Why coronavirus-battered universities may not be able to use their endowments
"Schools are legally bound to spend the money in the way the donors determined."
The saga of elite universities initially slated to receive million-dollar bailouts as part of the CARES Act erupted in a firestorm of controversy this week, with President Donald Trump, lawmakers and others slamming schools for taking the funds while pointing to their billion-dollar endowments.
Harvard University, Stanford University and a slew of other colleges eventually reversed course after mounting pressure, saying they wouldn't accept stimulus funds, despite taking major financial hits as a result of the coronavirus pandemic.
In the midst of the controversy, many critics were quick to question why the elite universities couldn't use their massive endowments to sustain financial losses during the pandemic.
Harvard's endowment, for example, reportedly now tops $40 billion, yet it was initially allotted to receive nearly $9 million in government stimulus funds. Cornell University, which was slotted to receive $12.8 million in funding despite a $6.5 billion endowment as of 2017, said in a statement it "faces an anticipated COVID-related budget shortfall of over $100 million for the coming fiscal year."
Most experts say, however, that these universities will not be able to access their endowments to sustain financial losses throughout the pandemic due to a web of restrictions.
Jim Hundrieser, the vice president for consulting at the National Association Of College and University Business Officers, told ABC News that "most funds in those endowments are earmarked or designated."
"Let's say you or your family gave money to Harvard, and you say that has to go to first-generation females from the city of Boston," he said. "Those dollars have been designated and a gift arrangement is often required."
"Rarely does a family say if some random pandemic comes up feel free to use it however you wish," he added. "It’s usually a long-term gift for a very specific nature."
Hundrieser added that most institutions also have strict spending policies that say you can withdraw a certain percentage from the endowment "and it's those returns on those investment dollars that you can use."
Steven Bloom, the director of government relations at the American Council on Education, told ABC News that it's "really a misnomer to say an endowment."
"Any individual university’s endowment is really endowments, plural, because they are made up of thousands of individual funds that are established by individual donors," he said.
Bloom noted that with endowments, "schools are legally bound to spend the money in the way the donors determined when they give their money."
For example, Bloom said, "If a fund is set up to fund a chair of chemistry, it can't be used for financial aid or pandemic response."
He added that schools could be sued if they misuse endowment funds for anything other than the intended purposes set out by their donors.
"It's just a misunderstanding by a lot of people," he added. "People think of them as bank accounts; they are more like a mutual fund… They have thousands of different sub accounts."
On its website explaining its endowment, Harvard University said that access to the funds is very limited.
"There is a common misconception that endowments, including Harvard's, can be accessed like bank accounts, used for anything at any time as long as funds are available," the website states. "In reality, Harvard's flexibility in spending from the endowment is limited by the fact that it must be maintained in perpetuity and that it is largely restricted."
Moreover, it added that many endowment gifts are "intended by their donors to benefit both current and future generations of students and scholars."
"As a result, Harvard is obligated to preserve the purchasing power of these gifts by spending only a small fraction of their value each year," the website added. "Spending significantly more than that over time, for whatever reason, would privilege the present over the future in a manner inconsistent with an endowment's fundamental purpose of maintaining intergenerational equity."
It added that "roughly 80 percent of endowed funds" are subject to restrictions designated by the donor.
Pandemic creating 'disaster of historic proportions' for higher education
Despite the noise surrounding the handful of schools with massive endowments, the experts urge that the people not forget the massive impact of the pandemic on colleges across the country, especially smaller less-endowed institutions.
The outbreak is having an "enormous, historic impact on higher education," Bloom said, calling it a "disaster of historic proportions."
"There will probably be some institutions that will not survive," he said. "It's an existential threat. Smaller colleges that are tuition-driven, they have little or no endowment, if they lost 15 to 20% of their class, that is a huge budget crisis."
Hundrieser echoed Bloom's sentiments, saying, "there are harder financial days ahead for many private and public entities."
"I hope that we don't lose the value of higher education and the importance that it means for our society, for our economy," he said.
"We’re producing most of these front-line workers that we are applauding every day with great pride, those come from higher education doing its work and preparing doctors and nurses and teachers," he added. "I hope we don't forget about that when we think about the long picture of our recovery."