Month: February 2025

Executive Summary

• Congress is currently discussing multiple endowment tax proposals.
• While most colleges today pay no federal tax as nonprofit institutions, the 2017 Tax Cuts and Jobs Act (TCJA) introduced a 1.4% excise tax on the wealthiest of endowments. Fifty-six institutions paid that tax in 2023.[i]
• The new proposals look to (1) increase the existing excise tax from 1.4% to 21%[ii] or above, and (2) expand the applicability of the tax to include a broader range of institutions by reducing the endowment assets per student criteria.
• While there are many opponents, certain groups believe some version of these proposals will get passed.
• The greatest impact on affected institutions would be the reduction of funds available to the institutions to support their mission, whether financial aid or general operating budget.
• Higher endowment taxes will also raise the required rate of return for endowments. TIFF is available to assist clients in navigating these challenges and understanding the potential implications for their portfolios.

The Impact of Proposed Endowment Tax Changes

The discussion surrounding the taxation of college endowments is intensifying as legislators evaluate potential amendments to the existing tax regulations. The most well-known proposed changes have centered around increasing the rate at which endowments are taxed and broadening the group of colleges and universities that are impacted. If enacted, these proposals could materially change the financial strategies of these institutions.

Understanding the Current Excise Tax

Historically, colleges and universities operated as tax-exempt nonprofits, with no taxes paid on donations or investment earnings. However, during the first Trump administration, the Tax Cuts and Jobs Act (TCJA) of 2017 introduced an endowment tax. The existing tax is as follows:

• Tax: 1.4% excise tax on net investment income.
• Criteria for inclusion: (1) private institutions with (2) at least 500 tuition-paying students and (3) endowment assets exceeding $500,000 per full-time student.

The rationale behind the tax was to generate additional revenue and address concerns that educational institutions were not contributing enough to public finances. The tax aimed to encourage colleges and universities to use their endowment funds to reduce tuition costs and increase student aid.

The tax affects only the wealthiest of private colleges and universities. In 2023, 56 universities paid about $380 million in endowment tax, up from about $68 million in 2021 from 33 institutions1. The tax threshold for qualifying for taxation is not adjusted for inflation, resulting in an increasing number of schools becoming liable for the tax over time. As college and university endowments continue to grow, the associated tax revenue will grow as well.

Proposed Changes to the Endowment Tax Law

The Trump administration’s tax proposals for 2025 focus on extending and potentially expanding some of the provisions of the TCJA of 2017, which are set to expire at the end of this calendar year. While the endowment excise tax is permanent, it has garnered attention due to its significant revenue-generating potential and the current federal budget deficit.

Proposed adjustments to the endowment tax focus on two potential changes:

• Increasing the excise tax rate: Proposals suggest raising the tax rate from 1.4% to 10%, 14%, 21% or potentially even higher.
• Expand the number of colleges and universities subject to the tax: Proposals range from no change to lowering the criteria to $200,000 of assets per student. Rep. Michael Lawler (R-NY-17)’s Endowment Accountability Act proposes the reduction to $200,000 of assets per student[iii] while Rep. Troy E. Nehls (R-TX-22)’s Endowment Tax Fairness Act does not include an expansion.

As with TCJA of 2017, the objective is to raise federal revenue further to reduce the national deficit.[iv] Taxfoundation.org estimates that increasing the endowment tax from 1.4% to 21%, with a 7.5% average annual endowment return, would generate about $69.8 billion in extra revenue over 10 years.

Taxing Endowments: Revenue Analysis of an Endowment Tax

Source: Taxfoundation.org

How Likely Is this Expanded Endowment Tax to Pass?

These proposals are still in the early stages, and there are many opponents. Certain groups believe changes are likely due to the administration’s focus on fair resource distribution and raising federal revenue. The first Trump administration passed the first-ever endowment tax, albeit small, and the second Trump administration has struck an action-oriented tone. It remains to be seen what is approved, if anything, and in what form.

Potential Implications of the Proposed Tax Law Changes on Impacted Endowments

For those impacted, the proposed increase in the endowment tax would undoubtedly reduce the amount of endowment funds available to support the institution’s mission. Colleges and universities are preparing for possible tax changes and trying to understand how these challenges might affect the higher education landscape more broadly.

