Recent punitive actions by the Trump Administration are putting universities under significant financial strain. These include cutting USAID funding, cutting NIH funding, cancelling (or threatening to cancel) federal funding at Columbia and 60 other universities for allegedly failing to protect students and faculty from “antisemitic violence and harassment,” and threatening to cancel federal funding at 50 universities for using “race-based preferences” in admissions, scholarships or any aspect of student life. And, already, the effects of these cuts and threats are being felt by faculty, students, and staff. Johns Hopkins has said it will eliminate more than 2,000 jobs; several universities, such as the University of Pennsylvania, have reduced or entirely paused graduate admissions; and others, such as North Carolina State, Emory, and Harvard have implemented hiring freezes.
Some of these cuts are flagrantly illegal and may be paused or overturned if universities fight them in court. But short-term disruptions are inevitable, and universities may now need extraordinary resources to plan for leaner times ahead and to rethink long-term funding models particularly if they do not acquiesce to demands from Trump. For the lucky few universities with extraordinarily large endowments, the question becomes: can we use our endowments to protect our mission (and maybe even share the wealth)?
The answer is complicated because endowments are complicated. Public critics mistakenly characterize endowments as giant pots of money that universities can endlessly tap, like a magic checking account. But endowment defenders often cast endowments as entirely inflexible, with wholly predetermined endowment spending. The answer is somewhere between these two positions. There are real legal constraints on endowment spending, and school leadership bodies have important fiduciary duties to uphold in administering the endowment funds. But these leadership bodies also exercise discretion in determining how endowment income is spent, and this discretion is shaped not only by legal obligations but also institutional need, administrative preference, and donor relations.
Let’s start with the basics. What is an endowment? The endowment is nothing more than a collection of gift funds that are all restricted in one similar way – the principal is not to be touched (other than to be invested) and only the income that the fund generates every year can be spent. Some of these funds are unrestricted in terms of where that income can be spent, in which case university leadership has the right to direct the income revenue to the place of highest need in the university, while others include further restrictions, specified by the donor. Endowed funds can be restricted to a particular use, say for supporting a faculty chair, for student scholarships, for athletics, or for the library. It is also worth mentioning that restrictions on charitable gifts can last in perpetuity, just like charitable trusts can, exempt on policy grounds from the normal property rules for private trusts.
If a donor has not specified whether or not the gift is to be endowed or spent down, the university can choose to treat is as an endowed gift, invest it with the endowment, and generally treat it as “quasi-endowment.” In these cases, the gift is also usually unrestricted. Often these are older funds, that may have been established without a gift agreement (in fact, gift agreements have only been used regularly in the last several decades), and these funds can be sizeable because endowment income that is not spent on its designated target is reinvested, growing the principal with every passing year.
As one might suspect, university leaders like unrestricted endowment funds (and often gift officers push for them), but unrestricted endowed funds do not form the bulk of most endowments. Yale reports that only 25% of their endowment income is unrestricted, Harvard says 20%, and Stanford 22%. Nowadays, the trend in giving is toward restricted giving, and the institution and donor almost always hammer out the specifications of an endowed gift in a negotiated gift agreement. Sometimes gifts come to the institutions with pre-set terms, usually as an unexpected bequest through a will or other donative instrument.
All of these donor-set restrictions are legally binding restrictions that must be observed, and to violate donor restrictions could constitute a breach of fiduciary duty by the institutions’ trustees or directors. Such violations could wind up in court, based on claims of trust (fiduciary duty) and contract law (gift agreement) violations. This point was made clear when Sweet Briar College was on the verge of closing their doors ten years ago, claiming that they could not keep the school afloat because they did not have enough general revenue and the $84M endowment did not provide them with enough flexibility given the donor restrictions. An important part of the final settlement that kept the College open was the state attorney general lifting restrictions on $16M of endowed funds.
