University Relocation

Harvard's Greg Mankiw writes in response to proposed plan by Massachusetts to impose a 2.5% annual tax on college endowments that exceed $1 billion.

If this were to pass, here is what I would consider:

1. Instead of expanding the university into Alston, Harvard could create a second campus in another state. Call it Harvard South. (Put it in a better climate than Boston, and I would be one of the first faculty to volunteer for the move.)

2. Transfer much of the endowment to Harvard South. Support Harvard North by slowly selling off land in Massachusetts.

3. Eventually, make Harvard South the main campus, and Harvard North the satellite. If Massachusetts state lawmakers remain hostile, close Harvard North down entirely.

I have often wondered what the efficient scale of a university is and, in particular, whether it would be better to create a second Harvard with the university's wealth than to expand the first one. Maybe the Massachusetts state legislature will give the powers-that-be at Harvard an incentive to consider more radical expansion plans.

And if states and cities are willing to pony up billions for convention centers and stadia, and hundreds of millions in industrial incentives for factories, how much do you think they much come up with for a Harvard, or MIT, or Stanford, or Oxford relocation. Universities are already setting up foreign campuses. Trust me, it's just a matter of time until this game gets big.

Comments

[Aleem : Urban Digs]

Just call it Harvard North, and bring it to Canada ! That way, we can keep you here in Toronto :)

[Craig Blitz]

Ironic that this posting should not consider the importance of place in Harvard's reputation. Afterall, what is Harvard if not Hahvahd.

[Diane Freaney]

Harvard needs to remind the Massachusetts legislature of the financial aid initiatives announced in December 2007. Harvard is using its endowment creatively so all students admitted can attend Harvard University. At the same time, the new financial aid package is straight forward and understandable so that students are not deterred from applying by complex rules. Harvard's change in policy will - I believe - generate positive change in tuition and financial aid policies of all US private and public colleges and universities over the next several years.

Harvard should be commended for taking a leadership role in leveraging its endowment and creating change, not punished by taxing its ability to maintain this new initiative.

[Michael Wells]

I wonder how Mankiw feels about companies that outsource production overseas or move factories to low tax states? Will elite universities join the "race to the bottom?" I wonder what the cost of services are that Massachusetts provides to Harvard, that Harvard doesn't pay for? As a nonprofit, Harvard doesn't pay income or most other taxes. I'd guess Harvard makes 10-15% tax free on its endowment, or a conservative $3.5 billion annually on a $35 billion endowment, not counting new gifts. The new financial aid will barely be noticed, it's a rounding error at these financial levels. Much of the Land Mankiw talks about selling Harvard didn't pay for, but was deeded to it by the King of England in I believe the 1600's. I remember an accounting class (at Harvard) where we learned there are special accounting rules for colleges like Harvard and Columbia, because their royally granted land has no cost basis.

I'm just asking, because my first reaction was that the legislature was overreaching -- but when I thought about it I wonder if there's a size when a nonprofit should begin paying taxes of some sort. On the other hand, I'll bet 10-1 odds that the legislation doesn't have a chance of passing -- Harvard is too rich and powerful.

[Jim Russell]

Score one for Flat World.

[Whitney Gunderson]

The old Republican adage seems to hold here: tax what works, subsidize what doesn't. It will be amazing if this initiative actually passes the Massachusetts legislature. A precedent will then be set for this to happen in states other than Massachusetts.

[Michael Wells]

Just to obsess a bit here. The theory of tax exemption is that 501(c)(3) nonprofit organizations like Harvard College provide social value that offsets or replaces their obligation to pay for the government services they receive or for the common good. Some types of very large nonprofits, notably some hospitals and elite universities, are so profitable that they stretch the premise.

In 2005 (the most recent IRS 990 forms posted on Guidestar), Harvard had $4.9 billion in revenues and $3.5 billion growth of net assets, roughly speaking "profits". Of its $35 billion+ in "endowment", only $4 billion is true donor-restricted endowment, the rest is mostly retained earnings from past profits. Harvard collected $800 million in tuition and gave $284 in scholarships, fellowships, etc. in 2005.