School business offices are thinking about the impact higher taxes will have on:

• College affordability: Higher taxes could reduce funds for tuition assistance and scholarships, making college less affordable for some students.
• Budget and spending: Tuition alone doesn’t cover education costs, so institutions rely on endowments and donors to fill the gap. Reduced support from the endowment could force cuts to student services, infrastructure, and other areas.
• Research funding: Increased taxes could lead universities to scale back research initiatives, affecting advancements in science, technology, and medicine.
• Charitable giving: Higher taxes might deter future donations, as donors may not want part of their gift to go toward taxes.

The long-term effects of taxing endowments are a topic of debate. However, the bottom line is that colleges and universities will need to generate returns to offset any tax burden. Given that most colleges and universities pursue an investment return of inflation plus spend (historically around 8% and not always easy to achieve), compensating for an increased tax burden will lead to changes in investment strategy.

Conclusion

Legislators are closely examining the nonprofit sector to generate funding for other projects and ensure that wealthy educational institutions contribute more to public finances. Forecasting the future of the tax landscape is difficult and as a result, colleges and universities are beginning to prepare for the unknown. Those responsible for overseeing the endowment are engaging in several activities to prepare:

• Maintaining communication with the college and university’s tax and legal counsel to stay informed about developments in tax law.
• Forming advocacy consortiums to ensure their collective point of view is heard around the role and benefits of endowments.
• Discussing with the business office the implications of possible tax law changes on the college and university’s budget and spending.
• Exploring tax-efficient investment strategies that could help mitigate a larger potential tax burden.

While the direction of tax reform is uncertain, TIFF is prepared to assist higher education institutions in meeting their financial needs. For more information, please contact info@tiff.org.

The materials are being provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. These materials also do not constitute an offer or advertisement of TIFF’s investment advisory services or investment, legal or tax advice. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

[i] Endowments impacted under the current tax include Harvard University, Yale University, Princeton University, Stanford University, Massachusetts Institute of Technology (MIT), the University of Pennsylvania, Northwestern University, Washington University, Duke University, and Vanderbilt University per https://nehls.house.gov/media/press-releases/rep-troy-e-nehls-introduces-bill-hold-elite-university-endowments-accountable.

[ii] 21% is proposed in Rep. Troy Nehls (R-TX)’s Endowment Tax Fairness Act, which would match the federal corporate income tax rate. The House Ways & Means Committee’s Chair Jason Smith (R-MO) outlined a 14% rate. Rep. Michael Lawler (R-NY)’s Endowment Accountability Act proposes 10%.

[iii] https://lawler.house.gov/news/documentsingle.aspx?DocumentID=3716

[iv] Rep. Troy E. Nehls (R-TX-22)’s Endowment Tax Fairness Act states its objectives as “The revenue derived from the amendment made by this section shall be deposited in the general fund of the Treasury and shall be used to reduce the national deficit, to the extent thereof, and thereafter to reduce the national debt.”

Jessica Portis, Chief Client Officer at TIFF Investment Management, recently spoke with FundFire about the potential impact of proposed tax hikes on endowments. She highlights how smaller endowments could struggle to build robust research and investment teams and may face pressures to raise tuition or reduce services.

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The materials are being provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. These materials also do not constitute an offer or advertisement of TIFF’s investment advisory services or investment, legal or tax advice. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

The NACUBO-Commonfund Study of Endowments FY24 average 1-year performance for all institutions is 11.2%, bringing the 10-year average return to 6.8%.

