Princeton responds to Senate debate on tax issues

With a 24.7 percent return on investments, the University’s endowment reached $15.8 billion at the end of the 2006–07 fiscal year, the Princeton University Investment Co. (Princo) reported in October.

Princo’s returns have topped 16 percent in each of the last four years, and during the last decade, the endowment has compounded at an annual rate of 16.2 percent. Though volatility dampened some markets in the months since the June 30 close of Princeton’s fiscal year, the endowment managed a 2 percent return in the first quarter of the current year. “The world got a little bit more challenging, and we’re happy to report that we continue to make money,” Princo president Andrew Golden said.

Among the five private universities that started the year with endowments of $8 billion or more, Princeton’s return ranked second, behind Yale (28 percent) and ahead of Harvard (23 percent), Stanford (23 percent), and M.I.T. (22.1 percent). While Golden was pleased with last year’s return, he noted that his office devotes more time to “planting” than “harvesting.” Overseas investments will continue to be a priority for Princo, he said.

As the large endowments reported impressive growth, testimony at a Senate Finance Committee hearing questioned how universities were using their largely tax-exempt funds. Princeton defended its endowment spending practices in a letter to the committee, which scrutinized nonprofits in a Sept. 26 discussion of offshore tax issues. Sen. Max Baucus, D-Mont., the committee chairman, tied colleges to the conversation by noting that “nonprofit investors sometimes invest in hedge funds through offshore entities incorporated in low- or no-tax jurisdictions” to avoid unrealized business income tax.

Two witnesses — Jane Gravelle of the Congressional Research Service and Lynne Munson of the Center for College Affordability and Productivity — suggested changing tax policy to force universities to control increases in tuition. “Since tax breaks for charitable donations are supposed to contribute to the public good,” Sen. Charles Grassley, R-Iowa, later told The Chronicle of Philanthropy, “it’s fair to ask whether the tax breaks that lead to big university endowments are serving the public.”

Princeton’s response, written by Vice President and Secretary Robert Durkee ’69, contended that the University’s endowment acts in the public interest by supporting a substantial financial-aid program. More than half of undergraduates and “essentially all” graduate students receive aid, he wrote, noting that Princeton “treats its financial aid budget as an entitlement, not an appropriation,” placing no limit on the number of aid applicants who can be admitted. In 2007–08, the University’s scholarship budget is $81 million, and its net tuition revenue is $75 million.

The endowment also supports research, teaching, and other expenses. A rule set by the trustees ensures that the University spends between 4 and 5.75 percent of its endowment accounts each year (4.6 percent in 2007-08). Endowment spending and annual gifts fund 52 percent of Princeton’s $1.2 billion operating budget, according to Durkee.