• University endowments would face a 1.4 percent tax on investment income under the GOP tax reform plan.
  • Endowments would also be among the tax-exempt organizations required to pay a 20 percent excise tax if they award executive compensation over $1 million.
  • Many major university endowments pay multiple members of investment teams more than $1 million as they need to recruit the investing world's top talent.
  • An endowment trade group warned it would ultimately hit tuition and scholarships.

The world of university endowments was reeling after the GOP tax reform plan revealed on Thursday included two measures that would hit the investment management arms of top schools hard.

University endowments would be required to pay a 1.4 percent tax on investment income. Endowments that paid executive compensation above $1 million would also be required to pay a 20 percent excise tax on it.

While university endowments, including Ivy League schools managing billions of dollars, do not have extensive public support, a trade group representing them warned that the excise tax would lead to fewer dollars available for scholarships, student services, research, and college and university operating expenses, and potentially hit employment opportunities across campuses. Student loan interest is already on the chopping block in tax reform.

The excise tax would apply to all tax-exempt organizations where an executive is compensated at $1 million or more — including university presidents, charities and nonprofit medical systems. Though it would hit endowments especially hard, where the need to achieve superior investment returns and recruit Wall Street's best talent to handle the billions in endowment assets has led to multi-million dollar compensation that resemble financial services industry pay packages. Charities, by and large, do not pay executives over $1 million, according to research from Charity Navigator, though there are exceptions and it would be difficult for a charity to explain having to use donations for a 20 percent excise tax on executive compensation.

While several university presidents at both public and private schools make more than $1 million, there are even more investment managers at university endowments being compensated at that level of higher.

Charles Skorina, who recruits investment talent for endowments at his firm Charles Skorina & Co., said based on his analysis of 2014 IRS filings, there are 35 university endowments making more than $1 million, and at some of these endowments, multiple members of management teams are also paid in excess of $1 million. At some top schools there may be between five to 10 managers paid more than $1 million. As an example, based on tax filings archived by ProPublica, Princeton University paid five members of the Princo investment management company more than $1 million.

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Harvard Management Company's CEO, N. P. Narvekar — who was recruited away from Columbia University, where he made more than $3 million — is being paid close to $6 million a year now.

While NABUCO, the trade group representing college and university business officers, is making the case that these tax reforms will hit students and employees of higher education, Skorina said it is going to be a tough fight. "Good luck to the lobbyists," he said. "I think this caught them [the schools] by surprise."

Skorina at Charles Skorina & Co. said that, in his experience, defending university endowments is "not a popular position to take and that is why I am worried."

"I am the lone guy while arrows come at me," he said. "Salaries are too high and endowments are too big: End of story. That's what people say. But if you tax education salaries and endowment earnings you really are hurting schools."

Steve Seelig, senior regulatory advisor at benefits consulting firm Willis Towers Watson, said that, of three changes related to executive compensation in the tax reform plan — the other two involve stock options and performance-based pay — it's the hit on tax-exempt executive compensation that is the most significant.

Skorina at Charles Skorina & Co. said it will hurt his ability to attract top talent to foundations and endowments. Top university endowments have faced years of pressure for difficulty beating indexes like the while also paying Wall Street stars big pay packages.

There have been a few recent high-profile defections from the star manager universe at endowments, including the decision by the chief investment officer at the $7.6 billion University of Virginia, Larry Kochard, going to a private investment firm set up by former Stanford University endowment managers.