Colleges Are Tapping Restricted Endowment Funds, Survey Finds

The financial crisis is prodding colleges and foundations to take advantage of a new law that allows increased flexibility in endowment spending, according to the results of a survey released today by the Association of Governing Boards of Universities and Colleges.

Until recently, colleges faced strict legal limits on spending from donor-restricted endowments where the market value of the fund has slipped below its original worth at the time of the gift. But since 2006, 37 states and the District of Columbia have passed a law that gives flexibility in spending from such “underwater” funds. The law, which has been introduced in 10 other states, also challenges college governing boards to rethink endowment management.

A report on the survey results is available on the association’s Web site, which also features a description of the law and a magazine article about endowment spending.

The association conducted the survey this past spring, in partnership with the National Association of College and University Business Officers and the Commonfund Institute. It found that 38 percent of the total value of the endowments of 184 colleges and affiliated foundations was underwater.

Of the surveyed institutions, only 27 percent had frozen all spending from endowment funds that were worth less than original value, a decrease of 11 percent from the number before the new spending law was enacted. About 31 percent were tapping underwater endowments at the same rate that applies to healthier funds.

The association praised the new law for giving colleges latitude in tight times.

In an interview, David G. Bass, the association’s director of foundation programs and research and the report’s primary author, said most governing boards were doing a good job of managing the competing needs of spending to preserve their institutions’ strengths while also trying to protect endowments.

“The boards that we’ve heard from are giving it a lot of careful attention,” Mr. Bass said, adding that boards face many tough decisions over the next year about endowment returns and the sustainability of college budget models. —Paul Fain