Do Elite Universities Abuse their Tax Subsidies?

A recent op-ed in the New York Times with the provocative title “Stop Universities from Hoarding Money” once again raises the issue of university endowments. It focuses in large part on the extraordinary amounts elite universities either “hoard” or spend on fees to investment advisors and hedge funds in contrast to the much smaller sums spent on “tuition assistance, fellowships and prizes,” those things seen as the university’s true mission. The author, a tax professor, suggests that universities with endowments in excess of $100 million should be required to expend at least eight percent of their endowments each year. This is not a new proposal; similar proposals arise periodically. Of course entities with such large sums (Harvard’s endowment is reported to exceed $32.5 billion) are formidable players in politics so these calls generally go unheeded.

To understand why we all have an interest in these matters one must know a thing or two about federal tax law as it applies to charitable organizations. Universities are classified as “public charities” which status means that they can generally earn and accumulate money exempt from federal income tax. Policy experts sometimes refer to these benefits as a taxpayer “subsidy,” to the university, because exempting the university from tax is the same as taxing it like other entities and then returning to it its tax payments rather than using them for other public benefit. Imagine the potential tax liability of an institution like Harvard if its receipts (tuition, income and gains on investments) were subject to the income tax. That figure would reach at least tens of millions of dollars annually. The idea behind the tax exemption, of course, is that it allows universities to provide more research, knowledge and education—all seen as public goods. And tax-exemption is not the only federal tax subsidy from which universities benefit. Donors’ taxes are reduced when they make contributions to universities through generous tax deductions. Like exempting universities from the income tax, subsidizing donations to those institutions with taxpayer dollars increases the availability of the public goods produced by universities.

By implementing the foregoing tax benefits, Congress apparently assumed that we (the taxpayers) are getting what we pay for. But is that true as respects university endowments? Why does Harvard have $32.5 billion and what is it doing with all that money? Why did Yale pay $480 million to private equity fund managers compared with $170 million for tuition assistance, fellowships and prizes? Should these wealthy elite universities be spending more of their endowments on their core mission? That question has been considered by a couple of scholars. Unfortunately, the results seem to suggest that when it comes to at least some university endowments, we are not, in fact, getting what we pay for.

It seems to be generally accepted that a university should spend no more of its endowment than the endowment generates in income and (perhaps) capital appreciation. Many spend income only and allow capital appreciation to accrue, which will generally allow an endowment to grow much larger over time. These practices are justified on the basis of “intergenerational equity.” Maintaining the endowment’s value over time means that it can continue to support the university’s activities indefinitely. But a 1990 study found that the basis for the intergenerational equity argument had little merit. And the fact remains that elite university endowments are growing at substantial rates.

A more recent study, undertaken in 2010 sought to determine why universities, in the immediate aftermath of the 2008 financial crisis, slashed operating budgets, laid off employees, froze salaries, and delayed expansion projects, among other things, rather than dipping into multibillion dollar endowments. Reasons given by the universities were that pre-crisis spending was unsustainable, the endowments were legally restricted as to use, and that the investments were generally illiquid and difficult to access. This study found each of these reasons to be unpersuasive. The author concluded that the endowments served primarily as status symbols, and that universities would reach for any other source of funding to avoid diminishing their endowments.

There is certainly precedent for requiring tax-exempt organizations to expend a minimum percentage of their assets. Private foundations are different from public charities in that rather than being supported by a wide range of public contributions they might be funded only by one family or even one individual. Because private foundations are not “publicly-supported” federal tax statutes require them to expend at least five percent of their net investment assets on charitable endeavors each year. Failure to comply subjects them to a potentially crippling penalty tax. Under the same principle, universities should be using their tax-subsidized endowments to support their core charitable missions. Those who don’t should be penalized.

Kent D. Schenkel

Tribute to a Mentor

On Monday, August 31, Gregory Hobbs will step down as Associate Justice of the Colorado Supreme Court, a position he has held for the past nineteen years. I was extremely fortunate to serve as a law clerk for Justice Hobbs for the 2000–2001 term. On the occasion of his retirement from the bench, I wanted to add my voice to the chorus of praise for this extraordinary public servant.

Justice Hobbs was (is!) a water law expert, a historian, a poet, a keen cultural observer, and a man with his finger on the pulse of the communities he served. More than once during my clerkship, he reminded me that the Court’s authority came with profound responsibility: each decision directly affected lives and livelihoods. There was no place for judicial (or judicial clerk) egotism or haughtiness. At a time when the news cycle and daytime television converged to create a culture celebrating sassy, snarky judges, Justice Hobbs was always a jurist of remarkable care and humility.

But a commitment to judicial humility still left plenty of room for the Justice to make his individual mark. “There is a second story in the footnotes,” he once said to me during my clerkship. He was talking about his majority opinion in Board of County Commissioners v. Vail Associates, Inc., an opus of an opinion that concerned a head-spinning series of exemptions to the general rule allowing counties to impose property taxes. The opinion was a careful parsing of case law and statutory and constitutional text, but it was also a fascinating jaunt into Colorado’s history. There was a second story in the footnotes, taking readers on a ride from 1877 to the turn of the twenty-first century, and folding in references to mining, farming, ranching, and skiing—the things that make Colorado uniquely Colorado.

