Category: Insights

Restricted Funds – Why the Endowment Can’t Save a Budget – Johns Hopkins University Case Study

Following federal funding cuts, Johns Hopkins University (“JHU”) announced that they will repurpose a portion of its existing spend from their $13.1B endowment to help fill their c. $1B research funding gap. The cuts hit JHU particularly hard, as JHU is the largest recipient of NIH (National Institute of Health) grants, and over 50% of its revenue comes from federal funding.1 JHU has already lost over 100 federal research grants and cut 2,200 jobs following the USAID cuts.2

Why can’t JHU take more out of the endowment to support the gap? Why can it only repurpose existing funds?

JHU’s endowment, which has 78% of its AUM in donor-restricted funds, highlights the nuances of endowments that add a layer of complexity when trying to solve budget issues.

What are restricted funds?

Endowments are often made up of many underlying gifts. A portion of these gifts are unrestricted, meaning the institution can use those funds for any purpose it sees fit. However, there are also restricted funds, which occurs when the donor provided stipulations about how those funds can be spent. Examples could include financial aid for specific criteria (e.g., geographic focus, major focus), faculty support (e.g., endowed chairs), specific school funding (e.g., library books only), among a number of other purposes. An institution can decline any gift with overly stringent stipulations. These stipulations are legally binding and therefore not easily changed.

To change a restricted fund stipulation, institutions either need the original donor to change the legal document, or, if the original donor is now deceased, the institution can petition its state’s Attorney General to change it. A revision is likely a broader application of the original intent, not to unrestricted purpose.

Why can’t restricted funds be used to fill any funding gap?

Restricted funds can only be used for their designated purpose, meaning the endowment is not a carte blanche savings account for the institution. Only unrestricted funds can be used for these emergency purposes, reducing the funds available for special appropriations.

Johns Hopkins University: A Case Study on Restricted Funds

JHU has a $13.1B endowment, 78% ($10.2B) of which represents restricted funds. JHU notes that its endowment is comprised of approximately 4,700 individual funds, including both restricted and unrestricted funds. JHU’s endowment supported 6% of its budget in FY24, while federal contracts represented more than 50%. JHU withdrew 4.2% from its endowment in FY24.3

JHU’s high allocation to restricted funds provides the university with less flexibility in how the organization can use its endowment. Of those restricted funds, only 7% are designated for research and the stipulations may be too narrow for funding cut-related projects.  To entirely replace lost funding, JHU would be required to use one-third of its unrestricted funds ($2.9B). Covering the entire funding cuts would deplete all of the unrestricted funds in 3 years. Because endowed funds must exist in perpetuity per the Uniform Prudent Management of Institutional Funds Act (UPMIFA), this solution is not feasible, which is why JHU ultimately repurposed the existing endowment payout instead of taking more from the endowment.

Johns Hopkins University Endowment Details

The Baltimore Banner reported on JHU’s statement on the issue of restricted funds: “It’s a common misconception that universities can simply “use the endowment” in moments like this. The reality is that most of our endowment is made up of legally restricted funds designated by donors for specific purposes. The principal of the endowment must legally be preserved in perpetuity — to support Johns Hopkins’ mission now and for future generations — and cannot be drawn down like a reserve fund. That said, we are using flexible resources — some of which are tied to endowment earnings — to help sustain critical research in this moment of uncertainty.”4

Conclusion

Higher education institutions face many challenges today with federal funding cuts. The nuances of endowments make it hard for institutions to utilize just the endowment to solve budget issues. In addition to the “in perpetuity” requirement for endowed funds (meaning taking out too much continuously will ultimately drain the endowment), the restricted vs. unrestricted funds dynamic is another factor institutions contend with.

For its clients, TIFF is focused on ensuring each client’s Strategic Asset Allocation, in particular, liquidity, is tailored to the unique circumstances of each institution. Understanding the structure of your endowed funds, and broader institution’s financial circumstances, can help any institution weather a challenging time such as we are in currently.

The materials are being provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. These materials also do not constitute an offer or advertisement of TIFF’s investment advisory services or investment, legal or tax advice. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

These materials may contain forward-looking statements relating to future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other comparable terminology. Although TIFF believes the expectations reflected in the forward-looking statements are reasonable, future results cannot be guaranteed.

Nonprofits in the United States are facing unprecedented financial hardship. Swift federal policy changes have left organizations in a state of urgency and confusion as the government grants and contracts they have regularly relied on have been canceled or held in limbo. How does the changing policy landscape impact nonprofits’ ability to deliver their services? What can fundraisers do to ensure they can secure funding to continue to deliver their services?

