Question

Do colleges and universities have unrestricted endowments? Why or why not?  Explain.

Answer 1

1. Endowments represent money or other financial assets that are donated to universities or colleges and are meant to be invested to grow the principal and provide additional income for future investing and expenditures. Typically, endowment funds follow a fairly strict set of long-term guidelines dictating the asset allocation that will yield the targeted return without taking on too much risk.

2. Most endowments have guidelines stating how much of each year's investment income can be spent. For many universities, this amount is about 5% of the endowment's total asset value. Because some of the more coveted schools, such as Harvard, have endowments worth billions of dollars, this 5% can equal a large sum of money.

3. An endowment is a donation of money or property to a non-profit organization, which uses the resulting investment income for a specific purpose. "Endowment" can also refer to the total of a non-profit institution's investable assets, also known as "principal" or "corpus," which is meant to be used for operations or programs that are consistent with the wishes of the donor. Most endowments are designed to keep the principal amount intact while using the investment income for charitable efforts.

4. Endowment donors can sometimes restrict how the schools spend this money with an investment policy statement (ISP). For example, donors can decide to use a portion of an endowment's scheduled income on a merit-based or need-based scholarship. Another standard restrictive use of an endowment's income is to provide funding for endowed professorships, which are used to attract world-class educators.

5. Endowment donors can sometimes restrict how the schools spend this money with an investment policy statement (ISP). For example, donors can decide to use a portion of an endowment's scheduled income on a merit-based or need-based scholarship. Another standard restrictive use of an endowment's income is to provide funding for endowed professorships, which are used to attract world-class educators.

6. Except in a few circumstances, the terms of these endowments cannot be violated. If an institution is near bankruptcy or has declared it, but still has assets in endowments, a court can issue a doctrine of cy-près so the institution can use those assets toward better financial health while still honoring the wishes of the donor as closely as possible. Drawing down the corpus of the endowment to pay debts or operating expenses is known as "invading" or "endowment invasion" and sometimes requires state approval.