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What Constitutes Prudent Spending from Private College Endowments? Evidence from Underwater Funds

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  • Drew M. Anderson

    (University of Wisconsin-Madison Madison, WI 53706 Author email: dmanderson5@wisc.edu)

Abstract

This study examines how private colleges and universities choose to spend versus reinvest resources in endowment funds that have suffered investment losses. The analysis takes advantage of a market downturn and public policy shift, which together revealed how colleges define prudent spending. Investment losses during the financial crisis of 2008 left many endowment gift funds below their original donated values, or “underwater.†Colleges in some states were legally required to cut spending from underwater funds. Other states had recently enacted the Uniform Prudent Management of Institutional Funds Act, which allows prudent spending from underwater funds. The act loosened financial constraints, and affected colleges responded by spending 22 percent more from their endowments in the fiscal year after the financial crisis. Constrained colleges did not increase spending from unrestricted parts of their endowments to offset reduced spending from underwater funds.

Suggested Citation

  • Drew M. Anderson, 2019. "What Constitutes Prudent Spending from Private College Endowments? Evidence from Underwater Funds," Education Finance and Policy, MIT Press, vol. 14(1), pages 88-114, Winter.
  • Handle: RePEc:tpr:edfpol:v:14:y:2019:i:1:p:88-114
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    References listed on IDEAS

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