Over the past decade — during which University of Delaware officials have requested more than a billion dollars in taxpayer funds from the General Assembly to support in-state scholarships, construction projects, and even general operations — the state’s flagship university has quietly shifted hundreds of millions of dollars to investments overseas, according to a review of the university’s tax returns and other financial documents by Delaware Call.
With the university’s offshore investments growing from $14 million in 2010 to a peak of $413 million in 2016, according to UD’s tax records, the university is likely avoided paying millions of dollars in federal taxes using an accounting scheme The New York Times described as “tax wizardry” and which is often out of reach for all but the largest nonprofits. The majority of those investments were and continue to be located in one or more Central American and Caribbean nations.
Since 2016, UD’s offshore investments have slowly declined to $334 million in 2018 and $266 million by June 2020, the most current year for which the university’s tax information is available.
While UD invested hundreds of millions of dollars overseas, it also increased tuition every year between 2009 and 2019, according to reports in the Newark Post, sometimes by 7% or more, resulting in the price of annual in-state undergraduate tuition rising more than 50% — from approximately $9,000 to $14,000 — over the course of a decade.
In an attempt to discern the origins of the dollars that UD has invested overseas, Delaware Call filed a Freedom of Information Act request asking university officials for more details regarding the school’s overseas investments. UD denied the FOIA request, claiming that it is not obligated to share any documentation regarding its offshore investments because these investments do not include state-allocated funds.
“Pursuant to Delaware’s FOIA, only university documents that relate to the expenditure of public funds are public records subject to disclosure under the Act,” wrote UD Deputy General Counsel Jennifer Becnel-Guzzo, “Your request does not relate to the expenditure of public funds. The University, therefore, has no public records responsive to your request.”
When asked by Delaware Call if any federal funds in the form of Pell grants or student loans were diverted to offshore investments, UD initially declined to comment. After multiple follow-up emails, UD’s media relations manager, Peter Bothum, replied, “No state or federally funded resources are applied to offshore investments,” but provided no evidence that substantiated the claim.
When shown UD’s tax returns, outgoing state Rep. John Kowalko (Newark) said that he was unaware of the university’s offshore holdings but not surprised, calling it “outrageous behavior” for a public institution and slammed the university’s special exemption from open records requests that shield information about these investments from public scrutiny.
“You can’t call yourself a public institution on Thursday when you want taxpayer money and a private institution on Friday when we want to look at your books,” Kowalko said, adding that even state legislators don’t have special access to UD’s finances. “I don’t think for one minute that UD has been a proper steward of taxpayer money. I think they’ve been manipulative.”
How offshore investments help universities avoid tax liability
UD first reported offshore investments on Schedule F of its 2010 tax returns under former president Patrick T. Harker and chief investment officer Mark Stalnecker. Over the following decade, UD’s offshore investments skyrocketed in an apparent attempt to supercharge capital gains through investments that would otherwise carry a tax penalty if traded by a nonprofit inside the United States.
By 2013, UD’s offshore investments had swelled to $136 million while the university’s total investment income grew to nearly $100 million annually and tuition increased by 4%. The next year, UD’s offshore investments ballooned yet again to $398 million while investment income reported on UD’s federal tax form topped $220 million.
The investment returns were a windfall for the university, which was in the middle of a construction boom that included the purchase and demolition of a former Chrysler assembly plant and its transformation into an entirely new campus with manufacturing facilities, modern glass towers, and a $165 million biopharmaceutical center.
In 2016, UD explained that its asset allocations had shifted “dramatically” since 2000 to reduce “the endowment’s investments in domestic stocks and bonds by reallocating to international and nontraditional asset classes.” At the turn of the millennium, UD invested the majority of its assets in US stocks and bonds and virtually none in hedge funds and private equity. By 2016, domestic investments had fallen to 40% of the university’s asset allocations while hedge funds and private equity swelled to 19% and 21%, respectively, according to archived versions of the university’s website.“These funds have been redeployed into the international equity markets and alternative assets such as hedge funds and private equity funds which should not only provide higher returns in a greater variety of investment environments but also help to control overall risk,” reads the current version of UD’s asset allocation page.
Figure 1: UD Endowment Asset Allocations vs Target Allocations as of 6/30/22 (Source: University of Delaware)
Among the nation’s most prestigious colleges and universities, it is not unusual to keep hundreds of millions, or even billions of dollars invested outside the United States. Just last year, Swarthmore College and Villanova University reported $375 million and $249 million, respectively, in offshore investments, and University of Pennsylvania reported more than $5.3 billion, almost entirely in Central America and the Caribbean. It’s all perfectly legal.
Why have UD and so many other major universities diversified their investments to include significant offshore holdings?
