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University responds to Congressional endowment inquiry

Letter details financial aid budget, defends endowment spending amid tax questions

Brown issued a response April 1 to an inquiry on endowment spending issued by members of the U.S. Senate and House of Representatives. The inquiry was sent to schools with endowments above $1 billion and aimed to determine how universities spend their record-level endowments in light of the rising cost of education.

U.S. Sen. Orrin Hatch, R-UT, chairman of the Senate Finance Committee, U.S. Rep. Kevin Brady, R-TX, chairman of the House Ways and Means Committee and U.S. Rep. Peter Roskam, R-IL, chairman of the House Ways and Means Oversight Subcommittee signed the letter.

The congressmen stated that the purpose of the letter was to learn about how the University uses its tax-exempt status to further its charitable and educational purposes. The universities and colleges were required to submit their responses by April 1.

“Over the past 30 years, adjusted for inflation, the cost of attending a private, non-profit four-year school has increased 146 percent, from $12,716 (in 2014 dollars) in 1984-1985 to $31,231 in 2014-2015,” wrote David Pasch, communications director for Roskam, in an email to The Herald. “We are concerned by this rapid rise in the cost of higher education and are working to study the effects of tax law on college affordability in order to identify solutions to help make college more affordable for more families.”

President Christina Paxson P’19 responded to the 13 questions — on topics including endowment spending and resources dedicated to financial aid — in the form of an 11-page letter.

In order to write the response, the University gathered a team of senior representatives from the Office of Government Relations and Community Affairs, the University’s General Counsel, the Office of Advancement, the Investment Office, the Budget Office, the Office of the Controller and University Communications.

In the introduction to the letter, Paxson acknowledged that Congress was interested in the capacity of universities to address the cost of college education, writing that “being attentive to these concerns is a top priority for Brown.” The letter said that the cost of attendance for students who pay full cost has increased 25.6 percent since fiscal year 2008 but noted that financial aid is also rising rapidly.

Paxson also included in her introduction that priorities for the University include making education “accessible and affordable” and highlighted past University efforts to promote financial aid.

The letter includes many details on undergraduate financial aid, including that over the past eight years, the undergraduate financial aid budget increased by an average of 8.9 percent per year, and the portion of the student body receiving aid rose from 40 to 44 percent.

The letter notes that “the average loan debt of Brown students who take out loans also was significantly below average — $23,967 at graduation for the class of 2015, compared to the national average of $33,000.” In 2014, Brown students graduated with the most debt of students at all Ivies, The Herald previously reported.

Russell Carey ’91 MA’06, executive vice president for planning and policy, said that he appreciated the opportunity to write a response letter, as it allowed the University to explain the complexity of financing itself with an endowment.

The details of the University’s financing “can get pretty technical and are not necessarily intuitive, particularly around the endowment,” Carey said.

He explained that the endowment is a gift base meant to be maintained in perpetuity, and a percentage of the endowment contributes to the University budget annually.

Carey responded to the possibility of legislative action by saying that if there were a proposal to mandate that the University “spend a certain amount on something, that may not be possible given the way that gifts are made to universities and other nonprofit institutions.” The endowment contains restrictions “on how it can be used, and they can’t just be legislatively or otherwise overturned,” Carey said. While he said he remains aware of all proposals to alter endowment spending, he does not operate under the assumption that any particular plan will go through.

By definition, endowments have restrictions, Carey said. If a gift is given to support a certain activity, “the intentions of that donor have to be respected.”

Funds within the endowment fall into four categories: unrestricted, permanently restricted by donors, temporarily restricted by donors and quasi-endowments, which are restricted by the University.

The letter notes that the payout to the University budget is between 4.5 and 5.5 percent of the endowment’s average market value over the past three years.

“The 5.5 percent spending rule is designed to maintain the principal of the endowment — allow it to continue to grow, but also to support the University budget,” Carey said.

Carey maintains that the financial aid portion of the endowment is a top priority for the University. Twenty-seven percent of the University’s $3.3 billion endowment is restricted to financial aid for undergraduate and medical students, which, according to the letter, was $787 million in fiscal year 2016.

Carey said that financial aid is structured as a budget and is approved within the operating budget process. “In setting the budget, there is a goal for how many students will be on financial aid.” He added that like other portions of the University’s budget, money for financial aid must be fundraised. Additionally, financial aid policies change to address a number of aspects, including how competitive the University’s financial aid packages are.

The financial aid endowment covers 34 percent of the financial aid budget, contributing $38 million of the total $112.5 million financial aid budget in fiscal year 2016. That $38 million represents 4.8 percent of the $787 million financial aid endowment. “The other two thirds (of the financial aid budget) come from tuition, fees, annual giving plus other types of support,” Carey said.

In fiscal year 2016, the University’s endowment distributed $155 million to the operating budget, including the $38 million to the financial aid budget.

“Raising the financial aid endowment is a high priority — certainly one of the highest priorities in the campaign, because it does have the benefit of permanently supporting financial aid,” Carey said. The letter notes that financial aid has been the fastest growing area of Brown’s budget over the past 25 years.

Hatch, Brady and Roskam have not commented on the letter.



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