I think of that opinion whenever I think of Justice Hobbs, because he too is uniquely Colorado, and because his influence on me and my career can, in a sense, be found in the footnotes as well. Well after my clerkship ended, I have come to regard him as a mentor and an example. It comes in the way he conducts himself as a father, grandfather, husband, friend, boss, and jurist. It comes in the humility he has always shown for his judicial position, and the constant recognition that doing what is right by the law is not always easy. It comes in his love of the State of Colorado, its people, and its institutions. It comes in his ability to stand by his principles while remaining willing to reevaluate his positions. It is a rare judge—indeed, a rare person—who can approach his job with such pleasure, dignity and candor day in and day out. The interaction between Justice Hobbs and his clerks, and among the Justices themselves, gave me a deep appreciation for how appellate decisionmaking should work. Those moments still influence me as a law professor today: I spend most of my time teaching, thinking, and writing about how judges decide cases and how judicial behavior influences others in the legal system.

So the text of my time clerking may read, “Law Clerk, Hon. Gregory J. Hobbs, Jr., Colorado Supreme Court, 2000–2001,” but the real story is in the footnotes. The people of Colorado have been blessed to have Justice Hobbs on the Court for almost 20 years. I have been blessed to know him for nearly fifteen years, where his example has been a constant influence. Thank you, GJH.

Jordan M. Singer

Obergefell and the Future of Plural Marriage

In an opinion piece for the New York Times, Professor William Baude suggested that, following the Supreme Court’s decision in Obergefell v. Hodges striking down prohibitions on same-sex marriage, the door may well be open to the argument that bans on plural marriage should fall as well. Baude takes as his cue the suggestion in the dissent of Chief Justice John Roberts that “[o]ne immediate question invited by the [Obergefell] majority’s position is whether States may retain the definition of marriage as a union of two people.”

The answer is, of course, “yes.” Explaining why, though, may take some doing. As my colleague, Jordan Singer, has noted, the decision in Obergefell was, at a minimum, “befuddling.” One reason is because its author, Justice Anthony Kennedy, eschewed a traditional equal protection analysis for the kind of soaring rhetoric that has become a hallmark of his opinions in the area of individual rights. Though the respect he accords the subject matter is notable, at the end of the day, lower courts, state government officials and lawyers need a good deal more to be able to understand the limits of our constitutional commitment to equality.

Had Kennedy embraced a traditional equal protection analysis—as did the Massachusetts Supreme Judicial Court in Goodridge v. Department of Public Health, the first decision to overturn a same-sex marriage ban—the force of the Chief Justice’s predictions about plural marriage likely would have been blunted. To understand why, we must remember that, despite the fact that it is fundamental, unlike nearly all other individual constitutional rights—both explicit and implicit—the right to marry does not exist unless the state provides for it. In other words, the Constitution does not compel states to offer their citizens the opportunity to enter into the legal relationship known as marriage. But if a state chooses to offer its citizens that opportunity, it cannot discriminate against parties who seek to enter into marriage absent some legitimate basis for doing so.

As numerous federal and state courts have concluded, there is no legitimate basis for excluding same-sex couples from marriage. Though as a historical matter such couples were not eligible for marriage, that is not a valid argument for continuing to prohibit them from marrying when they otherwise satisfy the structural requirements for eligibility. Those requirements contemplate two parties who have consented to be married in the eyes of the law, so that they may both enjoy the particular benefits that this binary legal relationship provides and undertake the particular responsibilities it assigns. Nothing about the inherent nature of those benefits and responsibilities disables same-sex couples from entering into marriage.

The point here is that every state has limited marriage to a union of two—and only two—parties. That binary relationship forms the structural core of the institution of marriage. For a court to hold same-sex couples equally eligible to enter into that relationship no more changed the definition of marriage than would an order foreclosing a state from declining to provide a particular opportunity to otherwise qualified members of the opposite sex. See United States v. Virginia. On the other hand, for a court to order that a state must extend the opportunity to enter into marriage to any combination of parties who desire it would take that court well beyond the judicial role contemplated by current equal protection doctrine.

To illustrate, consider this hypothetical situation: suppose in response to Obergefell the state of Pennsyltucky decided to get out of the marriage business altogether—in other words, suppose the state decided not to offer its citizens the opportunity to enter into any form of civil marriage. Could a court order the state to create that legal relationship, with all of the public and administrative costs associated with managing it? No more than a court could order a state to provide funds to allow aspiring but impoverished political candidates to run for office. It’s equally unlikely a court would order a state that currently offers its citizens the opportunity to enter into binary marriage—which is to say, every state under current law—to admit any number of parties to that relationship. Unlike the relief requested by the plaintiffs in Obergefell, such an order would in fact change the structural definition of marriage.

At bottom, multiple-party relationships simply aren’t the same as two-party relationships. The binary relationship—and not the genders of the parties to it—lies at the heart of marriage as the states have defined it today. Plural marriage may come, but it will be the result of legislative rather than judicial action.

Lawrence Friedman