April 11, 2019

Just How Venomous Is the Tuition Scandal to Endowments?

Reluctant donors could force investment offices to seek higher returns.

Reported by Michael Katz

Art by Brian Stauffer

Colleges and universities are already feeling public pressure from the fallout of the Operation Varsity Blues admissions scandal, and it could hurt their endowments’ ability to raise money and force their investment offices to seek higher returns.

Last month, the US Department of Justice announced the arrest of dozens of people involved in a nationwide conspiracy that facilitated cheating on college entrance exams and the admission of students to elite universities as purported athletic recruits. On Tuesday, former TPG manager Bill McGlashan and 15 of his co-defendants in the college admissions cheating scandal faced more charges. The second superseding indictment also charges the defendants with “conspiring to launder the bribes and other payments in furtherance of the fraud” by funneling them through William “Rick” Singer’s purported charity and his for-profit corporation, as well as by transferring money into the United States, from outside the United States, “for the purpose of promoting the fraud scheme,” according to the U.S. Attorney General’s office.

The charges could amount to decades in prison and cost hundreds of thousands in fines: conspiracy to commit mail and wire fraud and honest services mail and wire fraud provides for a maximum sentence of 20 years in prison, three years of supervised release, and a fine of $250,000 or twice the gross gain or loss, whichever is greater. The charge of conspiracy to commit money laundering provides for a maximum sentence of 20 years in prison, three years of supervised release, and a fine of $500,000 or twice the value of the property involved in the money laundering, according to the Attorney General.

The scandal is eliciting widespread public outrage, and is sending politicians scrambling to launch investigations and hearings, and to propose legislation to show they are going to take action.

In California, a group of assembly members unveiled a legislative package “aimed at reforming the system and curtailing abuse.”

And Democratic Sen. Ron Wyden of Oregon, the ranking member on the Senate Finance Committee, announced he would introduce legislation that would end the tax benefit for donations made to colleges and universities before or during the enrollment of children of the donor’s family.

“Headlines about the wealthiest Americans buying access to our elite colleges and universities is just a new version of an old story,” Wyden said in a release. “While the prosecutor attempted to distinguish these crimes from payoffs in the form of buildings or stadiums to secure access for the undeserving, it is all part of the same corrupt system.”

Wyden said the federal government has been perpetuating this system by awarding tax breaks for contributions “that return to the donor a benefit of inestimable value,” adding that “this is yet another example of how the tax code helps the wealthiest Americans get even further ahead.”

But higher education organizations say this is a knee-jerk reaction that fails to properly address the situation, and punishes the wrong people.

The National Association of College and University Business Officers (NACUBO) called Wyden’s proposals “impulsive and misguided,” saying that they ultimately penalize students, researchers, and other beneficiaries of higher education by drastically reducing the ability of colleges and universities to receive tax-deductible charitable contributions.

NACUBO said the scandal is about individual entitlement and greed, and that the indictments brought by the US Department of Justice were not a condemnation of the tax-exempt status of America’s esteemed colleges and universities.

“We are concerned at how this could play out,” Liz Clark, NACUBO’s senior director for federal affairs, said in an interview with CIO. She said Wyden’s announcement “was broad in scope, and we believe could potentially impact charitable giving at colleges and universities.”

Clark said that although the scandal was specifically about bribery, it has raised a lot of public interest in the legacy admission process of colleges and universities, and said there will continue to be scrutiny of this process.

“I think what may change is how donors decide to target their contributions,” Clark said. “We could see more donors want to make gifts targeting financial aid and addressing some of the equity issues that have been raised in light of the scandal.”

She also said NACUBO will keep an eye on how other attempts by lawmakers to address the issue might affect them. The April 3 House Education and Labor Committee hearing to address the college admissions scandal was called “Strengthening Accountability in Higher Education to Better Serve Students and Taxpayers.”

“We’ll be watching closely to see what the specific concerns of legislators are,” she said.

The Council for Advancement and Support of Education (CASE) also criticized Wyden’s proposal. The group said in a statement that “such a drastic proposal is misguided and would be detrimental to institutions that rely on philanthropic support,” adding that it would discourage giving while hurting students and others who benefit from philanthropy.

“These reprehensible schemes unfortunately contribute to increased skepticism and negativity regarding colleges and universities, despite the immense contribution made by the sector to the United States and the world,” said CASE. “If people believe that the admissions process is fixed, that effort and merit and will-to-succeed can be thwarted by people who cheat the system, then harm is done to both the education sector and to civic trust.”

If charitable giving to endowments is hurt because of the scandal, it could put pressure on endowment investment offices to seek out higher returns to compensate for any potential shortfall.

Michael Karris, a former director of investments for Columbia University’s endowment, and founder and CIO of EndowBridge Capital, an investment adviser that works with small to mid-sized endowments and foundations, said the admissions scandal might deter some donors from giving to endowments.

“There could be a knock-on effect. I don’t know if it would be a long-term effect, it might be just a short-term effect,” Karris said in an interview with CIO. Still, he says it could make a difficult task even more of a burden.

“The endowment team’s job is always challenging,” said Karris. “Since the 2008 crisis, returns have struggled in the high single digits, so if donations were to dry up, that would definitely have an impact on endowment teams—at least pressure would be ramped up.”

According to CASE’s 2018 Voluntary Support of Education report, US colleges and universities raised more than $46.7 billion during the 2018 academic fiscal year, a 7.2% increase from the previous year, and the highest amount ever raised.

Despite the record amount of money raised in 2018, colleges and universities can’t afford to have donors hold back on their charitable giving, as public funds have become a less reliable source of income over the past decade.

According to the Center on Budget and Policy Priorities (CBPP), overall state funding for public two- and four-year colleges for the school year ending in 2017 was nearly $9 billion below its 2008 level, after adjusting for inflation.

And, according to the State Higher Education Executive Officers Association (SHEEO), although public investments in higher education have increased in recent years, the constant dollar state support of higher education per full-time student is $1,000 lower than before the Great Recession of 2008, and $2,000 lower than before the dot-com crash of 2001.

“This is an era that calls for innovation among colleges and universities to develop new revenue streams,” said SHEEO.

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