The complexities of higher ed finance make it surprising to realize a college endowment with millions–or billions–in the bank can’t use those dollars for just anything.
There’s a new and frequently occurring question these days around higher education’s response to COVID-19: Why are colleges and universities laying off employees and cutting faculty when they have millions (or billions) of dollars in their endowments?
The question itself is rational enough. It seems unjust that Harvard cannot muster the budget to pay its dining services workers when it has $40 billion in the bank.
However, the vast majority of American colleges and universities — and let’s make sure we include community colleges in this conversation — are not Harvard. Not even close. According to a 2014 ACE report, slightly over half of four- and two-year non-profit colleges and universities even have an endowment, with a median endowment value of $7.9 million.
Each of North Carolina’s 58 community colleges has a local foundation that supports their work. Half of the state’s community college foundations have less than $5 million in the bank, however, and the smallest of these has fewer than $500,000 in assets.
That’s still a lot of money to most folks, though, and certainly enough to save a few employees if an institution is facing furloughs, right?
The issue is endowments aren’t designed to be piggy banks. Most folks outside academia don’t know how endowments work, so let’s go over a few basics.
First, a college’s endowment is almost always created of multiple, individual funds donated to the institution by many different donors over time. When we refer to a college’s endowment, we are typically referring to dozens (or hundreds, or even thousands) of scholarship funds, faculty funds, program support funds, and the like.
Second, each of those individual funds have their own specific purpose (providing financial aid, or salaries for faculty, for example), which are called restrictions. These restrictions bind the fund to only allocate resources toward the particular purpose stated. This means, for example, a college cannot use a scholarship endowment to pay a biology professor. Most of the multiple funds in an average college endowment are restricted in purpose.
Finally, college endowments are built to be sustainable, long-term funds. Think of them like retirement investment accounts. The donor gift that creates an endowment is a bit like a nest egg, and the idea is to spend the investment income that nest egg generates. Most endowment funds have to follow a college or university’s investment and spending policies, which govern how much an endowment can distribute each year.
That makes sense on a number of levels. Long-term stability has a lot of uses in higher education. You don’t want Myra’s scholarship to run out of money in the middle of her sophomore year. It’s hard to hire an economics professor when the faculty endowment used to pay him will run out of money in a few years. Endowments, then, provide a means of supplying reliable, sustaining support year after year, class after class, administration after administration.
To recap, then, endowment funds come with a lot of strings attached. They are frequently restricted by the purposes they can be used toward and the amount of funding they are allowed to expend. These restrictions are imposed by legal agreements, too. Violating them would bring consequences.
That doesn’t mean a college’s endowment is forever tied down, nor does it mean there aren’t measures to liberate some of these dollars to be used in extraordinary circumstances like these. As many have pointed out, federal and state legislation have created exemptions that free endowments from their restrictions. Some of that legislation was created in the wake of the 2009 financial crisis.
Further, many institutions are blessed with unrestricted endowment funds, which can be used toward whatever cause is deemed the greatest priority. (Administrators love these!) Unrestricted endowments are still endowments, however, meaning they cannot be liquidated and must abide the college’s investment and spending rules. And more often than not, colleges have already committed those unrestricted dollars for very good causes, like financial aid or program support.
It’s easiest to think of an endowment as a financial asset, just as a college’s academic buildings are assets. Each serves a dedicated purpose, and though each has significant value, it makes little sense to cash them in to deal with an immediate crisis. That is especially true when we remember that most colleges have modest endowment funds.
Colleges and universities will have to make difficult financial decisions in the coming months and years. It’s possible that, as was the case after the Great Recession, the COVID-19 pandemic reshapes legislation around college endowments.
Until then, remember that higher education mostly has its hands tied when it comes to using endowments for immediate cash shortfalls. College leaders are practicing long-term prudence when they take action to preserve an institution’s future and ensure that, when students do come back to campus, the scholarships, faculty, and programs they rely upon will still have sustaining funding.
Author’s note: This article was first published on May 14, 2020 as a perspective piece by EducationNC.