I think it's a valid question whether nonprofits of this size and profitability should be totally tax exempt.

[Zoe B]

There is a trend among universities to expand web-based education even for local students. At my local university about 10 years ago some student started a business of putting class notes on the web - so that students would not have to take their own. Now professors are officially encouraged to do it themselves. One consequence is that some students in intro lecture classes show up only for tests. Their grades generally are not the top of the heap, but one could argue that it is the more mediocre students who choose to pursue their education in this manner.

One long-term consequence of web-based education is that you don't need so many classrooms. Or professors, especially expensive ones with tenure. If the form of education basically is being told the material and then demonstrating mastery through multiple-choice tests, has the educational process suffered much? I will offer a 'modest proposal': who needs a campus at all? Rather than move Harvard to Delaware, let it evanesce into the ether.

[Whitney Gunderson]

Here is a far-reaching hypothetical. What if Harvard were to incorporate (like Harvard College, Inc.) in a corporate friendly state, like say, South Dakota, which currently has no state income taxes for residents or corporations? The deal between Harvard College, Inc. and the state of South Dakota could include an agreement that says "no taxes for 300 years," or something like that. Office space could be rented in South Dakota, but the actual campus of Harvard could stay in Massachusetts. Furthermore, Harvard College, Inc. could go public and sell stock (NYSE or NASDAQ? - A good project for Harvard business students). This would put Harvard in the league of a few private "start-up" law schools, like the Florida Coastal School of Law and Phoenix School of Law, but Harvard would still be Ivy League. Would Harvard be better off doing something like this if the Massachusetts legislature turns hostile and passes the initiative to tax endowments? It is tough to say.

Universities always seem to have public relations problems with state legislatures, this is nothing new. Why is it such a struggle to convince people of the true mission and value of universities? The time and money universities spend on defending themselves in state legislatures could be wisely spent elsewhere in the face of increasing tuition rates.... but only if universities are left to do what they do best.

[Michael Wells]

Whitney,

I think your argument about "true mission and value" holds true for most colleges, public and private, and I wouldn't argue for taxes or additional regulation for them. Harvard is an outlier, a money-making machine whose profits far exceed the amount it spends on education or research. Not to say that Harvard doesn't contribute enormously to society, but that its finances have outstripped its mission. In other words, I'm asking if the university and its "endowment" should be viewed separately in this case.

Why is the idea of taxing excess profits to pay for services "hostile"? In what way is Harvard's socking away $3 to 4 billion a year, more than their total expenses, in the public interest? Harvard is a "Charity" whose federal and state tax exemption is supposed to contribute to the public good.

As for going public, I'm not sure what good it would do them. Harvard already has dozens of for-profit subsidiaries managing some of that money, some in Delaware, some in the Cayman Islands, etc. Why should they create a for-profit and therefore subject to both taxes and regulation, when they can make enormous untaxed profits as well as collect hundreds of millions in alumni contributions annually?

[Whitney Gunderson]

Hey Michael - You have a few interesting points, but I still do not think that Harvard's endowment should be taxed.

You say that Harvard's "finances have outstripped its mission," but what precedent is there to justify this claim? Harvard does have a tremendous amount of endowment money, plus it has money coming in from alumni sources, etc. But there is no historical precedent that says a certain amount of money is too much for a private university to have. If the proposed endowment tax initiative does pass the Massachusetts legislature, then a precedent would be set, to my knowledge, for the first time that states: "X number of dollars is too much." Furthermore, Harvard's future mission in education has yet to be fully defined - as there are still advances in medicine, law, etc. to be made.

The question you raise about viewing a university and its endowment separately is even more interesting. Historically, a university and its endowment have been viewed as one and the same. Why change the precedent just because Harvard has an enormous amount of money? A large endowment, not just in the case of Harvard, is a sign of a thriving university. Why should a good university and its ability to raise money be viewed separately - one good, one bad - and both open for "public benefit?"

