endowment funds

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By OTAVIANO HELENE*

Considerations about experiences of "endowments” in the US and Brazil

Federal Law 13.800, of January 4, 2019, enacted by the current government, creates the legal status of an endowment fund managed by a management organization. This managing organization can/should use the resources of the endowment fund, or more specifically, the returns on investments made with them, in activities related to education, scientific and technological research, culture, among others. These activities must be developed in and by public institutions, including Universities. Resources must be used for previously defined purposes; that is, the public institution where the activities will take place cannot decide freely and autonomously on the activities carried out.

The management entity can commercialize intellectual property rights and even the brand of the public institution, incorporating the financial results to its equity. In summary, the managing organization, a private institution, will have the power to decide on the activities to be carried out by public institutions and commercialize the result obtained, and its decisions are taken based on the interests of individuals and legal entities of private interest.

This law is perhaps one of the factors that made the idea of ​​an endowment fund for USP resurface once again. As the cited law confuses this fund with existing funds in a few and small private Universities in the USA, called there endowments (reflecting the fact that they originated from donations), it is necessary to remember some facts that occur in that and other countries and interpret them.

(1) What endowments are for. Although there are cases in which a certain fund is spent in its entirety, a typical objective of endowment funds is to allocate only the remuneration of the investments made, without compromising the principal. Thus, for such funds to have any practical relevance, the returns generated by the investments made must not be insignificant when compared to the institutions' budgets.

(2) Where they exist. In the education sector, endowments of this nature exist only in some of the smaller private universities in the US. In the vast majority of higher education institutions in that country, public or private, such funds do not exist or are insignificant, that is, the remuneration obtained from financial applications and investments has no relevance in the financing of institutions. A similar situation occurs in other countries.

(3) US endowments and public and private institutions. In order to have an idea of ​​the significance of these funds in the US, it is necessary to remember that 3/4 of higher education students in that country are enrolled in public institutions, among them those that combine extremely high scientific, cultural, artistic and technological performance with the formation of large number of professionals. Of the remaining quarter of US students, the vast majority are enrolled in private institutions whose endowments, if any, are negligible.

(4) endowments Significant ones only exist in a few small private institutions of the US elite. The ten richest private universities in the US hold close to half of all endowments, but only 0,5% of students (undergraduate and graduate) in that country. All of these have endowments of more than one million dollars per student, which makes their income expressive when compared to the cost of their operation.

(5) endowments at public universities in the US. Among the public universities in that country, there are rare cases of significant endowments. For example, the University of California, with nearly 300 students, has an endowment less than half that of Harvard, with about 20 students; that is, per student endorsement at the University of California is on the order of 3% of that at Harvard. At California State University, with half a million students, the endowment per student is on the order of a thousandth of that of the wealthiest private institutions put together.

A similar situation occurs at the two large public universities in the state of New York, the State University and City University, with around 700 students as a whole. Overall, the endowment per enrollment at US public universities is between $20 and $25, with very few institutions having values ​​above $100. Consequently, the financial gains generated by the endowments of US public universities are insignificant when compared to their budgets.

(6) Resources from US Public Universities and USP. Although USP does not have an endowment fund under Law 13.800, it has accumulated cash resources that, compared to its budget, are higher or even much higher than the ratio between endowment funds and the budgets of US public universities.

figure – Number of undergraduate and graduate enrollments in US institutions and endowment per student, in dollars. To the right of the vertical line are institutions with more than 25 students, approximately; above the horizontal line, institutions whose endowments per student exceed $30.000. Empty circles represent private institutions; full circles, public institutions. Institutions with less than 10 students were not included; only a small part of public institutions with 10 students or more were included.

Figure constructed based on sources consulted between October and December 2021.

Private institutions that have a significant endowment have few students and occupy the upper left rectangle. Public institutions occupy the lower right rectangle, corresponding to a large number of students and small endowments per registration.

(7) US Income and Wealth Taxes and Gift Benefits. Tax rates in the US are generally much higher than in Brazil. The maximum rate for inheritance is currently 40%; In addition to this federal tax, several states apply additional estate taxes. (Just for comparison, in Brazil there is no federal tax on inheritance and the state tax, in the case of the state of São Paulo, is 4%.) In that country, this tax reached over 70% in the period characterized by the so-called new deal, from the mid-1930s to its end, which coincides with the beginning of the Reagan administration. Thus, a donation made by a billionaire had little effect on the amount to be received by the heirs; the combination of receiving a billionaire inheritance framed by a surname in an academic institution, a charity institution or a museum room can be rewarding.

(8) Donor financial benefits. In the US, in addition to federal income taxes, there are state and, in some cases, local income taxes. (The federal top rate is 37%, down from the pre-Trump figure of 39,6%.) Combining federal, state, and local taxes, the top rate can top the 50% top bracket. income[I] (in Brazil, it is 27,5%). As donations to certain entities are deducted from income, a donation can be financially advantageous, with several tricks that can turn a donation into income gain, not reductions[ii].

