Colleges invest millions in offshore accounts
Reed College isn't the only Portland higher education institution investing large sums in the Caribbean, despite being the only one named in the Paradise Papers, a leaked database of offshore holdings by wealthy people, corporations and other entities.
The Tribune has found evidence that multimillion-dollar foundations for Lewis & Clark College and Portland State University also invest in these offshore accounts.
The Paradise Papers is made of up 13.5 million leaked files that show how the wealthy avoid paying taxes in their home countries. The International Consortium of Investigative Journalists houses the database and coordinates coverage from it.
The tax-avoidance is perfectly legal, and local college officials say these are normal practices that allow the foundations to provide the best return on investment for their missions.
But many, including those currently hosting a sit-in in the Reed president's office, question the ethics of these sorts of investments.
"I think the whole trustees, their whole process of investment is kind of corrupt," says Addison Bates, a member of Reedies Against Racism, which is organizing the occupation.
Kevin Myers, a Reed College spokesman, told the Tribune previously that Reed is not avoiding taxes, because it is a nonprofit and doesn't pay taxes.
But nonprofits do pay taxes when they receive money not directly related to their mission. Called an unrelated business income tax, this tax could be avoided by investing overseas, says Richard Solomon, a Portland CPA who formerly chaired the Oregon Investment Council. That's the panel that oversees how state money is invested to benefit the Public Employee Retirement System and other pools of government money.
Reed College, as revealed by the Paradise Papers, invests in funds coordinated through the Cayman Islands. These in turn invest in EnCap, a U.S-based venture capital firm for oil and gas companies, as well as a Coller International Partners fund, invested in pharmaceuticals.
"I don't know the specifics of their investments in Encap, but presumably there was some unrelated business income and they used some sort of blocker corporation," Solomon says. A blocker corporation is used to consolidate a partnership of investors into one entity.
Solomon says Reed probably is not avoiding paying taxes on any income made on American soil, but the tax would be paid by the blocker corporation entity, whose records are not public.
Reed College's 2015 tax form shows that the college has $51.5 million in foreign investments, 84 percent of which is in "Central America and the Caribbean," the regional identifier allowed by the Internal Revenue Service. Solomon said this could be because that's where those sorts of investments have been created due to tax shelters for for-profit corporations.
"That's the problem with this stuff, is that it's so complicated," he said.
"Investing internationally is not a controversial or unusual practice," Myers writes in an email to the Tribune. "Global investments are key components to a prudently managed and properly diversified portfolio."
He adds: "Reed is not avoiding taxes. We comply with all applicable tax laws, which includes paying appropriate taxes on Unrelated Business Income Tax."
The 2015 tax form shows Reed counted $382,943 of its income as subject to this tax. The college made $28.8 million on all of its investments that year.
Myers is right that investing internationally is not an unusual practice in higher ed.
Lewis & Clark College's 2015 tax forms show that of its international investments, it has $58.3 million in "Central America and the Caribbean," but just $11.6 million invested in Europe.
Carl Vance, Lewis & Clark's chief investment officer, says the college has $32 million in hedge funds. Some of those investments would be taxed if they were on U.S. soil.
"However, if they were set up in the Grand Caymans, for example, the taxes are minimized based upon provisions in the U.S. tax code. This is a legal and common practice we use to maximize our investment returns," Vance writes in an email. He adds that none of the college's investments are in Central America.
Portland State University Foundation also invests abroad but they use a different strategy, which means the investments do not have to be declared on their Form 990.
"A portion of the foundation's endowed resources were invested in international assets by our investment partner J.P. Morgan," writes PSU Foundation spokeswoman Cate Soulages. "Those investments are not the type reported on the Schedule F, which discloses direct foreign activities."
The foundation reported $7.5 million last year in investment income. A quarter of their assets were in international equities; a further breakdown was not available by press time.
Solomon, the independent accountant, declined to comment on the propriety of educational foundations avoiding paying taxes that fund government services, such as education, health care and roads. But he did say that there are a lot of unresolved questions around fair tax rules for nonprofits. Even universities with massive foundations, such as Harvard University's $38 billion fund, still get donations that are tax-exempt, he notes.
"When somebody makes a contribution to a school that's got $30 billion, should they get a write-off?" he asks. "These are cosmic questions."