Money talks
Public and private sector interests in higher education contributions and endowments
By David G. Bass, Director of Foundation Programs and Research, AGB

A record-breaking influx of nine-figure gifts is certainly good news for higher education and signals the belief among donors that colleges and universities are trustworthy stewards of privately donated resources and capable facilitators of the most ambitious charitable purposes. The scale of these gifts, the growth of university campaigns and endowments, and the volume of contributions coming from a small number of major donors have, however, raised some questions about the potential influence of individual donors (or consortia of donors) over institutional priorities, curricula, and hiring, and enhanced the leverage of would-be federal regulators.

The growth of donor control

As of October 23, colleges and universities have received 21 gifts of $100 million or more in 2007. That’s almost twice the number of nine-figure gifts received in 2006 and accounts for almost half of the 48 nine-figure gifts received by higher education institutions since 1967.

In part this reflects the overall growth of higher education fundraising and the mushrooming of large campaigns. A recent study conducted by CASE and the consulting firm of Alexander Hass Martin & Partners found that the goals of the largest campaigns have grown by 36 percent per year over the past 20 years (more than ten times the average inflation rate over the same period) and contributions of the biggest donors have kept pace. The top ten gifts to billion-dollar campaigns account for 22 percent of the total dollars raised and the impact of large gifts is even more significant in smaller campaigns. The top ten donors to campaigns under $100 million account for an average of 50 percent of total campaign receipts. It’s hard to argue with numbers like these and that fact in itself may pose challenges for colleges and universities that are forced to balance donor interests and institutional autonomy.

In a recent article in Nonprofit and Voluntary Sector Quarterly, Susan Ostrander documents the growth of donor control since the early 1990s and argues that “philanthropy has steadily moved to a relationship controlled more and more by donors.” Among other explanations for this trend, Ostrander notes the increasing concentration of wealth (the top 1 percent of the population [in terms of income] contributes one-third of all charitable dollars), a rapidly growing industry of financial and philanthropic advisors, and the increase in venture and entrepreneurial philanthropy where “donors are closely involved in highly directive ways in the organizations they support.” In traditional models of “donor-centered philanthropy,” prospective donors are cultivated by professional fundraisers and respond to appeals developed by a charity based on an assessment of donor interests. In what Ostrander calls “donor-controlled philanthropy” the “donor actively and intentionally determines what he or she is most interested in supporting and then sets out to create a new philanthropic project or to influence a new direction for some existing project.” The demand to raise ever-higher levels of private support and increasing competition for charitable gifts create incentives for institutions to offer donors more and more control over their gifts.

When donor control trespasses on academic prerogatives

Although there is little evidence to suggest that colleges and universities have compromised academic freedom or institutional priorities in pursuit of major gifts, two recent cases illustrate the extent to which donors may attempt to exercise control in ways that trespass on academic prerogatives and board responsibilities. In a highly publicized lawsuit, members of the Robertson family are suing Princeton University for control of the supporting organization established by Marie Robertson in 1961 to support the Woodrow Wilson School. The plaintiffs are disputing investment decisions made by the foundation (technically a Type I Supporting Organization controlled by the University) as well as academic decisions Princeton has made in its operation of the Woodrow Wilson School.

A group of donors to the University of Illinois has established an endowment within the University of Illinois Foundation to promote and advance scholarly research and teaching on free market capitalism and limited government. The Academy on Capitalism and Limited Government Fund is overseen by the Academy Fund’s board of directors. Inside Higher Ed reports that the donors who have contributed to the Fund expect to have a formal role in deciding “who gets money from the fund” and “the views those people should have.” One donor noted that if professors at the university don’t want to get involved, the fund will “bring in adjunct faculty when we need to.” The Academy Fund, which is expected to grow to $100 million in 10 years, is supported by a number of prominent conservatives committed to redressing what they see as a systematic liberal bias in higher education. The Illinois faculty senate has expressed concerns about how the fund will operate, what oversight it will be subject to, and whether the gifts come with too many strings attached.

