Endowments boom as colleges bury earnings overseas
In 2006, the endowments of Indiana University and Texas Christian University invested millions of dollars in a partnership, hoping to mint riches from oil, gas and coal.
The partnership was formed by the Houstonbased Quintana Capital Group, whose principals include Donald Evans, an influential Texan and longtime supporter of former President George W. Bush. Little more than a year earlier, Evans had left his Cabinet position as commerce secretary.
Though the group had an impressive Texas pedigree, presidential cachet and ambitions for operations in the U.S., the new partnership was established in the Cayman Islands. The founders promised their university and nonprofit investors that the partnership would try to avoid federal taxes by exploiting a loophole called “blocker corporations,” which are typically established in tax havens around the world.
The Paradise Papers, a trove of millions of leaked documents from a Bermuda-based law firm, Appleby, reflect some of the tax wizardry used by American colleges and universities. Schools have increasingly turned to secretive offshore investments, the files show, which let them swell their endowments with blocker corporations, and avoid scrutiny of ventures involving fossil fuels or other issues that could set off campus controversy.
Buoyed by lucrative tax breaks, college endowments have amassed more than $500 billion nationwide. The wealth is concentrated in a small group of schools, tilting toward private institutions like those in the Ivy League and other highly selective colleges. About 11 percent of higher-education institutions in the United States hold 74 percent of the money, according to an analysis in 2015 by the Congressional Research Service.
“It’s overwhelmingly weighted towards the 1 percent,” said Dean Zerbe, former tax counsel to the Senate Finance Committee. “Most of the schools are the most elites in the country.”
The House GOP tax plan includes a 1.4 percent tax on the investment income of private colleges and universities with endowment assets of $250,000 or more per student. It would not apply to public schools. If passed, the new tax would affect about 70 elite private colleges, though it would not touch the type of offshore benefits the Texan partnership pursued.
On Monday, 45 education groups declared their opposition to the bill in a letter to Kevin Brady, R-The Woodlands, who chairs the House Ways and Means Committee.
College and university endowment earnings are usually tax-exempt. But as endowments have sought greater investment returns in recent years, they have shifted more of their money out of traditional holdings like U.S. equities to potentially more lucrative investments. These include private equity and hedge funds that frequently borrow money, opening them up to tax consequences.
When schools earn income from enterprises unrelated to their core educational missions, they can be required to pay a tax that was intended to prevent nonprofits from competing unfairly with for-profit businesses.
Establishing another corporate layer between private equity funds and endowments effectively blocks any taxable income from flowing to the endowments, the reason they are called blocker corporations. The tax is instead owed by the corporations, which are established in no-tax or low-tax jurisdictions like the Cayman Islands or the British Virgin Islands.
The use of blocker corporations has raised concerns among policymakers in recent years. That’s partly because they cost the U.S. Treasury millions of dollars, but also because they legitimize an opaque offshore network sometimes used for nefarious purposes.
“They’re not cheating. They’re not hiding money or disguising money,” said Samuel Brunson, a law professor at Loyola University Chicago who has studied endowment taxation. “But they’re adding money to a system that allows people, if they want to hide their money, to do it.” Not only do the universities benefit — so does the wealthy and influential private equity industry.
Perhaps illustrating the sensitivity of the topic, officials at most of the college and university endowments that use blocker corporations, including Colgate, Dartmouth, Duke and Stanford, declined to comment specifically, citing policies against discussing their investments.
An exception was the Quintana shareholder Fort Worth-based Texas Christian University, whose chief investment officer, Jim Hille, acknowledged that the $1.5 billion endowment had used blocker corporations. Hille said the decision to use one often came down to whether the expected return would offset the cost of establishing a blocker corporation.
References to such corporations in the Appleby files, shared with The New York Times by the International Consortium of Investigative Journalists, which obtained them from the German newspaper Süddeutsche Zeitung, date back at least to 2003.