Congress Imperils Tax-Free Borrowing

In a move that could make it more expensive for Harvard to borrow money for construction and other projects, a key House committee this weekend moved toward limiting the amount that private charities can borrow tax-free.

The House Ways and Means Committee, which is drafting a sweeping revision of the tax code, voted 18-17 to limit tax-free borrowing by universities, hospitals and other non-profit institutions to a maximum of $150 million outstanding at any time.

Harvard is the largest borrower of the kind and currently owes $662 million to bondholders. Because investors don't have to pay tax on the bonds, they will accept a slightly lower interest rate than on similarly priced--but taxable--bonds. That lower interest rate cuts Harvard's cost of borrowing money.

The University uses the funds chiefly for building projects, renovations and student loans. The bonds have financed much of Harvard's construction in Roxbury of a $350-million power plant for the Medical School and affiliated teaching hospitals, the Medical Area Total Energy Plant.

$1 Million Question

Financial Vice President Thomas O'Brien said yesterday the measure, if adopted by Congress, would cost Harvard $500,000 to $1 million annually in additional interest, on top of the University's $700 million yearly budget. The University would borrow less and pay commercial rates--two or three percentage points higher--for the loans it does take out, O'Brien said.

"It'll be more expensive for renovations. It will put more pressure on tuition, room and board," O'Brien said.

If the measure goes through, Massachusetts could not OK any new Harvard tax-free bond offers until the University pays off most of its current bond debt--which won't happen for 15 to 20 years, O'Brien said.

Harvard Tried...

Harvard and other educational lobbies argued against any cap on tax-exempt bonds. John Shattuck, vice president for government and community affairs, said the limit was unfair because it makes it much more costly for private universities to raise capital than for public schools, which the legislation would not affect.

"The construction of facilities and the lending of money to students for financial aid serves public purposes that are precisely the same as those served by public institutions. We think it's very discriminatory," Shattuck said.

The Ways and Means vote accepted the recommendation of a task force on the issue headed by J.J. Pickle (D-Tex.). Pickle was appointed by committee chairman Dan Rostenkowski (D-Ill.), who lobbyists said fought hard for the cap.

...Rosty Tried Harder

Lobbyists said Rostenkowski promised key Congressmen a tradeoff: in return for backing the bond cap--whose effects would be felt especially hard in the East, which has a lot of private universities--he would back other proposals to allow taxpayers to deduct state and city taxes from federal tax bills.

The issue of deductibility has been a hot one in several Eastern states, including Massachusetts, New York and Pennsylvania, which have high state income taxes.

"Mr. Rostenkowski seems to be telling people--say, from Eastern states where they are most concerned about these things [both the deductibility question and the bond issue]--that he will take care of them on state and local deductibility if they support this. We lost some votes that way," said Thomas Head, a senior tax lobbyist at the Association of American Universities.

Bruce F. Davie, the Ways and Means Committee's chief tax economist, said the cap is necessary because tax revenue lost to the bonds amounts to an unvoted subsidy. "The federal government didn't make a conscious decision to give Harvard $30 million a year," Davie said.

Despite their large endowments, major universities invest rather than spend their gifts, Davie said. "Harvard keeps the money [it gets from donors] and invests it at 12 percent, and borrows at 8 percent in the tax-exempt bond market rather than use the money people gave them," he said.

But O'Brien criticized Davie's interpretation of how endowments should be used. "Bruce's analysis misses the point that monetary gifts are typically restricted" in their use by the University, O'Brien said. "That money is not fungeable [able to be used for any purpose]."

Shattuck and Head said that while the cap is likely to stay in any final tax reform bill, they would continue lobbying efforts.

The Senate has moved much slower on tax reform and has yet to develop a working draft proposal