Is St. Lawrence a Charity?
Debates at the federal tax-exempt status and freedom to spend their income as they see fit.
By Macreena A. Doyle
You probably know that St. Lawrence University, as an educational institution, is exempt from paying the kinds of taxes that businesses are required to pay to local, state and federal governments. But do you know why? And do you know that there are efforts under way to rescind that status?
Non-profit organizations, including charities and schools, have been granted the exemption because they provide a public service or substantially reduce what would otherwise be a burden on governments. Standards from property-tax exemptions are set by the states, while the federal exemption means charities and non-profit organizations are not taxed on their income, including gifts. It has been estimated that the tax-exempt status of charities costs local governments $8 billion to $13 billion annually.
In late 2007, the Minnesota Supreme Court ruled that Under the Rainbow Child Care Center, a small, nonprofit day-care agency in the state, had to pay property taxes because, although it was classified as a “charity,” it shouldn’t be considered one because it gives nothing away. The agency charges a flat fee per child, regardless of parents’ ability to pay and whether or not they receive government support to cover the cost of services provided. The decision is being studied by advisors to charitable organizations throughout the country, and it is also being analyzed by those who would like to see colleges and universities paying the same taxes on income as businesses.
Also under way are efforts to force charitable organizations, particularly colleges and universities, to spend more of the endowments they have accumulated through increased giving and high returns on investments. Some members of Congress have stated their intention to pass legislation imposing a requirement that universities, especially those with massive endowments, make minimum payouts from those endowments. It is being argued that colleges should “give away” more of what they make, especially in the form of aid to needy students.
In a recent interview with The Chronicle of Higher Education, U.S. Senator Charles Grassley (R-Iowa) criticized academic institutions with the largest endowments for spending too little on student aid, and asked 136 colleges for details about how they spend the income from their endowments. The article quoted Grassley as stating that he is considering introducing legislation requiring colleges and universities to spend a certain percentage of their endowment income every year, perhaps as much as 5 percent, unless they do it voluntarily.
“I think I see an evolution of change of concern of universities toward the use of their endowment to a greater extent to help students,” the article quoted Grassley as stating. “I want that to continue and to the extent to which it continues, it’s going to lessen the extent of my maybe writing legislation.”
St. Lawrence uses 5.5% of endowment investment income, averaged over 12 successive quarters, in its annual operating budget.
The U.S. government, through the Internal Revenue Service, has already begun trying to determine how colleges and other non-profits use their income. In 2008, the IRS surveyed about 500 colleges and universities, to better understand how they invest and use their endowments, set executive compensation and calculate “unrelated business income.” Officials discussed the plan when making public the new version of Form 990, the main informational tax return that colleges and other nonprofit groups must file each year. In the discussion, officials noted that higher education institutions “make up one of the largest segments” of the nonprofit arena.
Have some tax-exempt nonprofit organizations, especially universities, so much wealth that they should no longer be considered charities? The question is under debate in Massachusetts, home to several endowment-rich institutions, including the largest, Harvard. Its endowment includes some $35 billion in assets, and lawmakers are considering imposing a 2.5 percent annual assessment on universities with endowments of more than $1 billion.
St. Lawrence President Daniel F. Sullivan has addressed some of these issues in essays published in Diverse Issues in Higher Education (May 29, 2008) and the Web site Inside Higher Ed (April 29, 2007). Citing research from the book Equity and Excellence in American Higher Education, by William G. Bowen, Martin A. Kurzweil and Eugene M. Tobin, Sullivan wrote, “The wealthiest colleges and universities – those that can best afford the financial aid necessary to enroll large numbers of low-income students – in fact enroll the smallest percentages of such students.”
While not advocating intervention into the spending practices of private organizations by government entities, Sullivan nevertheless has been critical of the financial aid policies of the institutions with the largest endowments. He points out that St. Lawrence not only has an endowment far smaller than the most elite institutions (about $250 million for 2,150 students), but also enrolls and aids a proportionately higher percentage of needy students. His arguments not only counter cries for mandated spending from endowments, but also address the question of what a university does for the public good.
"Twenty percent of our students are recipients of federal Pell Grants, the grants that go to students from the lowest quartile of family incomes in America,” Sullivan wrote. “For the elite, highly endowed institutions that were studied for Equity and Excellence, the average percentage of enrolled students from this quartile was 10.8 percent. Williams, with an endowment of almost $1.5 billion in 2006, had 10.6 percent of its students receiving Pell Grants in 2003-04; Middlebury, $800 million endowment,
9.4 percent Pell recipients; Pomona, $1.5 billion endowment, 10.2 percent Pell recipients; Swarthmore, $1.4 billion endowment, 12.3 percent Pell recipients.
“Seventy-five percent of St. Lawrence students received institutionally funded scholarships,” President Sullivan continued, “while 41 percent of Williams’s students do, 36 percent for Middlebury, 57 percent for Pomona, and 53 percent for Swarthmore. St. Lawrence’s institutionally funded student grant aid budget is, on an enrollment-adjusted basis, $7.5 million higher than Williams’s, $5.4 million higher than Middlebury’s, $3.9 million higher than Pomona’s and $4.8 million higher than Swarthmore’s. St. Lawrence students who have received financial aid graduate with more debt than students from these colleges, but they graduate at the same high rate as students who do not receive financial aid.
“Which institutions are making a larger contribution to the education of low-income students?” President Sullivan asked. “I guess the answer depends on one’s perspective. The low-income students enrolled at our wealthiest private colleges and universities receive a truly marvelous education and graduate with less debt, but there are far fewer of them at those institutions than at institutions like mine.”
As St. Lawrence’s media relations director, Macreena Doyle has been explaining matters like this to the public for 23 years.