BOSTON – An Internal Revenue Service report shows that the wealthiest colleges and universities should be spending a greater percentage of their endowments, according to Sen. Charles Grassley, R-Iowa.

The IRS found in a survey that 344 institutions had an average target of spending 4.7 percent to 5 percent of their endowments each year on operations.

The agency said it canvassed a cross-section of both private nonprofit and public U.S. colleges and universities, including 159 institutions with fewer than 5,000 students each and 91 with more than 15,000, according to a recently released interim report.

Grassley, the Senate Finance Committee’s ranking Republican, said he is concerned that 5 percent has become a “ceiling” for colleges and that the wealthier institutions should be spending more.

The panel held hearings in 2007 on rising tuition costs and growing endowments at colleges including Harvard and Yale, prompting the institutions to provide more financial aid.

“Colleges that can afford more should do more,” Grassley said in comments e-mailed to Bloomberg News last week. “I worry that 5 percent has become the ceiling for some colleges, just as it has for private foundations.”

Colleges are recovering from record investment losses. The median foundation and endowment fund gained 32.23 percent in the year ended March 10, according to the Wilshire Trust Universe Comparison Service.

University funds lost on average 19 percent in the year ended June 30, 2009, the biggest drop in 35 years, according to the National Association of College & University Business Officers, based in Washington, and Commonfund in Wilton, Conn.

Some colleges expect to make higher payouts this year because the value of their endowments fell faster than officials cut contributions to their operations.

Harvard, the wealthiest university, said in September that it will spend 6 percent of the fund in the current fiscal year, the most in 40 years and “well in excess of our targeted range” of 5 percent to 5.5 percent. Harvard had $26 billion under management June 30, 2009, down from $36.9 billion a year earlier.

Princeton University President Shirley Tilghman said in a letter in September that the institution also anticipates a payout of 6 percent, which is “outside the band,” even as it cuts the amount of money it uses for operations from the $12.6 billion fund, the fourth-largest in the United States and Canada.

Yale increased its target payout to 5.25 percent in 2004, from 5 percent, and last year spent $1.15 billion of its endowment to subsidize operations, accounting for 43 percent of its budget, according to Yale’s website.

Forcing universities to spend more of their endowments would discourage diversified investing and push them toward more conservative portfolios, said James K. Hasson Jr., a lawyer at Sutherland Asbill & Brennan in Atlanta, who represents tax-exempt institutions.

“A mandate would remove flexibility and creativity from the tools available to colleges,” Hasson said. “There doesn’t seem to be a crying need for a legal mandate.”

 

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