An opinion piece in yesterday’s New York Times proposed an interesting idea: subjecting larger university endowments (those in excess of $1 million) to an 8 percent payout requirement.
In arguing for the proposal, author Professor Victor Fleischer from the University of San Diego points to the large amounts many universities pay to the investment managers who invest their money, in contrast to amounts that go toward student scholarships and other direct educational assistance. For example, he points out that Yale last year paid about $480 million to private equity fund managers as compensation, while $170 million was spent on tuition assistance, fellowships and prizes. He emphasizes that students, not fund managers, should be the primary beneficiaries of endowments.
A payout requirement is not without precedent, of course. Private foundations have long been subject to a requirement to pay out 5 percent of assets annually for charitable purposes. And proposals have been made unsuccessfully in the past to subject donor-advised funds and larger public charity institutions to similar requirements.
Yet, if the payout requirement here is intended to directly benefit students, there are clarifications to be added. For example, in the private foundation area, reasonable administrative expenses count toward the payout requirement. If a similar regime applied in the university endowment context, it’s possible that the direct student impact may not be as large as expected.
And the 8 percent amount is likely to raise some eyebrows. As this blog article points out, it is above the 7 percent amount that establishes a rebuttable presumption of unreasonableness for endowment spending under UPMIFA. It is clearly above the 5 percent amount that applies to private foundations.
Finally, it is questionable to limit this proposal to universities. There are many other large public charities with massive endowments that wouldn’t be affected here—take health care institutions and certain supporting organizations like the George Kaiser Family Foundation (a supporting organization with about $3 billion in assets).
All in all, though, this proposal is certain to spur some conversation about whether larger, well-endowed organizations are doing all they can to benefit those for whom they are organized and operated, and that’s a good thing!