You define Harvard as having "excess profits," but, once again, there is no precedent to define the limits of "excess." I was not aware that a "Charity" could actually have excess profits. You also ask: "In what way is Harvard's socking away $3 to 4 billion a year, more than their total expenses, in the public interest?" Well, it’s NOT in the public interest for Harvard to do this - that's why Harvard is a private university - they do what's best for them.

I am not sure if Harvard College, Inc. is a good idea either, but it is an option, and would be a radical change. I also brought up the point that state legislatures can often be hostile to universities. The proposed tax on endowments in Massachusetts is the latest I have heard on this subject. There have also been a number of legislature bills proposed that would effectively end the practice of hiring foreign-born professors - these proposals say that professors "must use clear English pronunciation while teaching class." Conservative Midwest legislatures are famous proposing these sorts of bills. Universities then hire lobbyists to convince legislators that these sorts of bills are not good ideas. Public universities may face the most hostile environment of all, as the costs of education rise and the prospects of public funding decrease.

I see the challenges that public universities face, and then I see the ability of Harvard to be Ivy League, and to be self-funded. The actions of Harvard are something that should not be discouraged by an endowment tax, which is hostile (can you come up with a better word?) to other university endowments and their growth.

[Michael Wells]

Whitney,

First, a more recent post talks about small colleges being involved in community economic development. This is certainly a model for something Harvard could do with its earnings, instead of just continually banking them. My question about Harvard's amassing billions isn't just about the amount of money, but the fact that the "endowment" seems to have no purpose except to grow and amass more money. If Harvard was using it for charitable, educational, scientific, literary or even religious purposes, as the Internal Revenue Code reads, then it would be serving an "exempt" purpose and there would be a stronger case for not taxing it.

A word about endowment. In Generally Accepted Accounting Principles (GAAP), an endowment is donated money with permanent donor restrictions. Harvard has $4 billion of actual endowment. The other $31 billion is retained earnings from past years, which has no restrictions and the trustees could spend any way they want -- but they don't.

A historical precedent for a tax-exempt organization not just continually accumulating assets would be the laws that say tax exemptions should serve a public purpose. For example, in 1969 Congress started requiring private foundations to make grants equal to 5% of their endowment, in response to foundations being used for tax avoidance. This hasn't been applied to other nonprofits, partly because so few of them, including colleges, generate much "profit" beyond what's needed for survival and supporting their programs.

Harvard is indeed a thriving university, but its large asset base (quasi-endowment) and its growth has little to do with the university. $35 billion invested aggressively and intelligently will throw off about 10% a year -- the college could shut down and the assets would continue to grow at roughly the same pace.

"it’s NOT in the public interest for Harvard to do this - that's why Harvard is a private university - they do what's best for them." Exactly! But their tax exemption is based on their serving the public interest. I have no questions about a private company making a lot of money doing what's solely in its best interests -- but then they should pay taxes. Tax exemption is based on the idea that the organization operates to serve the public interest.

About state legislatures being hostile to universities. Amen! Oregon is a prime example, the rural dominated legislature kept Portland State small and struggling for decades and higher ed is dramatically underfunded. I don't think this is related to Harvard, which is a different animal. Harvard is more than self-funded. If you eliminated all tuition and continued the same programs, paying them entirely from investment earnings, Harvard's assets would still grow by more than $2 billion per year.

I have to admit I don't know the details of the Massachusetts proposal, or the motivations of the legislators. I'm not even sure that taxing Harvard's quasi-endowment is a good idea. I do think that it should be looked at, and not dismissed out of hand just because the owner is an educational institution.

[Charles Rostkowski]

Were Harvard to move to avoid this tax, it would reveal the usually hidden darker side of liberalism. As the faculties of all the ivy league colleges have been telling us for generations, it is appropriate to prohibitively tax the wealth of the nation for the sake of justice, but tax not my cache for we provide a social good that the nation dare not be without. Michael is right to point out that providing a free education to a few thousand minority students a year is indeed a small price for Harvard to pay for the continued annual bloated growth of its endowment. Is not this growth the equilivant of those "obscene" profits socialists are always going on about? It appears a few chickens are coming home to roost. Although I suspect Harvard will ring their necks long before they settle in.

