Charity for Universities Isn't Much Cause for Rejoicing

    When UCLA announced last week that it had collected more than $3 billion in private donations over the past 11 or so years, the university saw it as cause for a celebration. The country’s neediest students, though, should have looked at it as more than $1 billion in forgone tax payments, and all of the social services and financial aid that money could have funded.

    Even as UCSD claws its own way toward privately raising more than $1 billion in what the campus calls its “Imagine What’s Next” campaign, university students and administrators need to stop to consider whether the growing importance of individual charity actually makes higher education — and society — better off.

    Stanford University political science professor Rob Reich makes a good case for why it doesn’t.

    In the most recent issue of Stanford’s Social Innovation Review, Reich makes a very convincing defense for what he sees as “a failure of philanthropy” — the title of his essay. Indeed, he makes clear, America’s system of charitable giving does less to help alleviate social ills, and more to simply make the rich even richer.

    First, some background: In the United States, the federal tax code encourages donations to nonprofit institutions by allowing taxpayers to deduct their charity from the taxes they owe to the government. For example, if a wage earner in the highest (35-percent) tax bracket makes $1,000,000, $350,000 would normally go to the federal government. However, if she then donates that $1,000,000 to a good cause, the wage earner does not need to give the government its cut, amounting to, in effect, a subsidy on charitable giving.

    In 2005 alone, the subsidy cost the federal government an estimated $35 billion, or roughly 0.02 percent of its total revenue, money that could have been used to pay for essential services for the poor. America provides the world’s most generous tax concessions, according to economist Charles Clotfelter, and “no other nation grants subsidies at such high levels or across so many activities,” argues economist Burton Weisbrod.

    Of course, there would be nothing wrong with the system if charities, and universities specifically, used donations to help their low-income students. After all, why have government bureaucrats dole out cash when the nonprofit world can do it equally well? The problem, though, is that only a small portion of private university donations are distributed in a “need-based” way.

    Though UCLA will use some of its new largesse to create 30,000 scholarships and fellowships, nearly $800 million of it will be dedicated to medical research and patient care, according to the Los Angeles Times. Even more will go to pay for specialized research centers, new endowed chairs and professorships and the like.

    At UCSD, private money is currently being spent to construct a graduate business school, even as the rest of the campus faces a dire building-maintenance crisis and has no money to rebuild the crumbling facilities that house its undergraduate classes.

    In the fall, UC President Robert C. Dynes argued that the university should use some of its private donations to top off the salaries of the university’s highest-paid administrators and staff, who already make more than $350,000 a year. And UCSD is, at this moment, using money donated to the university to pay Chancellor Marye Anne Fox’s monthly rent of $6,500.

    Indeed, one of the reasons the university uses donations to pay for these seemingly less worthy projects is because the state does not see them important enough to fund with tax dollars. However, because the government cannot control what the subsidized tax dollars go toward, UC administrators can use private money to pay for inefficient programs. Unlike state money, which entails accountability — including probing audits into the university’s compensation policies — private donations come largely without oversight, especially when those who donate do so upon their death.

    Outside of the University of California, things look much the same. Because benefactors generally give to their alma maters, the money often goes to universities that need it the least. For example, the top four universities with the largest endowments in 2004 were all elite, prestigious schools — Harvard, Yale, Princeton and Stanford. Not a single campus of the California State University, by contrast, was among the top 25 schools.

    Combined, the top 10 schools (only two of them are public, state-supported ones) have endowments worth more than $87 billion. Assuming that most of that money was raised from private donations and with the current tax rates, these endowments deprived the federal government of more than $30 billion in tax revenue. That’s a lot of Pell Grants and subsidized student loans.

    Given the terrible financial problems facing the states, and their propensity to cut higher education in favor of more popular programs like prisons, more and more universities will surely look toward private donors for help. That does not bode well for the nation’s most disadvantaged students and campuses.

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