Harvard’s War With Trump Forces Question of How Endowments Should Be Spent

There are proposals from Republicans in Congress to increase the tax on large endowments, potentially to 14 percent, much higher than the 1.4 percent put in place eight years ago. Assuming a 10 percent return, that would leave Harvard with a tax bill of about $742,000,000, roughly equal to what it spent on financial aid last year. But you can go around and round. If Harvard raised its endowment draw, however sacrilegiously, to 7 percent, it would add about $1.3 billion to its budget.

Undoubtedly the prospect of higher taxes and the realities of a chaotic stock market have made the notion of tapping endowment income more robustly seem even less attractive to trustees. But those who consider endowments essentially inviolate dismiss some of the workarounds. It is true that as endowments have become more heavily invested in hedge funds and private equity, they have become less liquid. But there are secondary markets for selling positions in some of these funds if a need for cash is urgent. There are reports that Harvard is now considering this option.

One of the great luxuries of having a lot of money is the ability to borrow against it, often cheaply. Princeton University’s president, Christopher Eisgruber, has become one of the most prominent critics of the Trump administration’s antagonisms toward the academy. In response to the federal government’s freezing of several dozen grants, the university, rather than hike up its draw, has issued bonds as a means of raising cash.

Some observers of the recent campus upheaval have noted that Columbia, the largest landowner in New York City, rather than acquiesce to the government’s demands to preserve $400 million in grant money, might have borrowed against its real estate, the value of which stands apart from its $14 billion endowment. Harvard, with its triple-A rating, has issued more than $1 billion in bonds since March. “For a bondholder, the only question is: ‘Will I be paid?’” said Larry Ladd, a former budget director at the university who is now a consultant. “If Harvard were liquidated, they would get paid,” he added.

And while many restrictions are imposed by donors, others are imposed by the university itself, Mr. Schapiro of Williams and Northwestern explained to me recently, “so they can be unrestricted.” Although it is difficult to pull off, and Mr. Schapiro does not recommend it as protocol, he once approached the grandson of a donor who had died long ago to ask if he could use the money for something other than what was intended. The grandson said yes.