Endowment-Spending Talk Draws a Crowd of Tax Lawyers
By Paul Fan, Washington
The Journal of Higher Education
May 12, 2008
The rate at which universities spend their endowments remains a hot topic in the nation's capital, as evidenced by a standing-room-only crowd that gathered here on Friday for a panel at an American Bar Association meeting on taxation.
Federal lawmakers have shown interest in legislation that would require universities to spend 5 percent of their endowments each year. But such a requirement would raise many complex technical questions, not the least of which, the session's moderator and three speakers agreed, is defining what, exactly, is an institution's endowment.
A Warning From North of the Border
Canada imposes several rules on investments held by universities, including a 3.5 percent annual spending rate on endowments. Charities also must spend 80 percent of their revenue from the previous fiscal year. Those requirements have been a "technical disaster," said Adam A. Parachin, a law professor at the University of Western Ontario.
"This talk should be a cautionary tale," Mr. Parachin said, "because this is not the model you want to follow."
The reason, he said, is that the rules are clouded by a "tremendous lack of clarity." They also take a one-size-fits-all approach that does not work, he said.
For example, Canada's 80-percent charitable-spending requirement does not exclude overhead costs such as legal fees or expenses for fund raising. But that rule seems to contradict a policy stating that a 35-percent expense for overhead is reasonable.
Mr. Parachin said the 3.5 percent endowment-spending rate was a "perplexing figure" that does not reflect market performance.
