20.Dec.2017

Robert Moore
Senior Consultant, CEO Emeritus

Et tu, Berea?

New Federal Tax Code – Higher Ed Friend or Foe?

The passage of the new federal tax code triggered some “whew” reactions among members of the higher education community—graduate tuition stipends will not be regarded as taxable income, employer contributions for educational purposes will not be taxable to the individual, and taxes on UBIT income will not be increased. But there’s one new tax that adds an additional burden to a small set of institutions—a set that will only grow over time. And Berea College is the poster child.

The new tax code imposes a 1.4 percent excise tax on the net investment income at schools whose endowment is at least $500,000 per full-time student. Currently, this list comprises about 30 institutions, including the Ivies (all but Brown and Cornell), a number of highly selective liberal arts colleges, some of the nation’s leading technical institutions, and a handful of schools that have been extraordinarily fortunate in their alumni relations and fundraising activities. A number of other colleges and universities are on the verge of “qualifying” for this dubious distinction. Levying of this new tax has consequences—and, in fact, suggests a lack of understanding of endowment function on the part of politicians who saw fit to include this new tax. And again, Berea stands out.

First, an endowment is not a piggybank or a savings account. The great majority of most endowments are established and governed by very specific contractual arrangements between a donor and the institution receiving the gift or bequest. If the endowment contribution is to name and support an endowed research chair in neuroscience, the institution can’t simply say, “Well, let’s use that income to support undergraduate scholarships, instead.” If the goal of the revised tax code is to drive greater distribution to scholarships and lowering the cost of a college education—as much of the dialogue around the topic suggests—then this tax simply misses the mark. There will be less revenue available to support scholarships, research, access, and excellence—not more.

And next: Berea. The rural Kentucky college has been extraordinarily successful in both raising endowment funds and managing expenses—to the point where they operate without charging tuition while serving a student population that is 99% Pell eligible. It takes a very utilitarian approach, using its 250-acre campus as both a work-study site and an operating farm that provides meat and vegetables for the campus table. Rough math suggests that Berea’s annual payment under this new tax law will total nearly $800,000 annually. And is that what we wanted: taking significant dollars away from an institution that is simply trying to educate a deserving population because the impression is that some “elite” schools are not managing their endowment resources appropriately? I think not. And neither does Berea. [The] College uses its entire endowment to educate students…serving them on a no-tuition basis. [It] seems so unfortunate that the political strife over tax reform in our country will result in greater difficulty for colleges seeking to serve low-income students.

And there you have it. Lack of understanding about how endowment works, combined with a desire to influence spending by independent institutions and—perhaps—punish the elites, hammers a school whose good fortune and good management is now going to cost them.