Should Wealthy Universities Use Their Endowments During the Pandemic? It’s Not That Simple.

By Hugh T. Ferguson, NASFAA Staff Reporter 

As the Department of Education (ED) continues to issue guidance on how to distribute funding provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the issue of large endowments has come into focus, with wealthier institutions coming under fire for not using their own funds to support students and manage costs.

ED specifically called out certain colleges and universities with sizable endowments, requesting that those that did “not have significant financial need at this time,” refrain from accepting any funding from this round of aid. This request raised the question: Does endowment size suggest that certain schools have less financial concern in the wake of COVID-19 than others? 

With many questions raised about how institutions handle endowments, there has been some confusion as to what schools can do with these funds in the middle of the national pandemic.

The following is a transcript of an interview with Liz Clark, vice president of policy and research at the National Association Of College And University Business Officers (NACUBO), highlighting how endowments can and cannot be used, and why leaders should be wary to point to endowment size when allocating aid. The transcript has been lightly edited for length and clarity.

 

Today’s News (TN): What is an endowment?

Liz Clark (LC): Endowments are a critical part of how colleges and universities — and many nonprofit entities — fund their operations. They are a collection of funds, typically gifts from donors that the nonprofit organizations steward over time, rely on, and look to as a reliable source of steady and growing funding for their operations. Colleges and universities have endowments, but so do museums, hospitals, zoos, orchestras, many large nonprofits — and they use them to supplement their income to support their operations.

Many of the funds within an endowment are restricted in their use, but also in terms of how long a university has to use those funds. Many donors request that their endowment be kept in perpetuity, that is the college or university is required to manage those funds so they last, frankly, forever. 

This is what's different between endowments and reserve funds. Reserve funds are more like rainy day funds that are there to be used in case of an emergency, or to pivot and use strategically if something had not been included in an institution's original long-term plans, or short-term plans for that matter. 

An endowment is meant to be invested and paid out over time, so it's not the same as those rainy day funds. It's not as if it's a large pool of funding that just can be tapped into and drawn down like a savings account. The institution has to ensure that the way those funds are spent will last over time, and they carefully manage that spending with policies that are established by the investment committee of typically the college or university's board of trustees. 

 

TN: What is the main difference between an endowment for a school as opposed to other nonprofit entities?

LC: Most endowments work in very similar ways. They are part of the toolkit that the advancement office or a foundation that may be affiliated with a university use to support or manage the charitable giving to an institution. 

One thing to remember is that not all charitable giving to a college or university goes to an endowment. A significant part of giving to colleges and universities goes directly into annual funds to use for current operations, but it's typically the large gifts to an institution that go into an endowment. 

Typically, the donors stipulate how the funds should be used. Sometimes they direct them to student financial aid. They may direct them to specific research or scientific priorities. They may stipulate the funds should be used for supporting faculty, libraries, medical research, or even an institution's public service programs.

 

TN: What sort of restrictions are there on endowments?

LC: The first thing to know is that an endowment is not one pool of funds. For most institutions an endowment is made up of hundreds or even thousands of individual agreements with donors. Those agreements impact an institution's ability to tap into those funds. 

These are legally restricted agreements. Some donors want these funds to last in perpetuity. A great way to think about it is to compare an endowment to a retirement fund. If someone has saved for retirement over time, and they plan for their retirement to last at least 20 or 30 years, they're not going to tap into their retirement funds and draw down the funds in any one single year in a way that would hurt them over the long-term time period.

The donor restrictions are a part of those agreements that are struck with institutions. Again, most donors want those funds to be held in perpetuity. And the institution has to manage those funds to legally uphold the commitment they made with the donor when the donor directed those funds to the institution.

 

TN: Are schools with large endowments better positioned to handle economic crises? 

LC: Large endowments certainly help support an institution's operations, but you have to look at the overall operating picture of any one given institution. 

Most colleges and universities rely on a combination of tuition revenue, endowment support, if they're a public institution they rely on state appropriation, and there can be many other sources of operating revenues for an institution. It's not so much the size of an endowment that impacts a college or university's annual access to revenue — it's how their overall operating revenues come together.

For those institutions that are heavily reliant on tuition and only marginally reliant on an endowment, or other sources of funding, they really don't have an ability to significantly replace any lost tuition revenue with endowment revenue. 

Schools with large endowments certainly have more revenue available to them, but again it depends on what their overall operating budget looks like as to how well their endowment can serve their needs.

 

TN: Would it be a mistake for the federal government to take the size of an institution's endowment into consideration when allocating aid in the wake of COVID-19?

LC: Endowments are an instrument of good financial planning for nonprofit entities — large and small. Institutions with large endowments are certainly better positioned to rely on a larger, reliable funding source. 

However, different institutions rely on their endowment payouts to differing degrees. Some rely heavily on an endowment payout each year. In other words, an endowment-dependent school relies on the investment portfolio for a large part of its annual operating budget. For other schools, they may rely more heavily on tuition and other revenue to support their education and research operations, with the annual endowment payout only being a small part of their operating budget. 

So, while a large endowment undoubtedly provides more annual cash flow than a smaller endowment, the extent to which it can support the annual operations of an institution depends on many other budgeting and planning factors.

 

TN: What happens if an endowment’s funds are depleted?

LC: If an endowment were to take a significant draw in any one given year, what it would result in is increased funding for that operating year, but it could result in less funding for the future. 

An important thing to remember is that endowments are meant to serve today's students, as well as students into the future. An outsized drawdown taken today would mean that the institution may not be fulfilling its commitment to its donors who manage the funds in perpetuity, but it would also mean that the endowment might return less in the future.

 

TN: Any final thoughts you’d like to share on the discussions surrounding endowments in the wake of COVID-19?

LC: I would say that not many donors have gone to colleges and universities, and said, “here's a donation for you to use in case of a worldwide pandemic.” Many donors go to colleges and universities consider donating with other goals in mind, such as supporting scholarships or academic programs, and it is not easy for colleges and universities to pivot to those endowment funds and look for emergency revenues in the way that some have called for.

 

Publication Date: 5/7/2020


Karen C | 5/7/2020 4:12:18 PM

I have a similar question on the tax-ability of institutional funds provided to students as emergency grants vs. CARES/HEERF funds. Institutions are trying to help students and provide institutional funds beyond qualified educational expenses, but students end up owing taxes on those funds.

Charles M | 5/7/2020 11:11:36 AM

Specifically for schools who are able to meet the full need of their students and for using endowments to fund institutional emergency grants, why isn't there more focus on the fact that CARES/HEERF funds do not count toward the COA and an institutional emergency grant would have to count toward COA?

Even with a amazingly funded institutional emergency grant program, the CARES/HEERF can be provided to students in ways no other institutional or foundation/endowment funds can be awarded, regardless of the amount of other funds available at the college.

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