The recent “scandal” in the Church of Latter-Day Saints that I have called Ensigngate has caused me to reflect a bit. Although I have never felt a religious impulse to tithe, I’ve given a bit to charities over the years. Most of the money has gone to organizations that were pretty much hand to mouth including the church I attended for many years.

Be True To Your School

It occurred to me that one exception to that general rule might be my college. Although, I took courses at six colleges attaining three degrees, there is only one that I have supported consistently that feels like part of my identity, “my alma mater”. Let’s call it MAM. The development office at MAM is good at asking for money.

They started early. When I was a senior, I was recruited to be a “class agent” ready to call up my buddies to remind them to give every year. At that stage the amount is immaterial. You are bringing credit to MAM by showing that it has a high alumni participation rate.

At five year increments, competition enters into it. The Class of 1973 set a record in 1978. Surely the Class of 1974 can beat that in 1979. Twenty years out they are starting to talk about estate planning.

How does this connect to the Ensigngate story?

Ensigngate

The basic outline is that Ensign Peak Advisors, an integrated auxiliary of LDS has accumulated $100 billion over the last couple of decades according to the brother of someone who used to work there. The former Ensign employee has filed a whistle-blower complaint with the IRS.

Most tax pros who have contemplated the available material don’t think we are going to see Ensign’s exempt status blown up retroactively creating an enormous tax liability, but that is not the part of the story that has a lot of people excited. It is the $100 billion accumulation.

How Much Is Too Much?

Ian Lovett, Rachel Levy and Laura Saunders did a great story in the Wall Street Journal – The Mormon Church Amassed $100 Billion. It Was the Best-Kept Secret in the Investment World probing deeper into the accumulation aspect. The LDS has not confirmed the amount, but they haven’t denied it either and seems to be admitting that whatever the amount is, it is, as we say, a number.

Overall, there is a good argument for devout Mormons to not worry, even to be happy about the church socking away so much. For one thing, in their view, tithing is good for you independent of the church’s needs. And given that church years are kind of the opposite of dog years, it is not very long ago that LDS was a hand to mouth persecuted outfit. And the leadership is getting guidance from God, so you can be confident that they will know when to dip into the reserves.

Do They Need The Tax Subsidy?

The tax policy question that this raises is why is it that we need categories of exempt organizations at all. If you form an organization to feed the hungry, give drink to the thirsty or whatever and you spend all the money on food or water or whatever, it really doesn’t matter whether the organization is exempt from income tax. It will have no net income.

If year after year your revenue exceeds your expenses, it won’t kill you to pay some taxes. Tax deductions for charitable contributions are another matter of course, but I question whether the social benefit they provide is commensurate with the complexity generated particularly to the extent that donations are going to be warehoused.

Are Colleges Different?

In my mind they are. If MAM is squirreling away a big piece of my contribution, I would just as soon give the money to a donor-advised fund and keep an eye on it myself until it goes to somebody who really needs it.

Some Data

Unlike churches, most colleges (I am using college generically to refer to colleges and universities) are required to file Form 990 with the IRS. The filing is publicly available and you can get at it using this search function.

The sample of colleges I decided to go with is a little idiosyncratic. I selected the Ivy League and the Seven Sisters, although because of changing time there are only five of them with separate 990s. I wanted to include some really elite schools, so I threw in MAM and seven of the lesser Jesuit colleges. That makes 21 in all.

I went with the three most recently available years from each college, although in some cases there were only two years available. My covivant, who is a much better detail-oriented accountant than I, helped me out.

The analysis is on the crude side. We compared Line 19 of page 1 – Revenue Less Expenses – with Line 8 – Contributions and grants – (which is included in revenue). As noted there were only two years available for some of the schools, so there are 59 data points for each item.

The Colleges Are Gaining

I am a CPA, so you don’t have to tell me that revenue less expenses is different than cash flow, but these things have a way of evening out. If colleges were just doing their mission rather than socking a lot away beyond reasonable reserves, you would expect to see a mix of net positive and net negative years. Also you would expect that a few of the colleges would be net negative over three years.

That is not the way it is going. Of the 59 instances of “Revenue Less Expenses” for a year only three were negative and only two colleges were net negative over three years.. And more oddly, only one was what I would consider essentially break-even – $65,255.

Are Your Contributions Making A Difference?

To be fair, the answer is generally yes. Only two of the colleges have an excess of revenue over expenses greater than the amount of contributions. In other words, those two colleges would be net positive with no contributions at all. In the case of all the others, if nobody had given them any money, they would have posted a loss.

The aggregate was $26,004,412,953 in contributions and grants and $13,253,252,465 in revenue less expenses. So in a very simple analysis about half of the contributions drop to the bottom line. The result is remarkably similar for the three categories 51.27% for the Ivies, 51.16% for the sisters and 48.08% for the selected Jesuit colleges.

About The Numbers

As I noted the analysis is a little simple, but when I think of how it might be adjusted, the changes go both ways. You can go to page 12 Schedule IX to see some of that. The big item tends to be unrealized gains and losses on investments. The colleges have capital requirements, but that will be offset to some extent by depreciation, a non-cash expense. If we could isolate contributions from grants, the percentages might be even more dramatic.

An interesting exercise before you write your annual contribution check to alma mater would be to look at the Form 990 and see how much of the contributions are dropping to the bottom line. Call up the development office and ask them why they still need your money, if year after year there is a lot more coming in than going out.

I just sent an email to the Vice President for Development and the person in charge of Alumni relations at MAM. We’ll see how that goes.

Another View

I asked one of my high school friends who is an alumnus of what seems to be the most ferocious accumulator, why people would give money to a college that did not seem to need it.

During the three years ended 6/30/2018, Princeton’s excess of revenue over expenses was almost $2.5 billion. Included in revenue was $1.8 billion in contributions and grants. So all the contributions are dropping to the bottom line. The cumulative effect of this shows in the year ended 6/30/2018 as $1.7 billion of the $2.0 billion in expenses are funded by investment income.

Here is what he wrote me:

“Princeton believes in the pursuit of excellence in all that it does. Princeton also believes that the extraordinary opportunity of a Princeton education should be available to all regardless of means. Princeton’s motto is “Princeton in the service of the nation and of all nations”. To ensure graduates can serve the nation upon graduation, every admittee is provided an aid package that dos not have loans— kids graduate debt-free.

Excellence comes at a price and generates loyalty. Alumni giving and loyalty begins early and is stimulated by extraordinary reunion spirit. Had those before me not given, I could not have gone.”

I have to say that I am sympathetic to that view, being a first-generation college graduate. The fact that almost all those brand name schools lean towards legacy admissions to a greater or lesser extent lessens my sympathy a bit.

And unlike the confidence that Mormons might have in their prophets, I don’t have any particular reason to trust the leadership of the brand name colleges to continue wisely down the ages.

The Data

You can look at the spreadsheet if you would like. It is not very elegant, but it does include links, so you can dig further into the Forms 990. All sorts of interesting stuff in there.

The biggest weakness I see is the lumping together of contributions and grants. Presumably, if the people handing out the grants know their business, that money is not dropping to the bottom line, although it might include an overhead allocation. Adjusting for that would raise the percentage of contribution going to the bottom line, perhaps dramatically.