Connecticut Bill Would Allow Cities to Tax Private College Endowments

State lawmakers in Connecticut have introduced a bill that would allow municipalities to tax the endowment funds of private universities and colleges located in their jurisdictions.

If passed and signed into law, H.B. No. 5868, introduced in the Connecticut House of Representatives by Democrats Brandon Chafee, Anne Hughes and David Michel, would mean the city of New Haven could tax Yale University’s $41.4 billion endowment. That would go on top of the 1.4% federal “endowment tax” Yale must pay annually on its net investment income.

In late February, a public hearing was held that featured testimony from supporters and opponents of the proposed legislation. Not surprisingly, Yale University provided testimony arguing the bill should not be passed. Yale representatives said the bill would tax charitable donations that support teaching, cancer research (among other research), scholarships and capital investments and help drive the local economy.

To support its argument, Yale testified that it contributes an estimated $7 billion per year to the state economy and that it is the largest employer in New Haven, spending $3.2 billion on salaries and benefits for its employees this year alone. It also said it makes an annual voluntary payment of $23 million to the city of New Haven, which it claims is the largest payment by any private college or university in the country.

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“All of the independent colleges and universities are deeply enmeshed in their communities, and they create many ‘spinoff benefits,’” the Yale statement said. “Colleges and universities wish to be partners with their hometowns; that is the most promising way forward, not taxes on charitable giving.”

Sacred Heart University, a private college in Fairfield, Connecticut, also said in a statement it “strongly opposes” the bill. “If you tax the endowment funds independent colleges and universities use to give private grants and scholarships, you are taking funds away from Connecticut students in need in a state already lagging in per-student spending.”

In addition to Yale and Sacred Heart, the University of Hartford, University of New Haven and Fairfield University submitted testimony in opposition to the bill.

The New Haven Federation of Teachers, a local affiliate of the American Federation of Teachers, testified in “strong support” of the bill.

“While Yale does pay some PILOT [payment in lieu of taxes] taxes, in reality, they only pay a percentage of what they should be paying in taxes to the city. And it is voluntary,” testified Leslie Blatteau, a teacher and a representative for the NHFT. “Money from Yale should be democratically allotted. Yale should not be exempt from the key democratic feature of government in which the people decide where their tax money goes towards.”

Also supporting the bill is SEIU District 1199 New England, a local union of the Service Employees International Union.

“In a state where working people already face an undue tax burden, paying annually in taxes 19% more of their income than billionaires and multimillionaires, it is unconscionable that the taxpayers are footing the bill for the universities on both the local and state level,” testified Emily McEvoy, an organizer for SEIU District 1199. “Taxing university endowment funds is a practical step towards fixing the ‘revenue gap’ that results when their properties go untaxed.”

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Tags: Bill, Brandon Chafee, charitable donations, Connecticut, Endowments, Legislation, New Haven Federation of Teachers, Tax, Yale University

Volatile equity market performance mostly offset the impact of lower liability values in February, resulting in a modest boost in corporate pension funded ratios.

As falling stock markets offset the impact of higher interest rates, corporate pension funding improved marginally in February, according to analysis firms.

LGIM America’s February Pension Solutions Monitor, which estimates the health of a typical U.S. corporate defined benefit plan, found that pension funding ratios increased in February, and the average funding ratio is estimated to have increased to 99.9% from 99.8%.

Global equities and the S&P 500 decreased 2.8% and 2.4%, respectively, according to LGIM. Plan discount rates, however, increased about 46 basis points over the month, with the Treasury bond component increasing 38 bps and the credit component widening eight bps.

Additionally, plan assets with a traditional “50/50” stock/bond asset allocation decreased 3.9%, while liabilities decreased by 4.1%, resulting in a 0.1% increase in funding ratios by the end of last month, the LGIM report showed.

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LGIM concluded that the combination of weaker asset performance and falling liability values due to rising discount rates kept pension funding ratios relatively unchanged throughout the month.

Sweta Vaidya, the head of North American solution design at Insight Investment, said funded status overall improved by 1.4 percentage points, to 103.9% in February from 102.5% in January.

