M E M O R A N D U M
To: Reporters and Editors
Re: CBO on Tax Arbitrage by Colleges and Universities
Da: Friday, April 30, 2010
Sen. Chuck Grassley, ranking member of the Committee on Finance, today made the following comment on a report he requested from the Congressional Budget Office on the practice of some college and universities’ maintaining a large untaxed portfolio of assets while simultaneously borrowing with tax-exempt debt. The report came out today. Grassley requested the report in 2007 as part of his broad look at the non-profit sector, aimed at making sure non-profit institutions provide public benefit in exchange for their tax-exempt status and are not misused for individual benefit at taxpayer expense. Universities and hospitals have the vast majority of assets in the tax-exempt sector. An earlier CBO report looked at non-profit hospitals and tax arbitrage.
“This report finds that the majority of tax-exempt bonds are held by schools that have large investment assets. These schools are using their tax exemption to amass investments, receive tax-deductible donations, and float tax-exempt bonds. These benefits are unique to tax-exempt entities. The federal government forgoes the revenue from tax-exempt entities in exchange for the social benefit from these institutions. This report raises questions for parents, students, and taxpayers about universities’ issuing bonds and going into debt when they have money in the bank. Issuing bonds costs money on interest and management fees. Does the expense of debt service take money away from student aid or academic service? Do bond issuances occur even as universities raise tuition and build investment assets? These are further questions to explore.”
The report is available at http://www.cbo.gov/ftpdocs/112xx/doc11226/04-30-TaxArbitrage.pdf.