I found out that my alma mater (a small rural college) is about $10 million in debt. They have a $40 million endowment, but that, like all endowments, is no doubt strictly regulated.
Now if push came to shove, would they be legally permitted to “liquidate” part of the endowment to pay off the debt, or is it impermissible even then?
While it is true that some (but not all) donations to a college have stipulations, e.g., the money can only be spent on buildings. student aid or faculty salaries, these conditions don’t mean anything at bankruptcy time. It’s all one big pile of money once the creditors line up.
If you have more in the endowment than you owe, you are in some sense technically not bankrupt. However, by filing for bankruptcy, the “freeing up” of the money to spend on non-alloted purposes allows the college to pay off its debts.
Not just colleges, but many businesses also file for bankruptcy even though they aren’t in the red overall. Same reason. Certain types of assets can now be shifted around/sold/etc. in order to make things easier going forward.
BTW: Once a college does something like this, in all probability it is in so bad of shape that real bankruptcy will eventually happen. Hardly any school can pull itself out of a death spiral. Donations dry up, fewer students who can pay full tuition apply, etc.
OK, thanks, but could they ***prevent ***bankruptcy by using part of the endowment (i.e., deducting $10 million from $40 million) or is that like using escrow funds?
Depends entirely on the terms on which the endowment is held.
Debt isn’t necessarily a problem and colleges and universities can operate even though they have debt. For example, I went to school in upstate New York, and, from reading the plaques on the dorms and other campus buildings, learned that some of them were built using bonds issued by the NYS Dormitory Authority. Pretend the university uses $10 million in bonds to build a dorm. Over, say, the next thirty years, a portion of the housing fees paid by the students living in that dorm goes to pay off the bonds.
So as long as the school can continue to attract tuition-paying students, it can service its debt.
They could **postpone **it, but probably not **prevent **it. If you need to go into your endowment to stay afloat, you business model as most likely fatally flawed or broken.
If there is no restriction on using those funds, they pretty much have to be used to pay off debts. If there are restrictions, then a pro forma bankruptcy filing gets around that.
If you have assets and you owe money, you have to pay the debts. The college could be taken to court to be ordered to pay up, but the cost of that isn’t going to help the college’s situation. And once ordered, my previous points still hold.