The OAF Blog

Taxing Endowment ?

May 25, 2016

To our minds,  taxing endowment is very short term thinking.  Lately, US media and politicians have called for taxation of the larger endowment funds. As lawmakers look for sources of funds amid declining tax base at the local level, along with rising tuition costs, the presence of large, successful and growing university endowment funds have become an enticing target.

Most endowments, including the Ontario Arts Foundation’s, saw the market values of funds under their stewardship decline during the 2008 economic crisis.  Legislators and the media seem to have forgotten the impact.  Endowment distributions dropped or in many cases, had to be suspended for a year. Since that time, a combination of improving security markets over the last 5 years, sound investment management and new donations have seen the aggregate value of funds held in endowments grow significantly. Lawmakers in states where the large universities are located ( Harvard, Yale, Princeton ) are making statements that the school endowments should be ‘forced’ to make mandatory payouts to reduce education/tuition costs or help offset deficits in education budgets.

 

Not surprisingly, we are not supporters of this for several reasons:

  • Recent history of a time when the market value of endowments declined below the original principal, resulted in an inability to make the annual distributions that the arts organizations we support rely upon. Our investment strategy looks to mitigate that risk by growing the capital and maintaining a reserve to ensure we are able year over year, to make distributions. But no Board or investment manager has control over global markets.

  • Taxing investment profits, or challenging tax exempt status of endowments will mean that donors intending to provide long term support to an organization may use other vehicles, or not make the gift. One of the advantages of an endowment is the pooling of multiple funds to lower investment costs. Taxing an endowment and driving donors elsewhere may increase costs, which impacts the amount available for distribution.

  • What is forgotten in the dialogue is that many individual endowments, collectively managed by the foundation, or a university have very specific purposes (i.e. fund an arts award). The governing organization does not have the ability to re-direct the capital or income to the purposes external bodies are suggesting.

  • Endowments are an attractive tool for generating sources of income that are separate from government funding, operations/arts programming. The stability of returns is an important part of an organization’s finance’s.

Taxing an endowment may be attractive to the media or a politician, but it truly is short term thinking at its worst.

Wall Street Journal article March 28, 2016

Bloomberg article March 23, 2016

Forbes article August 25, 2015

 

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