In a related development, the Center for Excellence in Higher Education was established this September by a small group of philanthropists precisely for the purpose of helping donors transform higher education from the outside. The Center’s inaugural press release argued that “any serious effort to transform higher education must come from the outside. It won't happen from within. Those who support higher education with their voluntary contributions are uniquely qualified to bring about these needed changes.” In a recent editorial the Center’s executive director Frederic J. Fransen writes that donors to colleges and universities “need to carefully stipulate exactly how they want their money used and include safeguards against cost-shifting. A major donor can do this by working directly with trusted faculty in developing an academic program, with an advisory board that has budget oversight responsibilities.” Fransen also suggests that more modest donors could band together to exercise similar clout.

Should these donations still be treated as charitable gifts?

While the largess of major donors clearly reflects their confidence in the value and potential of higher education and their sense that colleges and universities are sound philanthropic investments yielding high social returns, others are questioning the rationale for treating contributions to richly endowed institutions as charitable gifts. Writing in the October 1 Los Angeles Times, former Secretary of Labor Robert Reich asked the headline question, “Is Harvard Really a Charity?”

This year's charitable donations are expected to total more than $200 billion, a record. But a big portion of this impressive sum—especially from the wealthy, who have the most to donate—is ...being donated to the universities they attended and expect their children to attend, perhaps with the added inducement of knowing that these schools often practice a kind of affirmative action for "legacies." I'm all in favor of supporting the arts and our universities, but let's face it: These aren't really charitable contributions.

Reich has elsewhere argued that tax concessions subsidize a system that enhances inequities between poor and wealthy schools.

Congressional leaders have been asking similar questions. Both the Senate Finance Committee and House Ways and Means Committee have been interrogating the extent to which tax-exempt hospitals provide community benefits commensurate with the tax concessions they receive and raising similar questions about tax exemptions for contributions to wealthy higher education institutions and tax exemptions for endowment earnings.

At a Senate Finance Committee hearing in September, witnesses argued that the public was not benefiting sufficiently from “massive” university endowments, endowment distributions were not keeping pace with endowment earnings, and increases in endowment payouts could offset tuition increases. Jane Gravelle of the Congressional Research Service suggested that “tax penalties could be used to require institutions to distribute more of their endowment or to restrain growth in tuition.” Ranking committee member Charles Grassley of Iowa followed up with an editorial in which he endorsed the idea: “as the...Senate Finance Committee hammers out details of an education tax package, an endowment pay-out requirement ought to be included in the discussion to reduce tuition and help students afford college.”

One approach outlined by Gravelle would impose a minimum annual payout rate similar to the requirements imposed on private foundations. More radically, “taxes could also be imposed on endowments if institutions increased their tuition by more than an appropriate rate such as inflation, or the HEPI index.” The higher education community was not represented in the hearing but several organizations submitted written testimony after the fact.

Private support plays a vital role in supporting advanced research, faculty chairs, innovative academic programs, and other projects that endow institutions with the “margin of excellence” necessary in a highly competitive market. Such research, scholarship, and teaching also pays rich dividends to society as a whole which benefits from collective advances in scientific, technological, and cultural capacity. Invested in need-based scholarships, private support enhances access to higher education for low-income students, promotes social equity, and contributes to an educated work-force and polity.

The impulse to leverage private resources to influence the programs, policies, and practices of colleges and universities is only going to increase as endowments grow, state support dwindles as a percentage of institutional budgets, and tuitions approach the maximum allowed by politics and price elasticity. Institutions certainly need to be prepared to justify the tax concessions they benefit from as public charities and not to sacrifice academic autonomy or integrity to well-moneyed outside interests.

In recent years, approximately 89 percent of private voluntary support has been designated by donors for particular purposes. Federal regulators and self-appointed reformers of higher education should pause to consider the forest of higher education (the community colleges, public colleges and universities, and many private institutions whose endowments are almost wholly restricted by donors for specific purposes) rather than focus exclusively on the few redwood-like exceptions with large pools of unrestricted funds at their disposal.

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