Final Questions from Congress Regarding Endowments

Question #12 of the 13 questions Congress has asked colleges and universities is about donations. Here is the question:

Does your college or university grant naming rights to donors based on certain donation levels? If so, please describe the naming rights program, including how much and what percentage of any naming rights donations your college or university has used for tuition assistance.

If you have been reading our prior blogs on this subject, you will know that the primary concern of Congress is the impact of endowment funds on tuition costs. Congress sees good investment returns, ever increasing endowment balances and continual increases in tuition rates and they are trying to determine how all of these items are related or should be related.

This questions appears to imply that a donation received that resulted in a naming right probably has diverted funds away from tuition assistance. As I discussed in a previous blog, I would like to see a respondent indicate that 100 percent of endowment spending has a reducing impact on net tuition levels. Net tuition level is the tuition sticker prices less all of the tuition assistance provided to arrive at actual tuition cash received.

The first point to be made in responding to this question is to note that the institution does not solicit or accept donations restricted to a specific purpose (such as a building or other physical space) unless it needs funds for that purpose. The institution determines its needs and then seeks funds to attend to those needs.  I believe that Congress thinks that donors are dictating to charities in the form of restricted donations and that the charities are happy to do whatever a donor requests. Institutions need to fight this misconception.

The second point that needs mentioning is that donor recognition plays a significant role in fundraising. Not only does it sometimes induce a donor to make a donation or a larger donation than he or she first thought about, but it also reminds others in the institution’s community that donations are an important part of the fiscal life of the institution. Naming a building or a walkway or a chapel bench for a donor as a form of donor recognition is a component of basic fundraising and does not and should not taint the donation in any way.

Congress wants institutions to describe the naming rights program. I believe Congress thinks that there is a menu of naming opportunities, each with a different price tag associated with it. In all of the institutions I have audited, I have never seen such a formalized program. Donor recognition is an individual thing that tends to be different for each donation received.

Lastly, any donations restricted to a specific purpose (which is usually the type of donation that results in a donor-named item) is restricted to that item and none of the amount donated can be used for tuition assistance. However, as I have said many times, every dollar that comes into the institution for operating or capital purposes has the effect of requiring less dollars for tuition. Use that concept however you like in your response to this question.

Question #13 deals with conflicts of interest.

What conflict of interest policies does your college or university have in place to address financial interest in endowment investments (including potential conflicts of interest among and between governing boards, trustees, executives, internal employees tasked with overseeing the endowment, and external asset managers of endowment assets)? How do you vet board members' potential conflicts of interest? What are your policies if a conflict arises with a member of the board of trustees?

Institutions will have general conflict of interest policies and procedures to monitor compliance with those policies. These general conflict of interest policies, while not specifically addressing the overseeing of the endowment do in fact cover those activities. Therefore, I believe that the proper response to this question will be a review of the general conflict of interest policy and an institution should not be defensive if it does not have a specific conflict policy addressing potential conflicts in the endowment area.

In summary, this letter from Congress and the questions addressed therein is wide ranging. Some questions contain inherent assumptions which I believe are incorrect and should be addressed in an institution’s response. One is likely to have only this opportunity to respond to these questions and if you can write a paragraph or more instead of just a simple sentence, I encourage you to do so. Endowments are one of the most misunderstood financial instruments in our country today. Try to reduce that misunderstanding when you respond to Congress.