New York : US colleges profit by selling tax-exempt bonds for capital projects, instead of spending money collected from donors, according to a Congressional Budget Office study.
Colleges earn money on the donations they collect for capital projects by investing them through their endowments while using tax-exempt bonds to finance construction, according to the report. This is a form of "indirect tax arbitrage" because the schools are earning more on investments than they are paying in annual interest rates on their bonds, the study said.
"A borrower could sell those assets to finance the capital expenditure instead of borrowing with tax-exempt debt," according to the report, which was written by Kristy Piccinini.
"Holding those assets while borrowing on a tax-exempt basis is, in effect, equivalent to using tax-exempt proceeds to invest in those higher-yielding securities."
The study identified 251 schools that sold $5.7 billion in tax-exempt debt in 2003, the most recent year for which it said data were available. Melissa Merson, a CBO spokeswoman, didn't immediately return calls seeking comment.