How did we get here?

The federal government has used the nonprofit sector to provide services to address poverty and social issues since the Johnson administration. The sector has also seen tremendous growth over time, with the number of nonprofits increasing by 60% between 1998-2023. The government’s investment in the sector is critical: as an Urban Institute report shows “[i]n every state, every congressional district, and more than 95% of counties in the United States, public charities receive government grants” which totals to $267B.  As the Trump administration moves away from providing government grants to nonprofits, fundraisers are left with a huge gap to fill.

How can fundraisers address this moment?

While the sheer size of this funding gap is daunting, there are strategies leaders can take to educate their teams, engage existing supporters, and secure funding to maintain services:

• Stay up to date: Organizations like the National Council of Nonprofits regularly provide updates and resources on policy changes that impact nonprofits. By finding similar resources for your industry, fundraisers can keep abreast of changes without overwhelming themselves.
• Mobilize your donor base: If organizations are transparent with supporters about the financial risk they face, donors may step up to invest in your organization in new and meaningful ways. Consider how you can solicit your individual donors differently to fund programs or build up your corporate partnerships.
• Connect with fellow fundraisers: No individual or organization should address uncertainty in isolation. Find avenues to connect with professional development groups and attend conferences to both learn from and support your peers.
• Access emergency funding: Foundations and philanthropists are providing emergency funding to nonprofits during this turbulent time. The Chronicle of Philanthropy is regularly updating its website with information on the different funds available to organizations

To learn more about how you can help your organization navigate financial uncertainty, register for the webinar Fundraising in a Time of Uncertainty on Wednesday, May 7, 2025, from 10-11AM ET. This webinar will feature Jessica Portis, Chief Client Officer at TIFF in conversation with Ebonie Johnson Cooper, Faculty Director, Do Good Institute at the University of Maryland’s School of Public Policy and Martin Sanders, Adjunct Faculty at the University of Maryland’s School of Public Policy.

The materials are being provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. These materials also do not constitute an offer or advertisement of TIFF’s investment advisory services or investment, legal or tax advice. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

These materials may contain forward-looking statements relating to future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other comparable terminology. Although TIFF believes the expectations reflected in the forward-looking statements are reasonable, future results cannot be guaranteed.

Yale’s Potential $6B Secondary Sale and its FY26 “Constrained” Budget – Could They Be Related?

News broke this week that Yale University is seeking a secondary sale of up to $6B of private equity interests from its $41.4B endowment.1

While this action is historic, it is part of a broader narrative about the challenges higher education faces and the strategies institutions employ to manage uncertain budgets. As noted in a previous article, in the face of lower revenue due to federal funding cuts or endowment taxes, these institutions must carefully balance supporting their mission while maintaining the endowment in perpetuity. Yale’s drafting of a “constrained” FY2026 budget in response to funding cuts highlights the reality that there is no easy, single answer to managing these uncertain times. Institutions must look at their budget as well as at the endowment to come up with a solution. TIFF anticipates that other schools may need to adjust their budgets, and Yale’s secondary sale is likely not the last.

TIFF reminds its clients that having a liquidity profile and Strategic Asset Allocation that meets an institution’s unique circumstances is key during periods of uncertainty. Misalignment between an institution’s endowment strategy and its overall goals often leads to actions such as this.

Why this sale is historic for Yale

Yale literally wrote the book on endowment model, with late Yale CIO legend David Swensen’s “Pioneering Portfolio Management” becoming the penultimate guide to utilizing alternatives in portfolio construction. Yale is one of the largest private equity investors in the world, with over $20B in private equity and venture capital, and an additional $5B in real assets2. This sale represents a significant transaction for Yale, potentially involving more than 20% of its private equity holdings and nearly 15% of its entire portfolio. Finally, this is reported to be Yale’s first time selling any of its private assets.3

Why could Yale be doing this?

Secondaries Investor notes Yale is attributing the sale to its portfolio management needs. TIFF estimates this move is aimed at adjusting asset allocations and potentially creating liquidity.

1. Asset allocation shifts: Yale’s 3-year performance is a modest 2.7%, which is 5.5% below its long-term target of 8.25% (spend rate target + inflation). Similar to many other large endowments with substantial private allocations, Yale has underperformed due to its significant private markets allocation. While Yale’s 10-year return remains above target at 9.5% due to those same private asset classes, recent underperformance may be pushing Yale to reconsider its asset allocation weights or the expected returns of existing investments. Yale explicitly stated it continues to believe in private equity: “We remain committed to private equity investment as a major part of our investment program and continue to make new commitments to funds.”4 Yale may believe the outlook is better for new capital deployed (in private equity or elsewhere) vs. the existing assets, despite the costs of transacting a secondary.