“The market is expecting two or three more rate hikes from the Fed this year, which may continue to decrease pension liabilities,” Vaidya said in a statement. “However, the question is: Will heightened equity volatility override liability gains and ultimately erode funded status? Do we want to wait and find out, ?”

Vaidya explains that if the discount rate were to increase 50 basis points this year, liabilities would go down and funded status would improve. However, if equities tank, this decrease in liabilities would not necessarily matter and funded status could drop. While year-to-date funded status is up slightly, Vaidya says the last few months have been quite volatile. In January, discount rates were down, which meant liabilities went up, but the equity market was strong enough that it overrode that rise in liabilities.

“You’ve got this push and pull between two sides of the balance sheet,” Vaidya says. “The Fed is controlling rates at this point, and the market is driving a lot of equity movements. … The way to protect yourself is to reduce the size of your equity exposure and to hedge your interest-rate risk.”

October Three reported that its traditional 60/40 portfolio lost 3% during February but remains up 3% for the year, while its bond-heavy conservative 20/80 portfolio also lost 3% last month and is now up 1% for the year.

Compared to January, February saw a reversal, according to October Three, as stocks were lower and interest rates were higher. The net effect was a modest boost in pension finances in the first two months of the year.

Discount rates moved 0.4% higher in February, according to October Three, and the firm predicts that most pension sponsors will use effective discount rates in the 4.9% to 5.2% range to measure pension liabilities right now.

Aon’s Pension Risk Tracker found that the aggregate funded ratio for U.S. pension plans in the S&P 500 increased to 95% from 93.6%. The funded status deficit decreased by $23 billion, which was driven by asset increases of $18 billion and liability decreases of $5 billion year-to-date.

The month-end 10-year Treasury rate increased 40 bps from the January month-end rate, and credit spreads narrowed by three bps. This combination resulted in an increase in the interest rates used to value pension liabilities, to 4.69% from 4.32%, according to Aon.

Michael Clark, the managing director of Agilis, said in a statement that two key events in February that shaped pension plan funded status.

“[First,] the Fed continued to raise the Fed Funds Rate but backed off from the larger increases from the prior 12 months and only raised the rate by 0.25%,” Clark said. “Even though there are signs that inflation growth is slowing, it still remains persistent and with a continued strong labor market the Fed is still looking to put the brakes on the economy. [Second,] towards the end of the month inflation numbers came in higher than expected. This sent markets downward as fears of a recession in 2023 still remain.”

According to the Agilis Pension Briefing for February, despite the poor investment returns from equity markets and rising fixed-income yield and spreads, pension plan sponsors most likely saw increases to funded status due to liabilities that declined more than investment portfolios.

Wilshire Associates’ U.S. Corporate pension funded status estimated that the aggregate funded ratio increased by one percentage point, ending the month at 100.2%. Wilshire said the change in the ratio resulted from a 4.8% decrease in liability values, which was partially offset by a 3.9% decrease in asset values.

“February’s funded status increase was driven by the sharp increase in Treasury yields with the liability value experiencing its biggest monthly decline since September 2022,” stated Ned McGuire, managing director of Wilshire. “Overall, discount rates are estimated to have increased by over 30 basis points due to continued inflation worries.”

McGuire added that February’s month-end funded ratio estimate of 100.2% indicates that U.S. corporate pension plans are fully funded in aggregate. This estimate is at its highest level since the end of 2007, which was estimated at 107.8%, before the Great Financial Crisis.

Milliman, in its latest Milliman 100 Pension Funding Index, found that ratios rose to 111.6% in February from 109.6% in January, and the funded status surplus increased to $154 billion.

While the market value of assets fell by $40 billion as a result of February’s 2.23% investment loss, Milliman concluded that pension liabilities decreased by $62 billion to $1.325 trillion at the end of the month. This change is the result of a 39-bps increase in the monthly discount rate, to 5.24% in February from 4.85% in January.

Milliman reported that discount rates have yoyoed in the first two months of 2023 and are up just 2 bps in aggregate since the beginning of the year.

Tags: Agilis, Aon, Insight Investment, Legal & General Retirement America (LGIMA), Michael Clark, Milliman, October Three Consulting, Pension Funding Status, Pensions, Wilshere, WTW