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Laws keep schools from using endowments

Universities and other nonprofit organizations in two dozen states face a frustrating quandary: They might have the money they need to save jobs, offer scholarships, invest in campus technology, or put on a solid schedule of programs–but they face state laws that keep them from using any of the money.

Many colleges and universities are in the same boat as the North Carolina Symphony, which has all the money it needs. But in this economy, the orchestra isn’t allowed to touch it.

The value of its endowment stands at nearly $6.9 million, a fund the symphony planned to tap this year to help pay its musicians and put on concerts. But because of the slump on Wall Street, the endowment is worth less than the original donations that created it. That means, under North Carolina law, the money is off limits.

"I don’t imagine the donors anticipated a situation where the market would fall so dramatically that the money would be held hostage and unable to support the symphony at all," said David Chambless Worters, the symphony’s chief executive.

Rules governing how nonprofits in North Carolina and 23 other states use their endowments date to the 1970s, when most states adopted a uniform law that prohibits withdrawing money from endowments that fall below their "historic dollar value"–the money given to create the endowment, plus any later gifts.

The law is designed to protect endowments by preventing institutions from dipping into the principal. An endowment is supposed to be a perpetual source of revenue, with institutions drawing off only the earnings.

The rule affects newer funds most severely, because they have had less time to invest a gift and build the endowment’s value.

Neither the National Council of Nonprofits nor the Council on Foundations, both based in Washington, D.C., keeps track of how many of its members are struggling with endowments that are now underwater.

But anecdotally, it is a serious problem. And if the current financial downturn continues, the problem will only get worse," said Harvey Dale, director of the National Center on Philanthropy and the Law at New York University.

The North Carolina Symphony started 2008 with an endowment of $9.3 million, well above its historic dollar value of $7.25 million and enough to allow for a planned withdrawal of $600,000. But with the endowment now underwater, the orchestra is looking for new ways to make money to cover that gap, including scheduling four June performances with the visiting Bolshoi Ballet that should bring in $100,000.

Among the hardest hit are colleges and universities. In the University of North Carolina system, where as many as 70 percent of the endowments at one campus are underwater, some of the system’s 16 schools are going back to donors and asking them for one-time donations to pay for what would normally be covered by the endowment.

The University of Wisconsin system suspended payments this month from 38 underwater endowments, taking away $700,000 that would have gone for scholarships and other programs at campuses across the state. At New York University, about $10 million of $16 million in scholarship endowments is untouchable.

"Our primary mission is to hold our students harmless," said Martin Dorph, NYU’s senior vice president for finance and budget. "As a result, we may have to make choices about other things we may have to eliminate or reduce. By implication, the problem then shifts somewhere else."

That’s what happened at Brandeis University, which originally planned to close its Rose Art Museum and sell its more than 7,000 works, including pieces by Willem de Kooning and Jasper Johns. After much criticism, the school backed off.

There are ways to get around the law. In creating an endowment, nonprofits can enter into an agreement with the donor that allows for the use of principal in emergencies. They can also ask the donor to change the endowment’s terms retroactively, which requires a trip to court if the donor has died.

Dale said that while some donors may have intended for the principal to remain intact, others may be asking: "Was it my intent that the students I want to help won’t get any help?" Dale said that most donors, if asked, would probably agree to loosen the strings attached to their gifts.

Since early 2007, 26 states and the District of Columbia have passed laws that give nonprofit organizations more flexibility in using money from endowments that are underwater. Because of the economic meltdown, 12 other states are considering such laws, according to the National Conference of Commissioners of Uniform State Laws.

Still, some nonprofits aren’t willing to dip into their endowments even when the law allows.

The American Conservatory Theater in San Francisco has watched its endowment, with a historic dollar value of about $22 million, drop to $18 million. It decided to focus on raising money to rebuild the endowment, rather than draw it down to pay salaries.

Two theater employees were laid off in January and four other positions remain unfilled, said theater executive director Heather Kitchen.

"Making the endowment even smaller wasn’t the key," Kitchen said. "It might be worth $13 million when the recession is over, and it would take even longer to get it back where we want it to be."


Uniform Law Commission

National Council of Nonprofits

Council on Foundations

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