Philanthropic Marginal Analysis

LDJ-4

Louis Johnston

For economists, good policy and personal choices are almost always about marginal analysis.  What is the impact, on the margin, of a change in an economic variable?  How will costs and benefits be affected by a change in policy or a change in behavior?  If Saint John’s raises tuition by 3.5% how will this affect the retention rate, how will this affect the yield on this year’s applications and what will happen to our tuition revenue?

My colleague, Louis Johnston, the Joseph P. Farry Professor of Economics, reminded me of the importance of this in one of his recent blog posts. In a thoughtful obituary about the life of St. Cloud philanthropist William Clemens, Louis notes the generosity of Bill and his wife Virginia, but makes the further point that the impact of their giving was especially significant because of the choices they made.

While the Clemens family has given Saint John’s University and the College of Saint Benedict millions of dollars, these generous gifts appear to pale in comparison to the donations in the hundreds of millions of dollars given recently to Stanford and Harvard.  But Louis reminds his readers, using marginal analysis, that the Clemens family may very well have been more impactful donors than Stanford’s and Harvard’s benefactors because the marginal benefit of a $4M gift to an institution that has an endowment of $100M might well be larger than a $200M gift to an institution with an endowment of $20B.

As Louis nicely puts it:

It’s clear to me that the marginal benefit of a $1-$5 million dollar gift to a small institution is far greater than the $395-$400 million dollars received by Stanford, Harvard, or even a large gift to schools such as Carleton College ($783 million) or Macalester College ($754 million).  Bill Clemens knew this.

This philanthropic marginal analysis is very important for our donors to remember, especially our young alumni, who have occasionally told me, “My contribution is so small at this point in my life, it doesn’t really help Saint John’s.”

Every gift matters to us, and the impact of any gift is made more significant by the relatively intimate scale of our educational enterprise.  One does not have to be a billionaire to have a powerful impact on the educational mission of Saint John’s University and the College of Saint Benedict .

Taxing Yale

Photo: Michael Marsland, Yale University

Photo: Michael Marsland, Yale University

In a probably apocryphal story, famous bank robber Willie Sutton was asked by a reporter why he robbed banks.  He allegedly replied, “Because that’s where the money is.”

Following this philosophy, some legislators are covetously eyeing college endowments as a source of revenue.  There is scrutiny at the national level from Congress, but recent attention has focused on Connecticut where a bill has come before the legislature that would specifically target Yale.

Schools with [endowment] funds of $10 billion or more — affecting Yale only — could face a tax on endowment income, according to legislation introduced this month.  Yale’s record $25.6 billion fund is the second largest in U.S. higher education, behind Harvard University’s $37.6 billion.

Connecticut has a deficit of $266 million for FY16, while Yale’s endowment earned a cool $2.6 billion in FY15. 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.”

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.

While the Yale spokesman naturally focuses on students and the “charitable mission” of Yale, he might well have emphasized that the University’s $3.2B operating budget and 13,000 employees provide significant revenues to New Haven and Connecticut.  In addition, the mission of Yale includes research focused on generating new knowledge, whose value is hard to assess in the short run.

As a college president it will not be a shock the discover that I think this is a very bad idea, though Saint John’s endowment is a couple zeros away from the proposed threshold.  But I also think it is a bad idea as an economist and donor.

Photo: Michael Marsland, Yale University

Photo: Michael Marsland, Yale University

First, as an economist, education plays a huge role in generating economic growth by raising the level of human capital at the macro level and improving the lives of citizens at the micro level.  Policies that potentially decrease investments in human capital, even at the very richest institutions, will likely have a negative impact on long run growth.  Presumably this benefit to society is one of the reasons colleges and universities are typically non-profits and are tax exempt.  One can debate the appropriate level of investment in higher education, but policies based on the deficit of the moment by legislatures that are unable or unwilling to balance their revenues and expenditures are hardly likely to generate optimal long run outcomes.

Second, as a charitable donor, my philanthropic decisions are based, in part, on tax law and my understanding of how those gifts are to be used.  I give to Saint John’s knowing I get a tax deduction and understanding that my gift will be used in one of three ways: to cover current operating expenses or to be spent on a capital project or put into the endowment.