   Yale has shown its willingness to shift its target allocation year to year. The last time Yale shared its asset class targets in FY2020, privates were 55%, up from FY2019, with allocations shifting towards buyouts and venture capital and away from real assets.

   

2. Increase liquidity to provide optionality for Yale budget support: Yale may want to increase the liquidity in its portfolio to support potential budgetary needs, despite stating that this sale is for portfolio management purposes. If executed at $6B, this sale would increase liquidity dramatically. TIFF estimates Yale’s current level of illiquidity at c. 50%, which is the lowest level of privates in six years. Post-sale, illiquidity would decrease to an estimated 36%.

Yale Endowment Private Allocation Over Time

What it says about challenges higher ed face and how this impacts endowments

Despite the comment that this sale is for portfolio management needs and has been underway for months, recent federal policy proposals and actions could also be influencing the need to increase liquidity.

Yale is already planning for lower funding and will be drafting a “constrained” budget for FY2026. In a letter to the larger Yale community, the Yale administration noted the budget would include reductions in spending on faculty raises, faculty and staff hiring, campus construction, and general non-salary expenditures.5

Federal funding cuts: In FY24, Yale received $899 million from the federal government for academic research and training.6 While Yale has not yet received any letters from the Department of Education, its Ivy League peers Columbia, Harvard, and Cornell have, setting the likely stage that Yale is close behind.

Increased endowment tax: Yale relies heavily on its endowment, which was the single largest source of revenue at 34% in FY24.7 Yale is already subject to the existing 1.4% endowment tax. An increase to the endowment rate would decrease the dollar amount available to support the budget.

Other federal proposals that would impact funding: Harvard has been threatened with the loss of its tax-exempt status and ability to enroll foreign students, both which would tremendously impact revenue. Yale could potentially encounter similar challenges.

Conclusion: Yale – A Canary for More Budget Cuts & LP Secondary Sales?

Higher education is facing a multitude of challenges in a changing federal policy landscape, prompting institutions to adapt through budget and endowment adjustments. TIFF anticipates that other impacted higher education institutions may need to adjust their budgets to address these evolving financial pressures.

TIFF also believes Yale won’t be the last to clean up its endowment, shoring up liquidity and rightsizing asset allocation, through secondary sales. Following the Global Financial Crisis, we saw a large increase in LP secondary sales as many nonprofits were overallocated to private investments. We haven’t seen the same phenomenon post-COVID, as many institutions learned their lesson and better managed their portfolios to avoid significant overallocation. However, current federal policy pressures on budgets may force overallocated nonprofits to finally take action and enter the secondary market.

All this being said, TIFF reminds investors that Yale may not represent the average endowment. It is crucial for institutions to have a liquidity profile and Strategic Asset Allocation that meets their unique circumstances, especially during periods of uncertainty. Misalignment between an institution’s endowment strategy and its overall goals often leads to actions such as this. The average private higher education institution has 41% in illiquids, with smaller endowments having even less (average 17%)8, far below Yale’s 50-60%. These institutions generally have more liquidity to navigate changes without restoring drastic actions like Yale’s. TIFF emphasizes the importance of each institution adhering to its own Strategic Asset Allocation, as overallocation is a primary reason for secondary sales.

The materials are being provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. These materials also do not constitute an offer or advertisement of TIFF’s investment advisory services or investment, legal or tax advice. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

These materials may contain forward-looking statements relating to future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other comparable terminology. Although TIFF believes the expectations reflected in the forward-looking statements are reasonable, future results cannot be guaranteed.

Introduction

The recent actions taken by the Trump Administration against Harvard University have sent shockwaves through the higher education community. With investigations into Antisemitic discrimination, demands for sweeping reforms, and threats to revoke tax-exempt status, the federal government is challenging the autonomy and operational frameworks of one of the nation’s most prestigious institutions. This brief article explores the unfolding situation, the positions of both Harvard and the federal government, and the broader implications for non-profit universities across the United States.

