Last September, I spoke with Jeffrey Moritz, an Ohio State University alumnus, who said that in 2016, he discovered that his father’s 2001 endowment gift had decreased in value and that the school failed to provide the requisite amount of scholarships as dictated by the gift arrangement.
The revelation prompted Moritz to launch the Honor Bound Initiative, which calls on OSU to honor donor intent and provide greater transparency into how it spends endowment funds. While the initiative focuses exclusively on how OSU manages these funds, it has also cast a light on common, yet frequently misunderstood fees that universities apply to gifts to support ongoing advancement operations.
This week, the Ohio Senate passed (SB) 135, a higher education bill that includes new rules allowing the donor’s heir, estate or the attorney general to sue the institution to comply with the donor’s intent. Moritz testified in front of the Ohio Senate Workforce and Higher Education Committee in support of the bill on May 19. The bill now heads to the Ohio house.
In a statement to IP, OSU spokesperson Benjamin Johnson said, “Ohio State manages all endowment funds in accordance with state law, which is consistent with the uniform endowment law that has been adopted by 49 states. The university has always been transparent about our modest development fees, which have been in place since 1994.”
The developments out of Columbus may appear to be a local affair, but the key issues at play—the existence of endowment management or development fees, their inclusion in gift agreements, and how the institution uses the fees—apply to advancement officers and donors everywhere.
“Increasingly common” development fees
Last September, Brian Flahaven, senior director for advocacy for the Council for Advancement and Support of Education (CASE), told me that universities frequently take an endowment management fee on gifts to “help the institution cover the costs of administrative and management operations so that the fund can be managed effectively.” Flahaven said these fees are very common.
Schools also apply “development fees” or “gift fees” that administrators use to keep the advancement machinery humming—bankrolling prospect dinners, fundraisers’ salaries and officers’ travel expenses. Fundraising expert John Taylor told me last September that these fees are separate and distinct from endowment management fees and are becoming increasingly common, especially in public institutions. However, universities don’t always list the individual fees in donor contracts. “Most will refer to ‘administrative fees,’ but will not mention specific percentages,” Taylor said. “That would make it challenging to update all the agreements when those fees change.”
In 2010, Taylor crafted North Carolina State University’s first-ever fee program, which offers a good example of how such fees work. The university implemented a one-time 5% “gift assessment fee” with 3% designated for central development operations and 2% designated to the fundraising entity receiving the gift. The fee did not apply to gifts for endowments. The school also implemented a fee on endowment earnings to be evenly distributed between central development and the fundraising entity receiving the endowment gift.
According to North Carolina State’s advancement office, the fees would help it more than double its annual gift income by allowing it to hire more fundraisers and improve its information and management systems. Taylor told me it is critical that officers inform donors about these fees up front, and noted that North Carolina State published its fee program on its website.
Johnson, OSU’s spokesperson, said in the school’s statement that “development fees are recognized in Ohio law as prudent and are a respected practice among universities and charitable institutions. Development fees contribute significantly to the growth of the long-term investment pool (LTIP), which funds education and research across the university’s 15 colleges. A national 2010 survey found that 100% of institutionally related foundations with an endowment of $500 million or more assess a development fee.”
Johnson told me that all endowed gifts are pooled with other long-term university investment funds in OSU’s LTIP. “The development fee is an annual fee that equals 1% of the five-year average of the market value of our gifted endowments, but that amount is expensed against the entire LTIP, and not just the portion of the LTIP that is comprised of gifted endowment funds,” he said. “This results in an annual effective rate of approximately 0.42% being assessed against all funds in the LTIP, including the gifted endowment funds.”
The Honor Bound Initiative has a few complaints about the way the school is handling endowments. First, the donors are objecting to the fees themselves, and the channeling of a percentage of donated assets toward development costs. They also say donors are not properly informed of the fees in the first place. Finally, they say the combination of poor investment choices and fees are depleting endowed funds.
Questions about funds’ performance
Greer Rouda graduated from OSU in 1977 and went on to run a successful real estate brokerage business in Columbus. In 2000, Rouda’s parents established scholarship endowment funds at OSU for athletics and real estate business majors.
Last year, Moritz encouraged Rouda to check the family funds’ performance on OSU’s online portal that tracks the university’s gifted endowed funds. Rouda discovered that the balances were less than he had anticipated, given the surging stock market; lower even than the initial endowment gifts. Rouda contacted OSU, but told me the school has been unhelpful. “I have no direct records from OSU,” he said.