1. For the second year in a row, the biggest performance driver was the allocation to private equity and venture vs. public equities. Private equity returned 5.8%, and venture returned 1.7%, while the S&P 500 returned 24.6%, a spread of 19-23%.
2. High allocations to public equities, and in particular the “Magnificent 7” outperformed. Portfolios with more S&P 500-like investments (passive or US Large Cap active managers with low tracking error). Many active managers underperformed as they were underweight the Mag 7.
3. Real estate exposure continued to hurt larger endowments, which tend to have larger allocations. Private real estate returned -1.3%, as the industry continues to reconcile with higher interest rates and the reduction in office demand post-Covid.
4. Hedge funds continued to outperform fixed income and bonds. Diversifying Strategies such as hedge funds (+8.7%) continued to outperform both traditional fixed income as well as the broader investment grade bonds.
5. For the second year in a row, smaller endowments outperformed larger endowments, on average. Because private market allocation (private equity, venture, and real estate) tends to be positively correlated with endowment size, larger endowments with larger private allocations underperformed smaller endowments with lower private allocations and higher public allocations. The largest endowments returned 9.1%, while the smallest endowments returned 13.0%.

FY24 Asset Class Returns

 

Past performance is no guarantee of future results, and the opinions presented cannot be viewed as an indicator of future performance. There is no guarantee that any particular asset allocation or mix of strategies will meet your investment objectives.

These materials are provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. These materials also do not constitute an offer or advertisement of TIFF’s investment advisory services or investment, legal or tax advice. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

These materials may contain forward-looking statements relating to future events. In some cases, you can identify forward looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other comparable terminology. Although TIFF believes the expectations reflected in the forward-looking statements are reasonable, future results cannot be guaranteed.

Jessica Portis, CFA, outlines her leadership at TIFF Investment Management, emphasizing goals for 2025 focused on delivering tailored investment solutions, enhancing operational efficiency, investing in team growth, and strengthening client relationships.

Jessica Portis, CFA joined TIFF Investment Management as head of member portfolio management and services in 2020 from Mercer, where she was a partner and oversaw the delivery of investment-related services to both advisory and outsourced nonprofit clients.

She was promoted to serve as chief client officer at TIFF in April 2024, where she is tasked with collaborating closely with the investment and client-facing teams to develop and execute investment solutions that cater to clients’ unique objectives.

Portis took the time to answer five questions with FIN News.

1. What goals are you aiming to achieve in 2025 as you continue to collaborate with TIFF’s investment and client-facing teams

Our mission at TIFF remains steadfast: to be the best outsourced cio and asset manager, delivering meaningful advice, strong investment outcomes and outstanding service. To achieve this, we have set three broad goals for 2025.

First, we aim to continue delivering strong investment outcomes to our clients by providing tailored investment solutions. We are committed to seeking differentiated strategies that drive value for our clients. Leveraging the insights from our advisory board of best-in-class cios and their tenure in the industry, our investment team will continue to scour the globe to identify best-in-class managers. The additional resources we have added across our investment and client-facing teams will enable us to extend our impressive 30+ year track record.

Second, we plan to enhance our operational efficiency by adopting new technology and tools to better serve our clients and broaden our service offerings. By leveraging these advancements, we aim to provide even greater value and a more streamlined experience for our clients.

Third, we are focused on investing in our people, as they are our most critical resource. We aim to support the growth and development of our talented team, fostering a culture of respect, intellectual curiosity and collegiality across our organization. This investment in our people ensures that we continue to deliver innovative solutions and exceptional service to our clients.

Our entire firm is committed to delivering on our mission. Despite the evolving market landscape, our dedication to providing exceptional investment solutions and supporting our clients’ organizational goals remains unwavering. Our CEO Kane Brenan recently released his annual retrospective and outlook for those looking for further commentary on TIFF’s strategy.

2. What is one challenging situation that you have faced since joining TIFF in 2020 and how did you reach a solution?

When I joined TIFF in 2020 amid the pandemic, I faced the significant challenge of transitioning roles while navigating the complexities of a fully remote environment. This situation was particularly challenging as it required building and maintaining strong relationships with both clients and colleagues during a period of heightened volatility.

Recognizing that we are fundamentally in a relationship-driven business, it was critical to ensure that we remained engaged and visible to our clients and potential clients. Our objective was to clearly articulate our value proposition and demonstrate how our solutions could help them achieve their investment goals, even in uncertain times.