What is happening with Harvard and the Trump Administration

• The Department of Education (DOE) sent 60 universities notice that they were under investigation for Antisemitic discrimination and harassment.1 It was noted federal funding would be revoked for those that don’t accept required steps to protect Jewish students.2 Columbia University was the first target, which currently negotiating with the federal government after $400M of funding was frozen.3
• The Department of Education sent Harvard a list of refined requirements on April 11, which included eliminating diversity and inclusion programs and enacting merit-based hiring and admission reforms, banning masks on campus, and reducing power of faculty and administrators.4
• Harvard responded on April 14 that it will not comply with the request, arguing that the changes requested by the government exceed its lawful authority and infringe on both the University’s independence and its constitutional rights.5 6
• The Federal government has retaliated by blocking $2.2B in funding slated for Harvard.
• The IRS investigation into revoking Harvard’s tax-exempt status7 and the Department of Homeland Security review of Harvard’s ability to enroll foreign students were announced this week.8
• Non-profits face significant risks including a potential larger role of government at U.S. universities, potential loss of tax-exempt status, the financial impacts of losing Federal funding or revenue tied to foreign student enrollment, and becoming a tax-paying entities.

The Two Sides

What is at Stake

The outcome, if in the Federal government’s favor, will change the rules of engagement for U.S. education and have long lasting impacts on U.S. higher education on the involvement and control.

Precedent for Loss of Tax-Exempt Status: This would set a precedent for U.S. higher education losing tax-exempt status if they do not align with views of being apolitical and for the public good. One would imagine those definitions are qualitative at times and any potential loss of status will be left to the courts.

Loss of Tax-Exempt Status Financial Impact: Harvard would become a for-profit entity, meaning the entire institution would now be subject to taxation. This would be broader taxation than its current endowment tax, which is restricted to endowment net investment income. Corporate taxes are charged at the entity level. In addition, Harvard would now be subject to state and local taxes.

Bloomberg estimated Harvard’s property taxes alone at $465M, with assessed property at $4 billion in Boston and $8.7 billion in Cambridge.9

Where are those taxes coming from?

• Federal Corporate Rate: 21% on corporate profit
• State Corporate Rate (MA): 8% on corporate profit
• Local (Boston, Cambridge): As one of the largest land-owners in the area, Harvard would now be subject to property tax in Cambridge and Allston. For example, Cambridge charges corporations $11.52 per $1,000 of assessed property value.10

Other impacts would be donations are no longer tax-deductible, likely leading to a decline in funding through donations.

All of these would require a structural change in how Harvard is structured and thinks about its financials.

Conclusion

The conflict between Harvard and the Trump Administration highlights the risks nonprofit universities face from increased government influence. If the government wins, it could set a precedent affecting tax-exempt status, funding, and institutional independence. Nonprofits should stay informed and be prepared for changes in regulations and resulting impact on finances. The outcome could impact not only Harvard but also the broader higher education sector, requiring a reassessment of the balance between educational autonomy and government oversight.

The materials are being provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. These materials also do not constitute an offer or advertisement of TIFF’s investment advisory services or investment, legal or tax advice. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

These materials may contain forward-looking statements relating to future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other comparable terminology. Although TIFF believes the expectations reflected in the forward-looking statements are reasonable, future results cannot be guaranteed.

Overview

In 2024, McDonogh School, a PK-12 independent school in Owings Mills, Maryland, successfully transitioned its endowment management to TIFF Investment Management (TIFF), an Outsourced Chief Investment Officer (OCIO). The goal of the transition was to better align the endowment portfolio with McDonogh’s investment objectives and support the school’s mission to provide life-altering educational experiences that inspire personal and intellectual growth.

“A streamlined transition process helped us facilitate a smooth shift to TIFF, strengthening our long-term strategy and ensuring financial and risk management considerations were carefully addressed,” noted Sherri Voelkel, Chief Financial Officer at McDonogh School.

Challenge

Transitioning to an OCIO is a multi-faceted endeavor requiring the well-orchestrated movement of potentially millions of dollars of investments, agreement on the strategic vision for the portfolio, and completion of many legal and administrative documents. Various groups are involved, increasing the need for coordination.

Solution

Over the course of the second half of 2024, McDonogh and TIFF successfully completed the transition utilizing project management best practices with adherence to endowment management best practices throughout the process. A summary is below:

Project Management Best Practices

1. Identifying Key Stakeholders and Their Responsibilities

The success of any OCIO transition hinges on assembling the right stakeholders in the process and establishing their responsibilities at the beginning stages of the transition. Key stakeholders and their responsibilities in the transition include:

• School Leadership: Partner with the OCIO on the transition plan, executing operational and legal tasks while providing input on the school’s financial circumstances.
• Board-Level Investment Committee: Provide guidance on and approval of the SAA and the IPS, as well as review key decisions regarding the investment strategy.
• Board-Level Finance Committee: Provide additional input on the school’s financial circumstances and approve the SAA and IPS.
• The Board: Provide final approval of the IPS and other governing documents.
• OCIO (TIFF): Lead and manage the transition process, designing and executing the plan to ensure alignment with the school’s financial goals, risk tolerance, and return objectives. Also, provide education and clarification whenever needed.
• Previous Advisor (if relevant): Serve as the counterparty in transitioning assets.

