund, creating bindingterms for the manner in which the college or university3 The American Council on Education, the Association ofAmerican Universities, the National Association of IndependentColleges and Universities, and the National Associationof State Universities and Land-Grant Colleges.10