03 August 2017

Attack on university endowments would undermine philanthropic freedom

by Sean Parnell, Vice president of Public Policy, The Philanthropy Roundtable

A few weeks ago Philanthropy Daily published a guest opinion piece by me addressing two other opinion articles it had recently featured that challenged the appropriateness of large university endowments. The co-author of one of those articles responded in the comments to what he saw as the deficiencies of my argument (and I offered my own comment in reply as well), and Philanthropy Daily published another response the other day by the author of the other article, professor Jeff Polet of Hope College. I, of course, wanted to respond to him as well.

Polet focuses much of his argument on what he believes are distinct features of universities with large endowments, suggesting that these differences call into question the appropriateness of their tax exempt status. For example, he asks “…whether endowments themselves are characteristic of nonprofit activity.”

Are endowments characteristic of nonprofit activity? It’s probably true that only a minority of charities have endowments, but it’s hardly unknown – nearly every nonprofit college and university has one, not just the elite schools at issue here, including Hope College (a little over $200 million).

And the Chronicle of Philanthropy just last week published an article reviewing nonprofits with endowments. Many of them are colleges and universities, but museums, hospitals, historical societies, the American Cancer Society, the Southern Poverty Law Center, the Knights of Columbus Charities, and the Rotary Foundation all have endowments, and the Chronicle article reviewed 1,600 nonprofit institutions with endowments.

Even if endowments weren’t characteristic of nonprofit activity, would that prove anything? If one believes that all charities have to look more or less the same, then perhaps. But such a framework would stifle innovation in how philanthropists and charities go about their good work. For example, I suspect few charities have what amounts to a private equity fund that invests in mission-directed companies, but the Juvenile Diabetes Research Foundation has exactly that, as The New York Times recently reported:

[Mr. Johnson] and his wife gave $1 million to a new nonprofit organization, the foundation’s T1D Fund, which invests in companies doing research into Type 1 diabetes. Any financial returns are used to make more investments….

Structured like a private equity fund, the T1D Fund has a minimum donation of $500,000. The fund, which received $32 million in seed funding from the foundation, has a goal of reaching $80 million. It already has $55 million.

Unusual? Definitely. Evidence that the JDRF or T1D aren’t really nonprofits? Hardly.

Polet also says that because schools often hold patents, they are closer to for-profit entities. But elite universities are hardly alone in holding patents. For example, the Milwaukee Journal-Sentinel reported just last week on the $505 million dollar judgement the University of Wisconsin-Madison’s research foundation won against Apple for infringing patents it holds. For that matter, Hope College also appears to own patents or at least aspires to do so, judging by the fact that it has gone to the trouble of developing the “Hope College Invention and Patent Policy.”

Polet dismisses my primary concern that his and similar efforts would establish a “hierarchy of giving” with politicians and bureaucrats picking winners and losers across civil society, saying that “government can hardly avoid, if it is in the tax-exemption business, asking determinations about eligibility.” But what is being proposed goes well beyond the simple requirements to be recognized as a charitable organization that exist today (the three main tests require that no profits be distributed to shareholders or employees, expenditures on lobbying are limited, and intervention in political campaigns is strictly prohibited). What is being sought instead is to treat organizations with identical missions engaged in identical work differently based on subjective notions of when some institutions have “too much” money or a disfavored demographic profile.

Polet stakes his argument on a quote from “celebrity egghead” (his term, not mine) Malcolm Gladwell that “anyone who gives a single dollar to Princeton” has “lost their mind.” Gladwell may be right, and those asked to give to it or any other charity ought to be asking tough questions about the uses to which their gift will be put. But philanthropic freedom and freedom in general will undoubtedly suffer once we invite politicians and bureaucrats to begin carving up civil society into favored and disfavored classes based on the whims of the day.