College Endowments Investing in Overseas Investments to Skirt Taxes!

Dear Commons Community,

The New York Times has a featured article this morning describing the way American universities are using offshore strategies “to swell their coffers, skirt taxes and obscure investments that could spark campus protests.”  Entitled, Endowments Boom as Colleges Bury Earnings Overseas, here is an excerpt:

“A trove of millions of leaked documents from a Bermuda-based law firm, Appleby, reflects some of the tax wizardry used by American colleges and universities. Schools have increasingly turned to secretive offshore investments, the files show, which let them swell their endowments with blocker corporations, and avoid scrutiny of ventures involving fossil fuels or other issues that could set off campus controversy.

Buoyed by lucrative tax breaks, college endowments have amassed more than $500 billion nationwide. The wealth is concentrated in a small group of schools, tilting toward private institutions like those in the Ivy League and other highly selective colleges.

About 11 percent of higher-education institutions in the United States hold 74 percent of the money, according to an analysis in 2015 by the Congressional Research Service.

 “It’s overwhelmingly weighted towards the 1 percent,” said Dean Zerbe, former tax counsel to the Senate Finance Committee. “Most of the schools are the most elites in the country.”

The House Republican tax plan includes a 1.4 percent tax on the investment income of private colleges and universities with endowment assets of $250,000 or more per student. It would not apply to public schools. If passed, the new tax would affect about 70 elite private colleges, though it would not touch the type of offshore benefits the Texan partnership pursued.”

The article gave a number of examples of the investment practices.

“The Appleby records show that investment funds of Columbia and Duke, both ranked in the top 20 endowments, held shares as recently as 2015 in Ferrous Resources, registered in the Isle of Man. Its primary business is iron mining in Brazil.

The company drew criticism there with a planned 480 kilometer pipeline to transport iron slurry from a mine in Minas Gerais to a port.

“Major demonstrations took place against this project, which culminated in the creation of a campaign,’” researchers wrote in a 2015 paper published in the journal Society & Nature.

A 2010 environmental study of the pipeline revealed that more than 110,000 people might be affected by noise, dust, soil degradation and water quality issues. The project was postponed in 2012 after a downturn in iron prices.

The company, Ferrous Resouces, declined to comment, except to say that the project had been discontinued.

Columbia, which owned more than eight million shares in Ferrous Recources, or 1.1 percent of the company, declined to comment. Various investment funds connected to Duke, which also declined to comment, held more than two million shares in the company.

While some schools have announced shifts away from controversial investments, others have pointed out that divesting from fossil fuels would probably lead to a significant drop in operating funds.

Underscoring endowments’ reliance on hydrocarbon holdings, 10 schools invested in a Cayman Islands partnership in 2012 known as EnCap Energy Capital Fund IX-C, part of EnCap Investments, a private equity firm known for the acquisition and development of North American oil and gas properties.

Among the investors were the University of Alabama, DePauw, Northeastern, Pittsburgh, Purdue, Reed College, Rutgers, Syracuse, Texas Tech and Washington State.”

Endowment managers are supposed to maximize earnings but it seems that they should have exercised some judgment as to the appropriateness of these activities.




Comments are closed.