Accordingly, endowments cannot pivot or produce large sums of unrestricted income on a moment’s notice. As Beth Popp Berman has recently explained, even the most generous endowments cannot replace federal science funding. The numbers simply don’t add up, and the flexibility is not there. Endowments are colossal ocean liners controlled by a thousand restraints put in place by donors, by a thousand gift agreements sitting in files in the development office and tracked on fundraising databases (which, to be clear, are not public documents and cannot be accessed by anyone other than development staff and school leadership). The fact that donors have so much control over the direction and distribution of endowment funds has given rise to the concept of donor governance, the idea that donors play a large part in institutional governance based on their control over where money flows. In this way, the endowment is a monumental inheritance that keeps building over time, a grab bag of last wishes, administrative demands, and personal legacies.
But, if endowments are creatures of restriction, they are also in smaller measure creatures of interpretation and discretion. Obviously, university leadership has the discretion to direct unrestricted endowed funds to the area of greatest need. Generally, these unrestricted funds go towards unexceptional operational purposes like infrastructure repair, technology upgrades, or maintenance equipment. They could, however, be repurposed in this critical moment to fund new programmatic initiatives (centers on free speech or anti-racism), support unexpected legal needs (helping clinics in a law school fight the government), or provide special hiring opportunities (including hiring opportunities to diversify faculties and staffs).
In addition, schools have the ability to exercise discretion in interpreting donor restrictions and could read donor terms in various ways in order to align with institutional needs and values. Money earmarked for the art history department that has been funding summer study abroad scholarships could be redirected as circumstances demand to help students who lose federal scholarship funding. Similarly, student scholarship funds meant for students from “underrepresented groups” could be used to provide additional support for trans students.
Finally, schools also have the power in some cases to petition courts to change the terms of a gift through the cy pres doctrine in order to give themselves increased flexibility. Cy pres petitions must propose changes that are not inconsistent with the donor restrictions, but they still allow for meaningful change if the original terms have become impossible (a fund at a medical school for polio research could be changed to general medical research) or impracticable (a prize fund to reward the best student paper about Edna St. Vincent Millay could be modified to become a fund for general student support in the English department). Cy pres petitions have been the means of changing restricted gifts with discriminatory terms and conditions, and almost all schools have gone to court at some point to change older gifts, for example the numerous scholarships schools once created to support white, Christian men. Schools with large endowments have by now modified the most egregious conditions attached to the largest of their old funds, but it’s likely that any number of restricted funds still remain that could still be modified in order to free up resources.
The bottom line is that universities do have some latitude, and they should use what flexibility they do have to stand up for their programs, employees, and students – for the core constituents in a mission-driven environment – in this time of unprecedented assault. To do so, however, institutions must grapple with and resist three tendencies.
This first is that institution generally play it safe and try to please everyone when spending from restricted funds. They take the moderate approach in hopes of pleasing as many people as possible. Similarly, those making endowment spending choices tend to avoid the radical, on either end of the political spectrum (hence why they are in trouble with the radical conservatives right now).
A second tendency is that the institution, delighted to have the money, holds on to it tightly and stewards it conservatively, loathe to spend it on the wrong thing and not have it available when really needed. This has been the longstanding, and legitimate, complaint against endowments and previous efforts have suggested, for instance, increasing the annual payout to provide more benefit to the intended recipients (students, faculty, staff) and to engage in wealth-sharing rather than wealth-hoarding. This is not necessarily a bad idea. More importantly, this is not the type of reform that’s on the table right now, which involves simply raising taxes on endowment investment income, perhaps to ruinous rates.
Finally, the third tendency is the desire to send signals to future donors. Accordingly, even when discretion in spending is appropriate and available, institutions are often concerned about sending the right message in order to ensure that potential donors feel comfortable with the institution and its programs. This is another, weaker, form of donor governance in that speculative donor desires come to control institutional behavior.
All three of the tendencies are almost unavoidable in a large institution that is serving multiple constituencies and takes a long-view in spending. Endowments are carefully managed and administered pools of money and funds are not meant to be spent blithely. But there does come a point when schools will need to prioritize spending the endowment over stewarding it toward preservation and growth, in order to protect the mission and the school’s primary constituents.
