→ The White House Takes Aim as Endowments Freeze. Universities are under attack on multiple fronts, and endowment allocators are justifiably concerned — if not outright scared. And when the world’s wealthiest university endowment is getting nervous about funding, you know things are getting serious.

Harvard’s recently announced hiring freeze not only follows a growing trend among universities but also comes on the heels of the White House deciding to pull $400M in funding from fellow Ivy-leaguer Columbia, while lawmakers push to increase taxes on endowment incomes.

One allocator told me: “People are rightly scared because of the magnitude of the changes, multiplied by the uncertainty over how it’s all going to play out.”  And from what we’re hearing, the locus of that fear is the uncertainty over what these moves mean to long-term investment planning. For instance, losing federal funding while gaining additional taxes could force higher payouts or special drawdowns, which would require portfolios to be rebalanced.

But without clarity on what’s ahead, it’s hard to know where to reallocate. (Some have suggested many would move out of hedge funds and more into stocks, though that could also prove volatile.) Plus, it’s not like CIOs can make really radical shifts without board approval.  Added to the strain, the CIO role at a university endowment has become an increasingly politicized one — no wonder more schools are turning to OCIOs.

Then there’s the question of the proposed tax hike(s). Hirtle Callaghan’s John Griffith says that a 10 percent or even 21 percent tax hike would not only impair colleges’ ability to provide student aid but also force allocators to rethink their asset allocation — perhaps be more conservative to avoid fluctuations and pay the tax each year. And even rebalancing would be unlikely to generate enough returns to cover the added tax.

According to The Harvard Crimson, If Harvard were subjected to a 10 percent tax rate on its endowment returns for the last fiscal year, during which it earned $5.1 billion, the University would owe approximately $510 million in federal taxes. This amount is significantly higher than the $71.5 million it would pay under the current endowment tax rate of 1.4 percent implemented in 2017. If such a tax increase were enacted, Harvard would be required to allocate 8 percent of its 2024 annual operating budget to cover these tax obligations.

Why the push for higher taxes? Big endowments are easy targets, and, as executive recruiter Charles Skorina puts it, it’s mostly a “revenue grab.” But now the “ideological overlay” is making the tax much more likely than in the past.

Skorina highlights another critical issue: the potential breach of trust. The tax-free status of donations and endowments was a foundational agreement. Taxing endowments now, he argues, undermines this trust and could "starve universities" of vital resources.

That said, Skorina isn’t without criticism of universities. He argues that they’re “not well run” and have been “sloppy” with how they’ve generated income. He also thinks schools have done “a terrible job of articulating” why the government should keep their “hands off donor money.” However, he still believes messing with the taxation of university endowments could cause serious damage to “probably one of the U.S.’s greatest competitive advantages.”

“It takes centuries to build endowments and universities,” Skorina tells me. “So why would you tear down what we’ve built better than most other countries?”

Although universities rely on their endowments to fund a substantial portion of their budgets and student aid, most endowment returns don't cover costs — and even if they did, endowments aren’t structured to function that way. As NACUBO’s Kara Freeman noted: “These endowments are built for the long term.”

So, what say you, noble allocators? Is taxing donor dollars to endowments solely a politically motivated power play and cash grab? Or is it about time these “hedge funds that have a university” be sufficiently taxed? Send me an email at james.comtois@institutionalinvestor.com. I know you have thoughts, why be coy?