A spokesperson from the Honor Bound Initiative said OSU took down the portal for seven months after the initiative began to send out weekly press releases about how the funds were performing. But recently, OSU’s Johnson pointed me to the same online resource, telling me, “at last check, each of the university’s 5,868 gifted endowed funds is worth more than the gifted amount.”
Moritz and Gouda attribute what they consider to be the funds’ underwhelming balances to overall poor investment management and the fact that OSU took the development fees out of the funds’ principal rather than its earnings. Rouda was slated to testify at the May 19 Workforce and Higher Education Committee hearing, but a false-positive COVID test forced him to cancel. According to his prepared statement, Rouda alleged that OSU “drained funds from the principal” of his family’s endowments.
Taylor told me universities typically can take the fees only from a fund’s annual investment returns. However, there are exceptions to the rule. For instance, the UCLA Foundation takes a one-time portion of the gift principal and/or income to “provide essential support necessary to UCLA’s overall operations.” In 2018, OSU spokesperson Chris Davey told the Associated Press that OSU trustees empowered administrators to take the fee out of an endowment’s principal beginning in 2000. OSU did not respond to IP’s request to verify Davey’s account.
I asked Rouda if he knew how much in fees OSU was drawing from his family’s funds. “I have not been able to obtain a copy of the endowment agreement to find out,” he said, while adding, “I’m not interested in lining the pockets of the development organization at OSU or using the money to wine and dine donors.”
OSU’s Johnson told me that “gift agreements explicitly state that fees will be assessed for development activities.”
“Trust but verify”
Two key takeaways from the donors’ ongoing dispute with OSU will apply to advancement officers and donors across the country. First, there is no “one-size-fits-all” approach when it comes to fee policy. Universities apply a host of gift fees serving different purposes. Some universities explicitly list the fees in gift agreements—but some don’t. Some universities tap the funds’ investment income—but some are able to tap the principal.
This informs the second key takeaway. “The old adage ‘trust but verify’ would be applicable,” Rouda told me. “Most institutions use a standard endowment contract, but I certainly wouldn’t rely on that without legal assistance.”
This means that when donors sign the dotted line, they need to know if the university will take a fee, what the percentage is, how it is applied, how it is spent, if it comes out of the fund’s principal or earnings, and if they have sufficient recourse should they determine the school isn’t honoring their intent. (Phew!)
I checked back in with CASE’s Flahaven given these recent developments, and he said that “the more questions that are asked, the more clarity there is from the outset, so you don’t run into issues down the line, or concerns,” Flahaven said.
On the other hand, advancement officers may need to make the case to donors as to why a development or gift fee is needed in the first place. “There clearly are costs associated with the advancement operation,” Flahaven told me, including, most obviously, staff, who “do that work and generate gifts and make a difference for the institution.”
A summary of SB 135
All of which brings us back to SB 135, which addressed a slate of higher ed issues, like community college partnerships and student financial aid, and is now on its way to the House.
The bill also establishes the scope and procedures for civil action when a state university violates a restriction in an endowment agreement. Under the bill, the person who transferred property under the agreement or that person’s legal representative may notify the attorney general if an institution violates a restriction in an endowment agreement. If the attorney general does not obtain full compliance and restitution for any value lost within 180 days, the party who notified the attorney general may sue the institution.
If the court concludes the university violated a restriction in the endowment agreement, it may order one of a list of potential remedies, including the transfer of property from the fund to another institution and the dissolution of the agreement itself. The bill also strengthens rules defining what constitutes the “prudent” amount of appreciated earnings that a university can tap from an endowed fund.
In light of the bill’s passage, the Honor Bound Initiative shared with IP the following statement: “We applaud the Ohio Senate in the passage of SB135. This is a great first step in requiring universities to comply with their own endowment commitments. This bill will finally hold universities to their commitments with regard to how they spend donor money. The Honor Bound Initiative looks forward to working with members of the Ohio House of Representatives to see this bill through. It’s time that Ohio protect [sic] future generations of students by ensuring they receive the scholarship money gifted to them by donors and promised to them by the universities.”
Meanwhile, a statement from OSU read: “We are continuing to review this bill as it moves from the Senate to the House. The Ohio Senate Workforce and Higher Education Committee made substantive changes to SB 135 prior to its passage in the Senate. While we appreciate the improvements made to the bill during Senate consideration, we still have concerns—particularly regarding provisions related to donor intent. We look forward to working with the House, the bill’s sponsor, Senator Cirino, and other state partners as this measure proceeds through the legislative process.”