University President Lawrence Bacow issued a letter on Feb. 28 condemning the U.S. Senate Finance Committee's suggestion that national colleges and universities should be forced to spend five percent of their endowments every year.
The committee is investigating what it views as a disconnect between colleges' continued increases in tuition and their rapidly growing endowments.
While private foundations are required to spend five percent of their funds each year to maintain a tax exemption, non-profit higher education institutions are subject to no such requirement, although they are tax-exempt.
But Bacow, a former economics professor, called the comparison between universities and private foundations "inappropriate" in his letter, which he sent to the leaders of the Senate Finance Committee.
Foundations can analyze their
endowments yearly and adjust to market conditions, but colleges must maintain a large operating budget, Bacow said.
"[C]olleges and universities entail substantial fixed costs that include faculty positions, libraries, dormitories and research laboratories," Bacow said in the letter. "Thus, it is much harder to accelerate and decelerate spending in response to changing market conditions."
The committee mailed letters on Jan. 24 to 136 U.S. colleges and universities whose individual endowments exceed $500 million, requesting detailed information on financial aid, tuition increases and endowment growth.
Tufts, which has an endowment of $1.4 billion, was among these schools. Tufts' endowment has doubled since the 2003-2004 school year, when it was approximately $700 million. Tufts' endowment is the 49th-largest in the country, according to a study released on Jan. 24 by the National Association of College and University Business Officers.
Bacow argued that endowment spending is tightly controlled to protect against shifts in the economy. Spending is already targeted at five percent over a 36-month trailing average and therefore spending will "result in payouts less than five percent in a rising market and payouts greater than five percent in a declining market ...
"Obviously the past several years have been good for most endowments so spending rates have lagged the five percent target," Bacow said. "As the markets correct, spending rates should exceed the targeted payout."
Bacow said that the spending policy at Tufts seeks to preserve the principle of intergenerational equity.
"We seek to ensure that future generations of students will receive the same benefit from the endowment as current students do," Bacow said. "While we are fortunate to have had strong investment returns in recent years, we must protect the value of the endowment against falling markets."
Statistics appended to Bacow's letter to the Senate Finance Committee indicated that the cost of tuition at Tufts has increased by $16,043 since 1999, a 52-percent growth; the average annual growth in tuition costs over the last 10 years is 4.8 percent.
Despite the increase, university officials say that the university actively pursues policies to control spending.
"Tufts is aggressively working to control costs and ensure that we get maximum return on every dollar we spend," Executive Vice President Patricia Campbell said in a statement. She cited that the university has brought legal services "in-house" and has become more energy-efficient as examples.
University spending on tuition assistance has more than doubled over the last 10 years, increasing to $42 million this year. In 1999, Tufts gave out an average of $4,354 in aid per student; that has increased to $8,373 for 2008.
Tufts announced last fall that it will move to a policy of need-blind admissions and meet the full demonstrated need of all students. Additionally, the university has replaced loans with grants for students from households with annual incomes under $40,000.
Bacow offered other arguments against the five-percent requirement. Endowment funds are often earmarked for certain areas of spending, and those not dedicated to reducing tuition costs and increasing financial aid cannot be shifted to address these concerns.
At Tufts, the letter said, 60 percent of the endowment is designated for certain uses. Of that 60 percent, 37 percent of the endowment, roughly $516 million, is restricted for need-based scholarships, according to the letter.
"Donor intentions restrict the permissible use of a substantial portion of university endowment funds," Bacow said. "Funds cannot legally or ethically be directed to purposes other than those specified by the deed of the gift."
According to the letter, tuition increases at Tufts are based on multi-year operating budgets prepared by each dean. Budgets are "reviewed centrally for consistency with plans, market conditions and historical activity patterns." The Board of Trustees has the final say in deciding tuitions.
"The Board of Trustees votes annually on each school's tuition as part of the university's budget process," the letter said.
A standing committee does comment and advise on the undergraduate budget, although only faculty can be members. The Arts, Sciences & Engineering Budget & University Priorities Committee is a faculty committee, has elected membership and has deans and certain staff as ex officio members, according to the letter.
"There are no formal opportunities for parents to comment on tuition increases prior to final decisions being made," the letter said.