The key stakeholders for McDonogh are aligned with its governance structure; however, it’s important to note that each school may have its own structure, which could impact the stakeholders involved.

2. Creating the Transition Plan and Timeline

During the transition, a well-defined project framework and timeline are crucial to establish key actions items, deadlines, and responsibilities.

• Transition Date and Interim Check Points: A specific date or timeframe to transition the investment portfolio provides key stakeholders a unified goal to work toward, along with interim checkpoints to ensure the process remains on track.
• Checklists: Using checklists ensures that action items and deadlines are tracked, holding key stakeholders accountable.

3. Clear, Transparent, and Frequent Communication

Effective communication is essential to the success of a transition, ensuring transparency and alignment among key stakeholders at each stage. The project lead should establish communication protocols and regular check-ins early in the transition process to facilitate important discussions with stakeholders.

• Project Management (OCIO and Staff – Weekly): Prioritize the time needed for check-ins to cover operational tasks, timelines, and any roadblocks.
• Strategic (OCIO, Investment Committee and Staff – two or three meetings): Schedule two or three Investment Committee meetings to discuss and make decisions on asset allocation, IPS, and other key investment and governance topics. There will also likely be intermittent discussions with the Investment Committee Chairs and/or school leaders in preparation for the transition.

Key Action Items in the Transition Stage

1. Conducting a Strategic Asset Allocation Review

A critical part of the transition is ensuring the endowment portfolio aligns with long-term financial goals and investment return objectives through the agreement on the SAA:

• Required Target Return: How will this portfolio maintain inflation-adjusted value after spending?
• Risk Tolerance: What is the school’s tolerance, both the Investment Committee and the school’s financial standing, for risk?
• Liquidity Requirements: What is the school’s liquidity profile (e.g., spend, debt, emergency)?

The OCIO should also evaluate organizational factors, including:

• Endowment Dependence: Reliance on the endowment draw to meet the annual budget
• Operating Profile Stability: Stability assessment financials

SAA reviews help assess various options and trade-offs between different asset allocations, helping the stakeholders to make informed decisions that best align with the school’s investment return objectives and financial circumstances.

Voelkel notes, “McDonogh’s endowment represents our commitment to balancing exceptional educational experiences with responsible financial stewardship. The partnership with TIFF has enhanced our ability to fulfill this vital balance for current and future generations.”

2. Update Governance Documents

Internal documents, policies, and governance structures need to be revised to align with the new investment strategy and governance shift to discretionary management. The most pivotal document is the IPS, which outlines the school’s investment objectives, asset allocation, spending policy, and risk management guidelines. McDonogh transitioned to a discretionary OCIO relationship with TIFF, featuring a portfolio including previously underutilized investment strategies. In collaboration, TIFF and McDonogh revised the IPS accordingly, which required approval from the Board-Level Investment and Finance Committees as well as the full Board.

3. Legal Documentation and Other Technical Items

There will be an influx of different agreements and documents that will need to be reviewed and agreed upon by key parties. These include:

• The Investment Management Agreement (IMA)
• “Know Your Client” / Anti-Money Laundering review
• Power of Attorney (POA)
• New fund subscription documents and account opening for brokerage firm(s)

It is prudent to include legal counsel to review and, if appropriate, comment on all new agreements.

4. Executing the Transition of Portfolio Assets

The final step is moving the assets to the new provider and implementing the agreed-upon portfolio allocation. TIFF provided McDonogh with guidance on the complicated concert of implementing a new strategy while adhering to a few key principles:

• Maintaining market exposure
• Timely processes and coordination of cash movements
• Clear timeline and dates of any redemptions and new subscriptions/investments

Conclusion

Successfully transitioning endowment management to an OCIO provider requires a strategic and collaborative approach. The process that TIFF and McDonogh executed ensured a seamless transition and enabled all stakeholders to have input into strategic decisions along the way.

The materials are being provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. These materials also do not constitute an offer or advertisement of TIFF’s investment advisory services or investment, legal or tax advice. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

These materials may contain forward-looking statements relating to future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other comparable terminology. Although TIFF believes the expectations reflected in the forward-looking statements are reasonable, future results cannot be guaranteed.