Universities, museums, and other nonprofits battered by investment losses are pushing states to ease legal limits on endowment spending so they can avoid imminent layoffs and deep cuts to programs, the Wall Street Journal reports.
Laws passed in the 1970s allowed charities, which traditionally had favored bonds, to put their endowed assets in stocks and other growth-oriented investments. To protect an institution's long-term health, however, the laws stipulated that endowed funds could not be spent if the value of a gift fell below its initial dollar value. In the years before the 2000 stock market peak, endowments generally soared and the restriction posed no problem. But as the market declined precipitously over the past year, many endowments ended up with gift funds that were "under water" — and thus frozen by law.
At the end of June, 39 percent of colleges and private secondary schools had gifts in their endowments that were under water, compared with 16 percent the year before, according to a recent Commonfund survey. The sharp decline of the stock market since October has probably caused the percentage to increase even further, said Commonfund executive director John Griswold.
Encouraged by nonprofit leaders, twenty-six states have passed laws loosening the spending restrictions since the spring of 2007, with twelve of those states, including California and Ohio, acting 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.
Still, some experts remain concerned that depleting financial reserves today could shortchange future generations. Andrew Grumet, a New York attorney who specializes in nonprofit law, said many donors and institutions see merit to the old law because philanthropists want to endow operations in perpetuity. "There is a real danger," Grumet said, "that once you dip into principal you aren't going to get it back."