University officials may increase endowment spending by as much as $50 million this year in light of a Massachusetts state law passed this summer, but they have not yet decided how to take advantage of the new legislation, Harvard’s Chief Financial Officer Daniel S. Shore said in an interview this month.
Under the Uniform Management of Institutional Funds Act, which was drafted in 1972 and previously governed endowment payouts, institutions were only allowed to spend income from an endowed fund if its current value–including accrued interest–exceeded the original value.
After suffering a 27 percent investment loss in the fiscal year ending June 30, 2009, the University found itself unable to tap many of its most-recently endowed funds, which had fallen in value to less than the amount bequeathed by the donor and are considered “underwater.”
The new legislation, the Uniform Prudent Management of Institutional Funds Act passed in July, now permits institutions to spend as much of an endowment fund “as the institution determines is prudent,” meaning that Harvard can now determine appropriate expenditures from more recently acquired endowments.
The difference in available income from the endowment is about $50 million, Shore said. With an endowment payout rate over 6 percent, this indicates that the new legislation loosens restrictions on about $800 million of Harvard’s $26 billion endowment.
“Harvard’s endowments tend to be quite old, so they have a lot of appreciation built up in there,” Shore said. “Underwater funds’ challenges have been biggest in the places that have received the newest endowment funds.”
In the past five years, both Harvard Law School and Harvard Business School have completed major capital campaigns, raising $476 million and $599 million respectively.
The actual increase in endowment spending has yet to be determined, according to Shore, as the University is in the process of formulating a new policy to address spending from underwater funds. But Shore said he expected the new income to be less than the $50 million figure. Excessive spending from a specific endowment fund, especially one that has already fallen below its original value, can erode at its long-term value—a crucial consideration for financial planners at the University, since most endowments are meant to last in perpetuity.
In recent months, University administrators have also taken steps to ensure that past gifts—which often come with strict spending guidelines—are flexible enough to allocate funds more efficiently.
University officials are currently evaluating whether these restrictive agreements can be renegotiated to match available resources with current needs.
Last month, Harvard renegotiated terms to an agreement with a South Korean foundation that loosened restrictions on a $13 million endowment established in 1975 for Korean studies. The funds, which were originally dedicated to endow a senior faculty member’s position in the field, can now be used to support tenure-track faculty, visiting scholars in the department, and students studying the economy and society of modern Korea.
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