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 Houston-based 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 United States, 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.
A trove of millions of leaked documents from a Bermudabased law firm, Appleby, reflects 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 Republican 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-Texas, who chairs the House Ways and Means Committee.
College and university endowment earnings are usually taxexempt. 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 alternative, 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.
“Congress is essentially subsidizing nonprofits by allowing them to engage in these transactions,” said Norman Silber, a law professor at Hofstra University who co-authored a paper on blocker corporations in 2015. “They’re allowing them to borrow so that they can build up their endowments.”