[Charles Rostkowski]

Correction, "wring their necks". I just got up:-).

[Whitney Gunderson]

Michael - I saw the Town/Gown post, but I haven't read Fisher's report yet. The Massachusetts legislature is proposing a tax on endowments over $1 billion. If it passes, which it probably won't, the tax will affect more than just Harvard.

Harvard does have a staggering amount of money, but I would like to see the Harvard money bags spend or invest that money on their own terms rather than having a tax on it - and therefore, a precedent set. I wonder if any members on the Harvard Student Association are thinking the same thing....

[Michael Wells]

Whitney, I don't have a dog in this fight as far as it being a college. What I worry about is Harvard as a nonprofit organization clearly skirting the intent of tax-exemption by hoarding rather than serving a public good. Tax exemption isn't an entitlement, it's a privilege based on giving back. If Harvard were using the money to improve Boston's schools, build low income housing, save the seahorse, put a human on Mars, cure diabetes, put a second campus in a warmer climate, etc. it would be noble. But to just let it sit and grow to no purpose other than growth is dishonorable -- and probably not in Harvard's best long term interests.

And I agree, this has very little chance of passing. Harvard lists spending a half million a year on lobbying, but I'm sure that's a vast understatement if you consider alumni connections, etc.

[Michael Wells]

Ten things Harvard could do with some of its "endowment":

1) Scholarships for bright poor kids to the private academies that feed into the Ivy League.
2) Start a couple of high end academies
3) Donate to United Negro College Fund, American Indian College Fund, Hispanic College Fund, etc.
4) Build the second campus, with a focus on needed occupations: General Practitioner MD's, nurses, teachers, etc.
5) Scholarships for students from poor countries to become doctors, teachers, etc. back in their home countries.
6) Peace Corps/Americorps like program for Harvard grads
7) Team with Gates Foundation on fixing American high schools
8) Work to improve the Boston area public schools
9) Medical research in areas that don't make money, like Malaria -- again, like Gates
10) Start a private grantmaking foundation focused on education.

Thoughts in the shower this morning. Harvard doesn't have to horde its money. I understand they have some bright people, they can probably think of other things to do themselves.

[Michael Wells]

Interesting, this showed up on CNN.com today:

http://www.cnn.com/2008/US/05/14/beck.collegeendowment/index.html

This may develop into an issue unless Harvard makes some strategic changes.

[Whitney Gunderson]

I read the CNN article, Harvard's endowment is biggest. What are the universities with the next four biggest endowments?

[Matt]

Yale ($22B), Stanford ($18B), Princeton, University of Texas (both $16B). See http://en.wikipedia.org/wiki/List_of_U.S._colleges_and_universities_by_endowment

I agree with Michael -- Harvard has the potential to do enormous good with this money if they're willing to think broadly. A "Harvard Endowment Foundation" could build the 21st-century equivalent of the Carnegie Libraries and much more.

[Michael Wells]

A couple of caveats.

While it's usually only of interest to financial types, it's important to differentiate between true endowment which can't be spent because of donor restrictions, and quasi-endowment which the trustees set aside but is actually legally unrestricted. If you want to see the financials for any US nonprofit, their IRS form 990's are available online from Guidestar http://www.guidestar.org/index.jsp
You may need to register, but it's free. It's usually more effective to click the "advanced search" and pick a state as well as name. Then choose View report, then scroll down and open the most recent 990. On the balance sheet on page 3, line 69, "permanently restricted" is the actual endowment. In most of these Universities cases, most of the unrestricted will be retained earnings. As a state School U of Texas probably doesn't have a 990.

The other interesting thing about Harvard's balance sheet is their actual holdings in 2005 were closer to $50 billion, higher now. The "other liabilities" on line 65 include $20 billion in "securities lending" which you'd probably have to get into their actual financials with an accountant to know if these are true debts or paper liabilities which don't really affect their bottom line.

[Whitney Gunderson]

I wonder if Glenn Beck read this blog before he posted his Friday commentary on CNN. Glenn.... are you out there?