Storing up resources for a long, long winter

The good news is we're well-endowed. The bad news is we're apparently hibernating.

The Princeton University Investment Company recently boasted to the 'Prince' that investment returns for the University's endowment were 17 percent this year — impressive in the current stock market environment. Some of the previous year's earnings were used to cover the University's operating costs, so the endowment actually grew only a measly 13.1 percent ... to $11.2 billion. That's $11,200,000,000.

Sorry, I needed to see all those zeroes to believe it.

As a 501(c)(3) educational institution, Princeton gets to keep those 13.1 percent earnings — $1.3 billion dollars — tax-free, since it is expected to use this income for educational activities. The trouble is that "educational activities" are very broadly defined: The tax code says a lot about what an organization qualifying as a tax-exempt educational institution can't do — it can't express political opinions or "discriminate on the basis of race, color, or national or ethnic origin," for example — but very little about what such organizations must do.

So let's give schools the benefit of the doubt and consider every expense in a university's annual budget to be an "educational activity." For Princeton's FY 2004-05, the annual budget expenses totaled $906 million. Why then, pray tell, are we allowed to hoard $11.2 billion, with the intention of using only 3.4 percent of it for the annual budget operations, as the University chose to do last year? The government should be subsidizing education, not the squirreling away of wealth. If these earnings are not used for their tax-exempt purposes, universities like Princeton should pay their fair share of federal income taxes just like any other company.

Sure, Princeton and its wealthy peers can claim they are saving money for huge campus building projects or as a guard against inflation. But we are storing food for a hypothetical winter, not the next Ice Age. An $11.2 billion inflation prevention program is clearly excessive.

There is no educationally necessary reason to accumulate this much money; rather, accumulating money has become an end in itself. Endowment maximization has become a sort of arms race among the elite colleges. Schools seem to take more pride in how much money they have than in how effectively they extract the value of that money. PRINCO president Andrew Golden may claim that endowment comparisons aren't "a football game where there's a winner and a loser," but every Princetonian's acknowledgment of our disappointing rank in the intense endowment competition — fourth — is inevitably followed by a cheerful declaration that our endowment per student is still highest. (So there, Harvard.)

The government should tax educational institutions' excessive investment earnings just like any other unrelated business income, which the IRS defines as income from business that does not have a "causal relationship to achieving exempt purposes ... other than the production of income." After all, even for-profit corporations have to pay an accumulated earnings tax. But more important than bearing their share of the national tax burden is ensuring that educational institutions actually make the most of their funds. If universities were subject to a tax on unreasonable stockpiling, or, alternatively, required to spend a minimum percentage of their endowments annually (just like charitable foundations), they'd use more of their endowment money for its exempt purpose: educational activities.

And if a university like Princeton claims it can find no use for the additional billions of dollars that it should be required to spend, I'm willing to make a few suggestions. Try teaching my preceptors English. Or subsidizing Pequod purchases, as has been suggested by USG candidates. Or better yet, sponsoring the entire undergraduate body's tuition and related educational expenses (which Princeton can easily afford to do: $43,000 x 4,600 students = $198 million = 1.8 percent of the current endowment), Then again, the University can always show how very much it is in the nation's service and give its excess away to a more threadbare — and less thrifty — institution. Catherine Rampell is an anthropology major from Palm Beach, Fla. She can be reached at crampell@princeton.edu.