The recent financial constraints imposed on universities across the United States have compelled these institutions to consider the possibility of accessing their endowment funds as a means of survival. The pressure has escalated following proposals such as the 21% tax on investment earnings from college and university endowments proposed by House Republicans. This financial squeeze is further exacerbated by the withholding of scientific research funding under the guise of combating antisemitism and anti-wokeism during the Trump administration.
Faced with these fiscal challenges, many universities are resorting to measures like hiring freezes, cutting Ph.D. admissions, and laying off employees as seen in recent developments at the University of Maine. However, universities are discovering that the doctrine of cy pres may offer a window of opportunity to legally modify the restrictions on their endowments.
The doctrine, which allows courts to adjust the purposes of nonprofit assets’ use under certain circumstances, may allow institutions to tap into these restricted funds. Although the doctrine is applied under very specific conditions —i.e., when it’s unlawful, impossible, impracticable, or wasteful to carry out the original purposes— the concept of “impracticable” can be leveraged when restrictions on funds would otherwise hinder the advancement of a valid charitable purpose.
Given the intricacies of the law, universities are advised to proceed cautiously and to involve state attorneys general in these processes as they seek to adjust financial restrictions. Moreover, it is crucial for institutions to first identify which parts of their endowments are “quasi” or “self-designated” — these are internally set aside funds that offer greater flexibility than donor-restricted endowments.
However, universities must bear in mind the limitations imposed by law, such as the prohibition against imprudent distribution of funds. New York and California, for example, set prudent limits on distributions such as a 7% threshold.
Ultimately, if universities seek to utilize endowment funds responsibly, they should not bypass the law despite the pressing nature of their financial predicaments. By carefully navigating these legal avenues, universities can potentially safeguard their futures amidst the mounting financial strains.
Jill R. Horwitz’s expert insights and further details on how universities can approach their endowment constraints are available here.