"It's An Attack On Higher Education": Connecticut Seeks To Tax Yale Endowment As Plug To Surging Deficit

One week ago, we observed an unexpected spike in the yield spread of Connecticut bonds over AAA-rate munis:


There were two specific catalysts for the spike in yield:

  • First was last week's disappointing bond auction, as a result of which CT bond risk has spiked to 65bps over the benchmark,  a record spread demanded by investors to take CT repayment risk. In the process CT, one of the states historically most preferred by the wealthy hedge fund community, became the 4th riskiest US state after NJ, IL, and PA. As Bloomberg noted at the time, the state’s $550 million general-obligation sale on March 17, which included debt due in 2026, priced to yield 2.52 percent, compared with an expected 2.37 percent based on Bloomberg’s Connecticut index.  
  • The second, and more troublesome, reason was that the state’s office of policy and management said two weeks ago that the budget deficit for the current fiscal year is $131 million, an increase of $111 million from the prior month’s estimate. Moody’s Investors Service dropped its outlook on the state to negative earlier in March. Worse, the state is facing a $266 million shortfall for fiscal 2016, according to the state Office of Fiscal Analysis.

One week later, we find that the state with the ballooning budget deficit has taken proactive measures to fill said gap, even if the proposed measures are not particularly enticing for one of the highest profile tenants of the state: Yale University.

According to Bloomberg, a proposed Connecticut bill would seek a share of Yale's endowment gains as a source of state tax revenue. According to the introduced legislature, schools with funds of $10 billion or more, which is clearly aimed at Yale as that is the only university to fit the criteria. Yale’s record $25.6 billion fund is the second largest in U.S. higher education, behind Harvard University’s $37.6 billion.

It's not just the state which is seeking to collect a share of these generous returns: the richest college endowments, many at their highest values ever, also have drawn scrutiny from federal lawmakers. Last month, the U.S. Senate Finance and House Ways and Means committees sent a joint inquiry to the richest 56 private schools about endowments, seeking to understand the impact of their tax-exempt status on the price tag of higher education, among other issues.

But back to CT, where legislators believe that taxing the endowment’s earnings could help close the state's budget gap. "Supporters of the bill want Yale to spend more money to expand access to higher education and “create innovative, high-paying jobs,” Martin Looney, a Democrat who presides over the Senate and whose district includes Yale’s campus in New Haven, said in written testimony submitted for a committee hearing on March 22."

“It is our hope that these rich schools can use their wealth to create job opportunities, rather than simply to get richer,” Looney said, adding that Yale “possesses the resources to have an even greater impact on our economy.”

To be sure, Yale and the Greater New Haven Chamber of Commerce urged legislators to reject the bill. Yale currently makes a voluntary payment to New Haven of more than $8.2 million annually, according to the school.

Yale was particularly distressed, and Richard Jacob, the school’s associate vice president for federal and state relations, said in written testimony that the bill and a second one that would tax college property are a “specific attack on higher education.”

Yale does have a point:

"The proposed taxes on Yale would diminish the university’s ability to carry out its charitable mission and to enable and support growth in New Haven,” Jacob wrote. “Yale’s generous financial aid policies, which enable Yale College students to avoid any loans, and which waive any parent contribution for low-income students, exist because of the endowment."

Unfortunately, in a time when only the 1% are swimming, while the rest are sinking, any profitable entity becomes a target.

Bloomberg adds that Yale’s endowment allocated $1.1 billion to the operating budget for the year ended June 30, according to the school’s annual report. The fund earned a return of 11.5% in the period, among the top performers of endowments. It returned an annualized 10 percent over the last decade.

The school’s annual budget is $3.2 billion, including $2 billion in wages and benefits, and almost a third of Yale’s 13,000 employees live in New Haven, according to the school.

The budget will promptly change if first the State, followed shortly by the Federal government, decide that it is only fair that well-endowed colleges such as Yale can double down as piggybanks for cash-strapped and money-losing entities, of which there are many within the government apparatus.