To overcome these challenges, we employed creative strategies to foster client engagement. We scheduled virtual one-on-one meetings outside of traditional committee settings to provide more personalized interactions. Additionally, when possible, we arranged in-person meetings in outdoor settings, such as coffee meetings, to maintain a personal touch while adhering to safety protocols. We also increased the number of written and digital communications available to maintain visibility and open communication with clients.

These efforts not only helped us maintain strong client relationships but also reinforced our commitment to supporting our clients through adversity. By adapting our approach and prioritizing effective communication, we successfully navigated the challenges presented by the pandemic and continued to deliver value to our clients. We continue to leverage some of our learnings from that time in support of our relationship building today.

3. What is your favorite part of your role today? What gets you excited to come to work?

As a member of TIFF’s leadership team, I have the privilege of collaborating with talented professionals across the firm, including some of the most skilled investors in the industry. The dedication and passion our entire team has for serving our clients’ missions is truly inspiring.

I am particularly passionate about serving the nonprofit community. Every day, I am honored to help nonprofits achieve their missions. I am constantly in awe of the incredible nonprofit organizations that exist in this country, each with a unique mission and a significant impact on the communities they serve. Hearing about the specific impacts these organizations have adds profound meaning to the work we do. This motivates me daily!

TIFF is experiencing growth, making every day an exciting new adventure. Whether it is assisting a long-term private foundation client in structuring their investment program to support larger, multi-year, more targeted grants, or helping a new client establish their endowment following a significant initial gift, the work we do is both rewarding and impactful.

Looking ahead to 2025, I am excited about the future. We have added outstanding talent to our investment and client-facing teams, and I am confident that their contributions will further enhance the value we provide to our clients.

4. You are no stranger to the industry having worked at investment consultant Mercer for more than seven years and before that with Summit Strategies Group for more than a decade – what did you take away from those prior experiences to use in your role today?

My experience as an investment consultant equipped me with valuable skills and insights that I carried into my current role. As an investment consultant, I primarily focused on providing strategic advice to clients regarding their investment programs. I developed a deep understanding of each client’s unique circumstances and objectives, which allowed me to formulate tailored investment strategies. Once the overall strategy was defined, I presented investment ideas for committees to consider, working collaboratively to execute the agreed-upon investment program. My role involved building strong relationships with clients and gaining a comprehensive understanding of their needs. This client-centric approach has been instrumental in my current role, where I continue to prioritize understanding clients’ financial circumstances and aligning investment strategies with their goals.

I joined TIFF because I believe the outsourced cio model offers a better opportunity for most nonprofit organizations to achieve their missions. TIFF’s fully discretionary approach allows for more active management and execution of investment strategies, which has historically led to strong investment outcomes for clients. The outsourced cio model takes on a more hands-on role, contributing meaningfully to performance over time. Five years ago, TIFF provided limited strategic advice to clients and did not tailor investment programs as extensively. Over the past several years, we have significantly enhanced our advisory offerings by focusing on linking clients’ financial circumstances with their strategic asset allocation. This combination of strategic advice and TIFF’s commitment to investment excellence has proven to be powerful in achieving clients’ goals.

My consulting experience has provided me with a strong foundation in strategic advice, client relationship management and the importance of aligning investment strategies with client objectives. These skills have been invaluable in my role at TIFF, where we strive to deliver exceptional investment outcomes for our clients through a comprehensive and proactive approach.

5. What hobbies or activities do you enjoy doing in your spare time?

Today, my hobbies and current reading material align well with my interests. I enjoy staying physically active through various activities, including cycling on my Peloton, Pilates, weight training and yoga. These activities help me clear my mind and focus my efforts.

Currently, I am reading “Activate Your Greatness” by Alex Toussaint, who is a Peloton instructor. This self-help memoir aims to inspire readers to activate their greatness in all aspects of their lives. The book emphasizes the importance of setting clear goals, working consistently toward them, bouncing back from setbacks and maintaining a positive, growth-oriented mindset. Whether it is achieving personal fitness goals or excelling in our roles as leaders and stewards of our clients’ capital, I believe it is essential to always strive for greatness. This involves having a focused approach to both personal and professional development.

The materials are being provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. These materials also do not constitute investment, legal or tax advice. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.