Stanford’s endowment grew nearly 22 percent last year to $17.1 billion. This massive quantity of tax-free money has attracted the attention of members of Congress, who want the wealthiest universities to do more to reduce tuition costs.

The Senate Finance Committee is pressuring universities to use more of their wealth for financial aid and is threatening to require them to “pay out” five percent of their endowments each year. In an attempt to prevent Congressional intervention, wealthy universities have rushed to expand financial aid. Harvard has recently increased its financial aid for families earning up to $180,000 a year, while Yale has boosted funds for families with annual incomes of up to $200,000.

Additionally, Stanford is expected to announce further financial aid initiatives by the end of winter quarter.

The committee, which helps determine national tax policies, is worried about the rising cost of higher education and has requested detailed information from the nation’s wealthiest colleges and universities, including specifics about tuition, financial aid and endowment spending.

The demands come after a new study, released last week by the National Association of College and University Business Officers (NACUBO), which shows double-digit endowment growth at hundreds of colleges over the past year. According to the study, 136 colleges in the United States now have endowments of $500 million or more.

“[Universities are] supposed to offer public benefit in return for the privilege of tax exemption,” said member of the Senate Finance Committee, Sen. Chuck Grassley (R-Iowa), in a public statement. “If endowments increase by double digits from one year to the next, it raises the idea that maybe these schools aren’t using enough of their endowments to help students afford college.”

However, Randy Livingston, vice president for business affairs and the University’s chief financial officer, explained that Stanford’s endowment has been built up through the support of donors who have specific requirements for their donations. He explained that the donors usually require that the gift must be invested and held in perpetuity, with only the investment income expended each year to support the gift’s purpose.

Additionally, the endowment is composed of over 6,000 distinct funds, each of which has different restrictions imposed by the donors. Some of the endowment funds are designated to support undergraduate scholarships or graduate fellowships, while others support faculty salaries through endowed professorships, specific areas of research, academic programs, centers and institutes.

He added that even though Stanford’s endowment has experienced exceptional growth, one must not assume that high returns will continue indefinitely.

“Over the past 10 years, [the endowment] has achieved an investment return averaging 15.1 percent per year,” he said. “These returns have been remarkable and unusual by long-term historical standards. However, Stanford cannot count on continuing to earn these strong investment returns into the future.”

Livingston pointed to the 1970s, a period during which Stanford’s investment returns failed to exceed the level of endowment payout plus inflation, and, as a result, the value of the University’s endowment declined substantially.

Provost John Etchemendy Ph.D. ‘82 also stated that the way the University spends its money is based on the goal of intergenerational equity.

“Investment returns on the endowment have to cover the current payout and also grow the principal to keep up with inflation,” he said. “If they don’t, we would end up spending down the endowment and cheating future students.”

Nonetheless, according to the University’s Budget Plan for 2007-2008, the Board of Trustees has decided to increase the target endowment payout rate from 5 percent to 5.5 percent. However, even though the target payout rate might be 5.5 percent, the University will not always achieve that rate.

Etchemendy explained that one reason why the University’s payout rate may not appear to be in keeping with the rate of the endowment growth is due to the “smoothing” rule.

“Universities use different smoothing formulas,” he said. “The simplest is to pay out 5 percent of the endowment’s average value for the last three or four years. But they all have the effect that when the investment returns are high, the actual payout rate falls short of the target rate, and when they are poor, the actual rate is higher than the target rate. That’s how they smooth the actual payout.”

Private universities such as Stanford are also forced to contend with a lack of government funding. In 2007, 30 percent of the University of California’s non-hospital revenue came from the state general fund and only 2 percent from endowment income. By contrast, none of Stanford’s revenue came from state general funds, while roughly 20 percent came from its endowment.

“Endowment income is to private universities what state tax revenue is for public universities,” Etchemendy said. “Some people have suggested that endowment revenue should be taxed for large endowments. But this would be like taxing state general funds flowing to public universities if they exceed a certain amount.”

Even though there are many factors involved in determining the amount of money the University spends from its endowment each year, Livingston said that the University intends to respond fully to Congressional demands. Debra Zumwalt, general counsel for the University and vice president of the Office of the General Counsel, explained that committees such as the Senate Finance Committee can hold hearings, conduct investigations in their areas and propose legislation to be voted on by Congress.

“The Finance Committee has jurisdiction to the extent that charitable organizations are exempt from federal taxation,” Zumwalt said.

However, she stated that even though the Senate Finance Committee’s demands are not in the form of a subpoena, the University had provided information to the committee informally in the past and will continue to do so.

Furthermore, according to federal law, most private foundations are required to pay out 5 percent of their assets each year toward their charitable purpose. No such requirement exists for university endowments. Donations to universities are tax-exempt, and endowment funds are tax-exempt. Zumwalt said that the problem arose because some foundations, whose only income was from their endowments, were spending no money at all and, therefore, doing nothing to further their charitable mission.

“That is not the case with universities,” she said. “[They] clearly spend huge amounts of money each year for education and research, including money from endowment income, gifts, research funding, tuition payments and other income.”

This feeling was echoed by Etchemendy, who said that there are two ways to look at financial aid. He explained that any endowment which allows the University to enhance the education it provides is a form of financial aid, since it improves the quality of the educational program without charging that enhancement to tuition.

“[The] endowment holds the quality of the educational program fixed,” he said, “but reduces the cost for those students who can’t afford full tuition [as well as improves] the quality of the program, while holding the tuition fixed for all students, whether they receive explicit financial aid or not.”

Officials were quick to point out that the issue of the University’s endowment is a complex one which could be adversely affected by an economic downturn.

“[It] doesn’t mean universities are hoarding their endowment,” Etchemendy added. “They’re just practicing responsible budgeting principles. Who wouldn’t like more money to spend?”