Battered Nonprofits Seek to Tap Nest Eggs
Feb. 11, 2009, The Wall Street Journal — Universities, museums and other nonprofits battered by investment losses are pushing states to ease legal limits on spending so they can tap their endowments to avoid imminent layoffs and deep cuts to programs.
For colleges, in particular, the effort marks a startling turnaround, yet another example of the impact of the financial meltdown. Only a year ago, universities, with their $400 billion in endowment money, faced a congressional inquiry because of widespread concern they needed to spend more of their savings on financial aid for students. Now, colleges are finding that state laws aren't letting them spend enough.
The laws passed decades ago to keep charitable gifts from disappearing too rapidly have suddenly started hamstringing institutions from the Audubon Society to Brandeis University, which are taking a beating from the recession and the collapse in stock prices. The laws restrict spending from endowment funds, which invest heavily in stocks and other assets that have taken a hit amid the financial turmoil.
The growing movement is sparking a debate about the value of freeing up emergency cash versus the danger of further depleting key financial reserves, potentially shortchanging future generations.
In Massachusetts, one of several states with pending legislation to remove spending restrictions, some cash-strapped nonprofits are pleading for or quietly supporting a change.
The state's repeal effort is being led by the Massachusetts Audubon Society, whose endowment lost 28% in 2008, ending the year at $85 million. More than a third of the 265 gift funds that make up the endowment can't be tapped for spending. The conservation group, the largest in New England, has furloughed naturalists at its sanctuaries and science centers.
The Massachusetts Society for the Prevention of Cruelty to Animals plans to close three of its seven animal shelters over the next eight months. The society, which took in about 28,000 animals last year and seeks new homes for them, says the closures will trim that by about 11,000. The organization blames "devastating" endowment losses of $11 million last year. State law now restricts the organization's spending unless the endowment recovers.
"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.
The new laws adopted in many states allow nonprofits to use a flexible definition of "prudent" spending that includes factors such as the age of the gift, economic conditions and other available resources.
Among those still looking for a change are the University of North Dakota and North Dakota State University. The schools say they may have to cut scholarships and will face difficulty recruiting top-notch faculty because their endowments are under water. Despite North Dakota State's $100 million endowment, "our hands our really tied" on spending, says executive director Jim Miller.
Andrew Grumet, a New York attorney who specializes in nonprofit law, says many donors and institutions see merit to the old law because philanthropists want to endow operations "in perpetuity" and "there is a real danger that once you dip into principal you aren't going to get it back."
Adam Weinberg, director of the Whitney Museum of American Art in New York, says some of the institution's $120 million endowment is currently below original value and subject to the state's spending restrictions. But Mr. Weinberg says he and his board would resist dipping into principal even though the Whitney recently cut its budget by 15%. "I want to prepare for the future, too," he says.
But Mr. Weinberg, a Brandeis alumnus, wants the school to find an alternative to selling its art collection, and says he sees merit in giving nonprofits some flexibility.
Brandeis is considering cutting 10% of its faculty, along with closing its art museum. Facing an outcry among donors and others over the proposed closing, the school has suggested it would consider alternatives to selling the more than 7,000 works in its collection, including paintings by Willem de Kooning, Jasper Johns, Roy Lichtenstein and Andy Warhol.
Robert Mnuchin, a New York City gallery owner and former Goldman Sachs trader, whose parents gave money to buy 21 artworks for the Rose in the 1960s, supports easing the Massachusetts restriction on endowment spending. He calls the art collection "a treasure" that needs to be preserved. "There are times when society has to be more flexible, and this is such a time," he says.
Joe Baerlein, a Brandeis spokesman, says much of the Brandeis endowment is under water because it was founded in 1948, making it relatively young for a top-tier university. But Mr. Baerlein says the school doesn't want to spend endowment principal. "You want to deal in a prudent manner with any deficit," he says. Brandeis hasn't joined the effort to ease endowment restrictions but is reviewing the Massachusetts legislation.