Battered Nonprofits Seek to Tap Nest Eggs

"Where do you take an animal you find on the street?" says spokesman Brian Adams. "Is it possible to find an animal a home in this recession?"

Gift-spending restrictions on nonprofits were enacted across the country in the 1970s. State legislators passed a raft of rules that let charities -- which traditionally favored bonds -- put their savings in stocks and other growth-oriented investments. But a key proviso protected an institution's long-term health: An endowment couldn't spend a dime if a gift fund fell below its initial dollar value. Endowments are generally made up of major gifts, each with restrictions of how they can be spent.
[to the rescue]

In the years before the 2000 stock-market peak, endowments generally soared, with the restriction posing no problem. But as the market soured over the past year, more endowments have gift funds that are "under water," or below their original worth -- and by law, frozen.

The little-known state spending limits figure in the high-profile controversy on the suburban Boston campus of Brandeis University. In part blaming steep endowment losses, the school announced late last month it was closing its Rose Art Museum and selling a collection valued at $350 million. Brandeis says Massachusetts law made it difficult to use much of its endowment, which recently totaled $549 million after posting a 25% decline since June.

At the end of June, 39% of colleges and private secondary schools had gifts in their endowments that were under water, compared with 16% the year before, according to a survey of 628 institutions by Commonfund Inc., a Connecticut money manager. John Griswold, a top Commonfund official, says the percentage has likely swelled beyond 39% now because the survey predated the October market swoon.

Since the spring of 2007, encouraged by nonprofits, 26 states have passed laws loosening the spending restrictions. Twelve of those states, including California and Ohio, acted in the past eight months.