(9) Endowments in countries other than the US. As already stated, endowment funds in other countries, along the lines found in the case of small private universities in the USA, are very rare and have insignificant values. Even in the two British Universities that have such funds[iii], the values ​​per student are far below those verified in those elite Universities and for the elites in the USA. In the cases of other Universities in the United Kingdom, the values ​​do not exceed one hundredth of what is found in the USA. In the case of French Universities, as a rule, the situation is even less significant than in the United Kingdom.

(10) Why in the US? Although donations are part of the US culture, and for that reason they even receive tax incentives, it is not just benevolence that they are made. In addition to the financial advantages already mentioned, it is a way to get closer to other people who represent economic and political power or to enter a sophisticated environment, which explains the high donations to museums and other artistic organizations. Thus, donations can become a kind of passport. Not by chance, most of the elite Universities have names that coincide with the surnames of the so-called “robbery barons”,[iv] billionaires who sought to embellish their names and leave to their heirs not only the mountains of money they managed to earn.

(11) Empire of fake news. In Brazil, in a recent period, lies were relativized and released with such intensity (whenever they are in the interest of the economically dominant groups, of course), that they began to occupy previously unimaginable spaces. Provisional Measure 851/2018, which gave rise to the aforementioned law 13.800[v], which now allows the private sector to benefit from Universities and other public institutions, states, in its justification, that “international experience shows that endowment funds represent an important source of revenue for public institutions, especially donations to Universities and historical heritage conservation entities are extremely important in other countries. In this regard, the United States stands out, where its most important Universities have billionaire funds. Harvard University, for example, has a fund whose assets are estimated at US$ 37,6 billion. Other top universities, such as Stanford, Princeton and Yale, manage funds with estimated assets between US$ 20 and 25 billion.”

The amount of manipulation in this little text is remarkable. International experience does not show this; on the contrary, it shows that public institutions are financed by the public sector with public resources originating from taxes. The expression in other countries refers only to the US. The institutions mentioned are not public, they are private. There is no doubt that the Universities of the North American economic elite are very dense, having very significant indicators when relativized to their small sizes; however, classifying them as the most important Universities denotes an analysis bias and ignorance regarding the size and quality of public Universities in that country.

 

A possible conclusion

Endowments that actually benefit the institutions to which they are connected is something that exists only in the case of elite US private entities. The non-existence or insignificance of such funds in public institutions in that country is that it is not possible to do business with them, such as freely defining the destination of resources.[vi] Donations to private institutions can be associated with the acquisition of a kind of passport for a person to be admitted to a certain environment, especially an environment that is linked to their personal and class interests.

Tax incentives mean that those who, in fact, pay for the donations made are the other taxpayers, who must compensate for the loss of income caused by the donations.

This text is just a glimpse of a more complex reality, but perhaps it is enough to make it clear that endowment funds do not respond to any interest of the majority of people, responding only to the interest of a small group that owns and controls financial resources.

*Otaviano Helene is a senior professor at the Institute of Physics at USP, former president of Adusp and INEP. Author, among other books, of A diagnosis of Brazilian education and its financing (Associated Authors).

 

Notes


[I] For example, a person with a very high income in New York City will be subject to a maximum federal rate of 37%, plus 10,9% corresponding to the maximum state rate and 3,9% municipal rate.

[ii] Here are some examples of possible tricks heard or read by the author. (a) Donate part of a large piece of land for a University to build a new building, leading to an advantageous appreciation of the rest of the property; the donation increased the equity of that person who donated. (b) A millionaire who invests in the wrestling industry founds a charitable entity designed to promote activities in needy communities and uses it to select fighters with whom he will sign advantageous contracts. (c) A good whose value for which it was acquired is, say, 30 units of money, is donated as if it were worth 100 and this is accepted by the receiving entity, this value being deducted from the donor's taxable income. That person, who donated something worth 30, will stop paying 37 federal income tax.

[iii] endowments seem to exist only at two Universities in England, Cambridge and Oxford, but not at institutions in other UK countries.

[iv] See the entry “Robberbaron (industrialist)”, from the English version of Wikipedia

[v] The aforementioned MP can be consulted at www.camara.leg.br/proposicoesWeb/prop_mostrarintegra;jsessionid=node0nvw9go101w9ukqbm8ok9be209791936.node0?codteor=1696057&filename=MPV+851/2018

[vi] There are cases of donations to public universities associated with practices such as linking a donation to acceptance of admission by a particular person, benefiting donors, family members and friends; see, p. ex., www.nbcnews.com/news/us-news/university-california-admitted-dozens-wealthy-white-students-favors-audit-finds-n1240766. This practice is not illegal in private institutions.

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