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Private equity firms, hedge funds, off-shore investments, tax avoidance, and blocker corporations. The public doesn’t equate those enterprises with public and non-profit endowment activities. But that’s simply not true and that’s why it’s time to clean up endowments.

Non-Profit Endowments

Endowments represent a classic form of “OPM,” that is, accounts made up entirely of Other People’s Money. Many people assume that public and non-profit endowment contributions are invested in ways that align fundamentally with institutional mission. That happens, of course. But make no mistake about something else: another three-letter acronym, ROI (Return on Investment), reigns supreme.

The challenge these days is how to boost ROI in an exceptionally low-interest rate environment. One way strategy is to put funds in the hands of money managers who engage in activities that shouldn’t be called “investments” – at least not in the conventional sense, i.e., mutual funds, government bonds, companies in Fortune 500. Alternative options include private equity, hedge funds, and other instruments that can put endowment funds in off-mission activities.

For example, Michigan State University made the decision recently to disallow Richard Spencer’s appearance on campus. Spencer heads the National Policy Institute, an AltRight lobbying group for white supremacists. Fair enough. But a few months later, ThinkProgress reported that MSU had “invested” $50 million of its endowment in a hedge fund led by a man who has financially supported a variety of AltRight personalities and activities.

While the decision to invest in that fund is questionable, the larger issue is having a public university invest in any hedge fund. The same can be said about accepting gifts with funds generated by hedge fund activity. The reason? A hedge fund is a highly speculative enterprise that operates with limited regulatory oversight. It’s not always clear what’s being done, where, to whom, and with what consequences.

For a very long time, endowment activity took place without much notice. Administrators would publish annual results, including reporting overall return and offering an investment breakout by category. Today that’s simply not enough.

For a very long time, endowment activity took place without much notice. Administrators would publish annual results, including reporting overall return and offering an investment breakout by category. Today that’s simply not enough.

While many donors know how their donations are being used (e.g., to support scholarships), most don’t have a clue about how or where their contributions are being invested. And that’s a critical matter when you consider that endowments are designed to last in perpetuity.

Sometimes there’s a stark disconnect between what an institution stands for and how it “invests.” For example, shortly after the deadly mass shooting in Sandy Hook, The California State Teachers Retirement System “discovered” that it had committed $15 million dollars to weapons companies—including the company that manufactured the gun used to murder children and teachers in Sandy Hook. CALSTRS divested.

While examples like this pop up now and again, the complexities (and murky world) associated with endowment investing hasn’t risen to the level of public attention. Thankfully, that’s changing.

The most recent example is a New York Times report, published just a few days ago. The article sub-title summaries the story: “American universities are using offshore strategies to swell their coffers, skirt taxes, and obscure investments that could spark campus protests.”

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The article describes how a variety of public and private universities (e.g., Indiana University, Texas Christian University) are using off-shore enterprises—in cooperation with private equity and hedge funds--in the effort to optimize financial returns, including tax minimization and avoidance. At issue is when universities invest in off-mission activities, deemed to be competitive with for-profit businesses. “Blocker corporations” are then set up in no- or low-tax jurisdictions, like the Cayman Islands, to manage tax liabilities in favorable ways.

What’s happening in the university endowment world—an industry that has grown to $500 billion nationwide—hasn’t been lost on Congress. It’s the primary reason why the proposed tax bill includes a tax on endowments at private universities—1.4% of endowment income at schools with endowment assets of more than $100,000 per student.

What can you and I do?

The first step is to stop being naïve. Public and nonprofit organizations push hard to get your money. You have a right to push right back. Ask where that money is going—not just in the programs you’ve supported (that’s easy), but how endowment funds are being invested.

Don’t be shy about sharing opinions and making recommendations. Tell your president or CEO that you want a significant share of endowment funds invested in socially responsible funds--where good returns are not only possible, but often probable. The Forum for Sustainable and Responsible Investment is one group that tracks investment performance.

It’s also time for public and non-profit endowments to invest in community and economic development—especially in local efforts. Just think about it? Endowment funds being invested in down-the-street activities, benefitting your friends and neighbors. As obvious as that choice would seem to be, it’s an extraordinary—not an ordinary—occurrence in the endowment business.

But don’t just offer opinions and make recommendations. Seek basic, structural change. Contact trustees and board members. Urge them to push administrators for greater transparency in endowment decision making. Demand that they create an oversight committee—a group made up of donors and other institutional stakeholders, including clients, but not institutional administrators—to review and comment on endowment choices. To give teeth to that group, demand that written reports be submitted directly (not filtered) to the chief executive and also be released to the press.

Congress needs to act, too, beyond taxing endowments. It’s time to stop the masquerade of what sometimes falls under the rubric of non-profit status. For example, universities shouldn’t bundle “seat license fees,” which are partially tax-deductible contributions, into the cost of athletic tickets. And Congress must put an end to outrageous money-making schemes that use tax-deductibility as a carrot. A very recent example is Texas A&M’s attempt to lure Aggie fans to game-day lodging in a hotel across the street from the football stadium—available for a $100,000 gift, tax-deductible.

Just about everybody I know believes that public and non-profit organizations need to be run like a business. But what America can’t afford is public and non-profit organizations that operate “on the edge.” Public and nonprofit organizations are social institutions—first and foremost—founded to serve the public good. They need to act that way.

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Don’t tolerate public and nonprofit “investment” shenanigans. It’s your money, after all.

Frank Fear