It’s a constant skirmish between donors seeking to fund specific scholarly projects at universities and the universities’ administrators, who would typically like to see as much of that money as possible go to “unrestricted” uses–that is, whatever the administrators, not the donors, deem the best use of the funds. And nowadays, with universities’ endowment values falling during the current recession, “best use of the money” can often mean covering deficits in the universities’ general operating budgets, deficits sometimes occasioned by wasteful spending on grandiose campus construction projects or–even worse in the eyes of some donors–ideological projects such as “diversity” and “sustainability” offices only marginally connected to the delivery of higher education.
Hence the recent and increasingly widespread phenomenon of the “levy”–a rake-off by administrators of a percentage of the income from endowed programs and endowed professor’s chairs, ostensibly to cover overhead and other “associated program costs,” as universities call them, but in fact a bit of naked budget-balancing. Such was the case in late May, when top administrators of Dartmouth College announced that it planned to increase, as of the fiscal year that began July 1, the percentage of its levy from 14.29 percent to 19.1 percent. Dartmouth administrators announced that the nearly 33 percent levy hike would raise $2 million that would have previously gone to endowment recipients but now would help close Dartmouth’s $100 million budget deficit.
The announcement not only enraged Dartmouth faculty members, who were not consulted about the increased “associated costs” cream-off and stood to lose funding accordingly, but it surely stands to irritate a number of Dartmouth’s and prospective donors as well. Most giving-minded college alumni think that when they endow a program in, say, ancient Semitic languages, all of the money they give will be used to pay the salaries of the professors involved in the program and for their research. They typically have no idea that the university that takes their money can unilaterally decree that nearly 20 percent of the income it generates might be used to help pay for the campus climbing wall or the Women’s Center. You don’t have to be a cynic to conclude that the levy is just another way in which college development officers manage to redirect a significant part of the proceeds from restricted gifts into the “unrestricted” category that administrators crave because it gives them maximum discretion over how the money is used.
The “associated program costs” levy scarcely existed before the 1990s (Dartmouth had no levy until 1999). Before that, every cent from a restricted gift to a university went directly to carry out the donor’s intention concerning the gift’s purpose: in salaries, travel and conference expenses, hiring interns, research grants, and special expenses that a department might incur. But now levies, exacted either to cover administrative costs or to pay for more fund-raising, are fairly common although not universal. Cornell, for example, doesn’t charge them. Some universities peel off up-front fees on receipt of the gift, such as the 2.5 percent on receipt for donor gifts and 10.5 percent on receipt for research gifts–unrestricted funds supporting a professor’s research that the University of California at Berkeley charges. Other universities, such as Columbia, skim off a percentage of the gift as it is paid out, although the fees at Columbia seldom exceed 10 percent, according to Inside Higher Ed. The 14.29 percent cut that Dartmouth recently took, and the 19.1 percent cut that Dartmouth takes right now seem to be at the very high end of the levy ladder. Joseph Asch, a lawyer and business consultant who graduated from Dartmouth in 1979, reported on the Dartblog blog that at least one Dartmouth donor who had set up an endowment during the 1990s said that he had never been notified when Dartmouth began siphoning off part of the proceeds from his restricted gift.
More recent donors told Asch that there had been no mention of the levy in their conversations with development officers at the time they made their gifts (the details of the levy might have been spelled out in the fine print on their donation documents, but they were never made aware of that, they told Asch). “…[F]or the outside observer, it is a shock to see that once again—despite the fact that there is money for staff raises, office redecorations, and a completely unnecessary new swim dock—resources have been taken away from areas that are the heart and soul of the education of undergraduates at the College,” Asch wrote. Following a unanimous demand by Dartmouth’s faculty of arts and sciences that the university release more detailed budget information, Dartmouth President Jim Yong Kim and Provost Carol Folt issued a “Finance Report” stating that out of the $2 million to be raised by increasing the levy, $250,000 would go to support arts and sciences—meaning that endowed programs will get a little more than 10 percent of their skimmed-off operating funds back, while the Dartmouth administration will keep the rest.
Furthermore, as Asch pointed out in another Dartblog entry, endowed chairs at Dartmouth, as at many other universities, seldom create new teaching slots, contrary to what the donors who endow the chairs might think. Instead, Dartmouth and other universities simply shift the salaries of professors already on their payrolls out of their general operating budgets, freeing up more money for construction projects, staff raises, or whatever. “[W] hile alumni might believe that they are creating an additional teaching position for the benefit of undergraduates, the reality is that most or all of the annual yield on their money is going straight into the College’s general fund,” Asch wrote.
Dartmouth’s position is that it is hardly alone in exacting “associated program costs” levies from donors. “There are schools whose rate is higher, and some whose rate is lower,” Carrie Pelzel, Dartmouth’s senior vice president for advancement, told Inside Higher Ed. She is undoubtedly correct– although Ronald M. Green, a religion professor at Dartmouth who led the battle to demand detailed budget information from Kim and Folt, wrote in an e-mail to me:
"College officials have said that such practices are common in peer institutions, but they have not provided a review of existing practices. I would not be surprised if donors expect some of their gift to be used for reasonable administrative expenses, but 19.1 percent seems very high to me. A number of the faculty who voted to request a more complete accounting of the budget situation were exercised about what they regard as a practice that treated donors unfairly by imposing a substantial after-the-fact levy on their gifts.."
Green added: "In general, the increased levy reduces funding available to the departments."
So, as the recent events at Dartmouth indicate, the watchword for sentimental alumni who would like to fund a program at Dear Old Alma Mater is, once again, "Caveat Donor." Anne Neal, president of the American Council of Trustees and Alumni, whose "The Intelligent Donor's Guide to College Giving" counsels would-be contributors about the wiles of administrators and development officers, said in a telephone interview, "That's why it's incumbent upon donors to put their interests in writing. Donors can make it clear up front that they don't want the proceeds from their gifts to be spent on overhead or administrative costs, rather than discover that later. You have to make it very clear how you want the money to be used—because the administration, especially during these economic times, is always going to be tempted to do what it wants with your money instead of what you want."
One thought on “Dartmouth Foils Its Donors”
To generate enough funds for an endowed professor at today’s interest rates, a donor would have to give about $10,000,000 (x3%=$300,000, which should be enough for a first class professor plus some extra for research and admin help). Many schools will let donors put a name on a professorship for a lot less than that – because they aren’t hiring a new faculty member, but instead taking the extra funding from the endowment yield and using it to supplement the school’s funding out of general funds. I agree with the author that it is important that donors have frank discussions with the schools about all these issues, including whether and to what extent the school will levy a tax on the endowment.