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Officials from one school also said that their institution would turn down a gift that came with restrictions that they believe would be too restrictive or would not contribute to the mission of the institution. Nine of the ten schools we visited utilize gift agreements that include standard terms giving the schools flexibility to modify restrictions when the endowed funds become unusable under the original restrictions. Schools can also negotiate restrictions with donors or their descendants after the gift has been made.
On rare occasions schools may go to court to ask for changes to endowment restrictions.
Officials how to buy a research paper told us that because the university does not always receive applications from qualified students from Birmingham, the endowment would sometimes go unused. Howard officials asked the donor to broaden the restriction to include all Alabama students, how to buy a research paper and the donor agreed. However, the fund eventually earned more than could possibly be distributed for this purpose, so the school took legal action to loosen the restriction so that income from the fund could be used for students in all of its dormitories. Not all restrictions are the result of donor intent. As noted previously, when institutions turn nonendowment funds into quasi-endowment funds, they may also restrict the funds to a particular purpose, though the institution is not legally bound by such a self-designated restriction.
For example, Berea College has a policy of designating all bequests to the college as quasi-endowment funds restricted for financial aid. Officials we spoke to said that the way that endowment funds are restricted governs how those funds are used once they are distributed from the endowment. School officials said that they generally consider all spending to be education-related because it furthers the educational mission of the institution. To the extent that endowment funds are distributed for purposes that are not directly related to financial aid, those funds may still provide benefits to students by improving education quality for a given cost of attendance.
An endowment made for a faculty position, for example, means that students receive the teaching and other benefits that the new faculty member provides, but a portion of their tuition and fees does not have to go to pay additional tuition and fees for that person. Among the schools we visited where data were available, the percentage of funds specifically restricted for financial aid — and the distributions for financial aid from those funds — varied substantially.
For example, funds restricted for financial aid ranged from about 12 percent to about 68 percent of endowment assets at case-study schools in 2009.
The distributions from such funds were as high as about 73 percent of endowment distributions at one school and about 51 percent of distributions at another school in 2009.
At several of the other schools we visited, distributions from funds restricted to financial aid were a smaller component of endowment distributions — between 10 and 23 percent at five of our case-study schools in 2009.
The Department of Education does not collect information from all schools about endowment distributions, so we developed information on such distributions from our case-study schools. Officials at the schools we visited told us that two important considerations went into their policies governing endowment distributions. First, they said that they need to protect the purchasing power of the endowments so that both students today and students in the future can benefit from the endowment. They said that they are careful not to distribute more from the endowment, over time, than the investment returns they realize, minus inflation and management fees. Second, officials said that they need to avoid large fluctuations in distributions from year to year. One official said, for example, that the school could not tell academic departments to lay off personnel one year and hire them back the next, or tell the financial aid office to reduce scholarship funds for students partway through their undergraduate years. At the schools we visited, officials created mechanisms to smooth the effects of market fluctuations and ensure a reliable stream of funding for the units within the institution that use endowment funds. At another school, the policy averages market values for each quarter of the prior 3 years to further smooth market fluctuations. At another school, officials calculate a percentage increase in endowment distributions based on the higher education inflation rate over the prior 10 years. Officials at the schools we visited noted that these policies and 20 Case-study schools used different terminology to describe financial aid. For example, in response to the decline in endowment market values that came with the current economic downturn, several schools have increased their endowment distribution rate. Another school has changed its smoothing formula to include a slightly lower distribution rate and a 60-month average of market values instead of a 36-month average. For budgeting purposes, schools determine their target distribution rate and the distribution amounts that their distribution formula or policy dictates for the coming year, but officials told us that they may not accurately predict how the market value of the endowment will change during the year.