The reason likely lies in a section of the tax code known as the Unrelated Business Income Tax, or UBIT, which is basically a special tax on nonprofit revenue derived from sources unrelated to any tax-exempt purpose. For example, if a nonprofit decided to start a business that generated a profit, then profit from that company would qualify as unrelated business income because it’s not a charitable activity, according to Zac Kester, CEO and managing attorney at Charitable Allies. Nonprofits do this all the time to bolster their impact on a community, like an organization that supports formerly incarcerated people re-entering society and wants to start a landscaping company to help its clients find work.
“The overall concept is that when a nonprofit organization has passive income — things like dividends, interest, rent — it’s not taxed,” says Kester. “But if revenue is not related to the exempt purpose of the organization, then that is taxable under the UBIT rules.”
Unrelated business income also includes many kinds of debt-financed and high-risk investments.
What does this mean? If a university were to profit from certain types of investments traded inside the United States — such as hedge funds, leveraged securities, or many types of private equity — then that university would be obligated to pay the 21% flat federal corporate income tax rate stipulated by UBIT. However, according to The New York Times, by establishing overseas companies known as “blocker corporations,” which often take the form of limited partnerships or limited liability corporations in offshore tax havens, universities can avoid paying federal taxes on leveraged and risky — but also potentially lucrative — investments.
In other words, rather than a university buying and selling investments and paying a flat tax, a company located outside the United States executes those trades in the supposed best interest of the university and pays out a dividend over time, which is untaxed when transferred back inside the country because the school did not, legally speaking, trade any securities, and dividends are treated as passive income, a tax-exempt form of revenue for nonprofits.
How risky are UD’s offshore investments? Because of UD’s exemption from FOIA, there’s almost no way to know for sure. Even state legislators do not have access to that information.
“I’ve made requests that have been declined,” Kowalko said. “We can’t verify anything they say, and I think UD has acted unethically in its refusals to allow a more open accounting of its finances.”
What little we do know can be found in UD’s annual financial audits. UD’s eye-popping returns came crashing down during the first three months of the coronavirus pandemic, with hedge funds being one of the worst-performing asset types, losing tens of millions of dollars in value between June 2019 and June 2020. The following year, UD appears to have almost entirely divested from certain types of hedge funds.
Where are these offshore investments located? That too is unclear. UD’s tax returns only report investment activity by region along with the corresponding amount of investments held in that region. However, according to the Offshore Leaks database managed by the International Consortium of Investigative Journalists, as of 2016 the University of Delaware was apparently connected to at least one apparent blocker corporation, Bermuda-based Dover Street Blocker LP, which itself was connected to Dover Street V Limited Partnership, which was connected to other higher ed institutions, including the University of Vermont and Texas Christian University, both of which report extensive offshore investments in “Central America and the Caribbean,” just like UD.
Another offshore corporation, University of Delaware Dover Inc., was incorporated in the British Virgin Islands in January 2007 by Portcullis TrustNet in the town of Tortola. Both Bermuda and the British Virgin Islands are among the world’s most popular and secretive tax havens, according to the Corporate Tax Haven Index developed by the Tax Justice Network.
Repealing UD’s “rigged” FOIA exemption
During his time in the General Assembly, outgoing Rep. John Kowalko filed numerous bills designed to increase transparency at the University of Delaware. Back in 2014, he sponsored House Bill 331, the first of three consecutive bills to amend the Delaware Code relating to the Freedom of Information Act. That bill added language expanding the university’s FOIA obligations to competitive bids and passed unanimously in both the state House and Senate and signed into law by Gov. John Carney.
“When you’re putting an enormous amount of money into a public institution — and it is a public institution — as Delaware taxpayers are, then there is no right to a FOIA exemption,” Kowalko said in an interview with Delaware Call.
UD’s exemption from the state’s sunshine laws is unusual. Delaware and Pennsylvania are the only states that shield their public universities from most freedom of information requests. Delaware State University also enjoys a FOIA exemption, although Delaware Technical & Community College, which also receives state funds, is not exempt.
Kowalko’s two transparency bills, however, did not draw as much support. In 2015, Kowalko introduced House Bill 42, which removed the state’s FOIA exemption for UD and DSU; however, the bill languished in the House Administration Committee over concerns there should be exemptions for the intellectual property and proprietary information of faculty and students. Kowalko attempted to address those concerns in 2017 with House Bill 72, but that too died in committee.
Blaming the “Delaware Way,” Kowalko said, “Leadership never allowed my bills out of committee.”
Now, on his way out of office, Kowalko says repealing UD’s “rigged FOIA exemption,” as he put it, would be “good public policy,” and he hopes that his efforts to increase transparency and oversight at UD will be carried on by the rising generation of progressive lawmakers in the General Assembly.
“I would like to see someone pick up the torch.”
DISCLOSURE: Jordan Howell taught English at the University of Delaware from 2011 to 2020.