Every college’s endowment is built on such gifts, with the expectation that the dollars will be invested wisely and that the institution will take an annual draw on the endowment to be spent carefully on the educational mission of the institution.  Further, there is an understanding that the earnings will be untaxed, making my endowment gift go farther, and that the draw will be managed conservatively to allow the institution to pursue its mission in perpetuity.  These expectations are implicit in charitable giving to higher education and are built on the incentives codified in current tax law.

Of course legislatures have every right to modify tax laws as economic circumstances change, but what is objectionable here is changing the law after the fact–an ex post decision that would have certainly changed the behavior of generations of donors had a they known that in 2016 part of their gifts would be used to pay for the state of Connecticut’s bills, in addition to their intended goal of providing for the educational and research mission of Yale University.

If the Connecticut legislature wants to change the rules, let them state that, henceforth, any endowment gift to Yale will have its earnings taxed.  It will take a long time to generate $266m in tax revenue, but at least it would be an ethically defensible way of addressing their deficit.

The other interesting aspect of this case is the potential incentives it provides for institutions.  Most colleges and universities are not very mobile, given their histories and significant physical capital investment in dorms, labs and classrooms.  This challenge notwithstanding, Governor Rick Scott invited Yale to move to Florida, promising not to tax the institution.  Yale politely declined.

The tongue-in-cheek invitation from a governor apparently interested in educational investment had a certain irony to it.  Scott was the same governor who drew sharp criticism from educators a couple years ago for taking a slap at the liberal arts, and anthropologists in particular, saying:

We don’t need a lot more anthropologists in the state. It’s a great degree if people want to get it, but we don’t need them here. I want to spend our dollars giving people science, technology, engineering, and math degrees. That’s what our kids need to focus all their time and attention on, those types of degrees, so when they get out of school, they can get a job.

Yale’s undergraduate curriculum is well-known to focus on the arts and sciences with no majors that would typically be considered vocational.  Apparently Yale anthropologists are cut from different cloth.

Higher Education and Minnesota Demographics

kristinized via Flickr

kristinized via Flickr

One of the things we spend a significant time thinking about at Saint John’s and Saint Ben’s is our demographic future.  The next 18 entering classes for higher education have already been born.  As Jon McGee, Vice President of Planning and Public Affairs, often reminds us, “They are not making any more 18 year-olds.”  So our attention is focused on where those future 18 year-olds live, what their educational needs and desires might be, and what our competitors might be doing to win their affection.

Our demographic destiny was on my mind as I listened to an interesting MPR story on Minnesota population growth.  The story reported that the state’s total population had grown by over 185,000 in the last five years.  What was particularly interesting were the sources of that growth:

Minnesota is actually losing population to other states. About 4,200 more people moved out of the Twin Cities than moved in. Immigration from abroad more than made up for that, though. Fifty-eight thousand people born in other countries moved in over the half-decade span.  But even new immigrants account for just a fraction of the region’s growth. Two-thirds of it is from native Minnesotans.  “Really it’s births that are driving the largest share of growth,” said Susan Brower, Minnesota state demographer.

There are several interesting takeaways from this story:

  1.  Though Minnesota’s growth has been slower than United States’ growth over the past five years – 3.50% versus 3.70% – Minnesota is growing faster than other Midwestern states including Wisconsin, Iowa, Michigan, Illinois and Ohio.
  2. Future college students in Minnesota are likely to be more demographically diverse as foreign born parents are much more likely to be people of color and native born populations of color are growing faster than the white population. We are, of course, already seeing this demographic change in our current student population, but this trend will grow.
  3. The share of native born Minnesota children going to college will be higher than similar populations in other states because their parents are well-educated.  As Carleton economist Nathan Grawe has found in his research, parental education attainment is a very good predictor for college attendance by children.  Over 30% of Minnesota’s population has a bachelor’s degree, putting MN in the top 10 nationwide.   College educated parents having babies is good news for colleges, especially colleges with a high percentage of legacy students, like CSB and SJU where over 30% of our students are in that category.

So while we often focus on the relatively slow population growth in the upper Midwest as a reason for enrollment concern in the years ahead, this story and the data behind it brought a ray of sunshine as we go into the heart of the enrollment season.

Though Minnesota is not growing like Texas or California (where we will continue to look for future Johnnies and Bennies), we are better off than most of our Midwestern peers, both in terms of actual population and the make-up of that population.

But we still need our alumni and friends to send great students our way!!

 

By |March 29th, 2016|Categories: Higher Education||0 Comments