COVID-19 has, undeniably, wreaked havoc at the University of Wisconsin.

UW has suffered from over 3,000 student and almost 120 employee cases of the virus as of mid-October. After cases shot upwards on campus, the administration took to locking up and locking down, mandating a two-week quarantine in two Southeast dorms. UW Chancellor Rebecca Blank described current circumstances as “the worst situation that anyone has seen around the university.”

Throughout outcries of disaster on campus, concerns about money and finance have been ever-present. UW braced for an estimated $100 million in losses, and the UW System saw a $45 million budget cut. Earlier this month, the Wisconsin Union announced an anticipated $15 million budget deficit, as revenue decreased by 60%.

For students, concerns often revolve around their personal finances, as hybrid learning hasn’t provided for any tuition cuts. Though other UW System campuses have reduced segregated fees due to COVID-19, UW has stated they have no intention of doing so, despite students being unable to utilize many on-campus services and facilities.

Students, perhaps understandably enraged, have pointed to the University’s financial holdings — with a $3.3 billion endowment, UW isn’t exactly in the same financial turmoil as the average unemployed student. And Badgers aren’t alone in this, as there have been demands at institutions across the country for colleges to utilize their funds to provide students with financial relief.

But what exactly does an endowment do? Most students, especially those outside finance or business programs, never take a finance class or receive real knowledge on how university financial systems work. Because of that, they’re in the dark about how huge pools of money work at the institutions at which they spend some of their most formative years.

Endowments Explained

Data reporter at The Chronicle of Higher Education Dan Bauman has covered university financials and endowments extensively in his work.

While describing what an endowment was, Bauman first clarified that it’s not as simple as a multi-billion-dollar pool of money lying around.

“An endowment is actually a collection of different funds. These funds are set up by various donors with the expectation that the university will invest in various securities to build the value of the fund to serve whatever purpose the donor connotes on it,” he said.

What that means is donors give an institution money, and that money gets invested. After that initial investment, the hope and typical scenario is that there’s a financial return.

Institutions have options when it comes to those returns, Bauman said. They can take those gains and reinvest them, making their returns reap them — well, more returns. They can also convert those returns into funding for programs.

“In some cases, a donor will say, ‘I specifically want this donation, the investment returns on the money I’m donating, to serve some function in the university,” he said. “So that may be for the swimming team or the football program or for the French program, what have you. In that case, there are strict rules about where that investment return has to be used.”

At UW, the force behind the endowment is the Wisconsin Foundation and Alumni Association, an independent, private 501(c)(3) organization. It’s the University’s official fundraising and gift-receiving group. They manage the endowment, among other things, and are responsible for compiling the reports and data on how gifts to the University are used.

Director of media and public relations for WFAA Tod Pritchard noted some specific endowed programs at UW where, like Bauman suggested, the donors have specified purposes for their money and the University has subsequently funded those niches.

“Examples of endowed funds include various scholarship programs — athletic scholarships attached to a specific sport, Chancellor’s Scholars, need-based or merit scholarships awarded by the admissions or financial aid or scholarships within a specific major — [or] named faculty awards such as chairs and professorships that support research and graduate students in a specific field of study or research centers such as the Center for Healthy Minds or the Nelson Institute for Environmental Studies,” Pritchard said.

At some schools, that’s not always the case, though — Bauman said sometimes donors will simply make a donation and allow whoever is in charge of the funds to decide what to do with the investment return on the money.

“So generally, when we talk about the endowment, and talk about a big collective figure that that endowment represents, we’re talking about the collective value of all those different funds that have been set up, the investment return that’s been made on those and then the transactions that have gone on, either taking money out or putting money in,” Bauman said.

At UW, Pritchard said the endowment is made up of more than 6,300 individual funds, each established by a donor gift. The WFAA’s investment team manages the funds into a single pool, he said, but then fund administration and fund accounting teams allocate them to underlying individual accounts, similar to how mutual funds work with their investors. The returns are then sent to the University for spending.

“All transfers from the WFAA to the University are in the form of ‘liquid cash.’ For each endowed fund, there is a corresponding cash account linked to a University account that is tied to the purpose of the gift,” he said. “Currently we transfer 4.5% annually of the value of an endowed fund to go toward the program designated by the donor.”

Though, like Bauman said, some schools allow for donors to hand over money without a tagged purpose, UW is not one of those institutions.

“Unlike endowments at some private universities, the endowment managed by WFAA is not ‘unrestricted’ so it cannot be used for ‘discretionary’ or emergency needs. The funds must be used in the manner designated by the donors at the time of the gift unless parties agree to a subsequent modification,” Pritchard said.

What that means, practically, is that during times of emergency or financial hardship, the University can’t simply take some of their returns and put it towards those causes, because the donors had a specific cause both in mind and in contract when they made their donation.

“Honoring donor intent is not only legally required, it is essential to preserving our reputation as a trustworthy fiduciary and securing future support of UW-Madison. Donors need to know their funds are being invested prudently and used on causes they intended to support,” Pritchard said. “We work with donors and present a menu of giving opportunities to them provided by campus.”

As a result, trying to redirect that money is complicated not only legally, but ethically as well.

Ethics and the Endowment

Bauman said It’s possible to redirect funds, but there are trade-offs.

“The people making these donations have a contract made with the University that says this particular funding has to go to this particular program,” he said. “So in order for the University to change that, they have to reach out to the donor and the incentive on the donor to acquiesce to that, particularly if the donor cares about the cause that they back, the incentive just isn’t there.”

To some, that might sound odd — during a national pandemic, why wouldn’t you want your funds redirected to alleviate student financial pressures? What could take priority over that?

But it’s not that simple.

“So let’s say your university was to come to a donor and said, ‘Hey, you made this endowed donation and the investment returns serve the swimming program. You really care about the swimming program, you were involved in the swimming program in college. But we’d really like you to lift the restriction so we can use this money for some other cause,’” Bauman said. “Well, if you acquiesce to that, the original program you donated to, the swimming program here, has now lost its funding. And because it lost its funding, the whole program is now at risk.”

The primary concern for donors, in this case, is that because they made a new contract, their program of choice might not be able to find new funding. And if that goes on for long enough, if nobody new steps in to fund that program, it might simply run out of money and disappear.

When used in that context, non-swimming-students might scoff at the concept — saving students money during a global pandemic or their swimming hobby? Is that even a question?

But donors donate to causes that mean something to them, and that often is tied to activities that were formative to them during their time in college, like clubs or teams — the same groups students every year join in hordes, spend hours of their time on throughout their collegiate experience and then donate to years in the future so they can stay up and running.

And for that matter, swimming is just an example. Funding often goes to other places, and for donors who fund things like research chairs or need-based scholarships, they’re unwilling to put those causes at financial risk

Another problem is that because these are investments, the more money you take out now, the less money you’ll have in the future. Because investments grow, you’re not just removing the flat thousands or millions of dollars you take out, you lose all their potential growth as well.

“On the one hand, you could choose to serve students and staff by taking a greater amount of money out now. And, you know, that potentially eliminates some human misery today,” Bauman said. “But that also means down the road, because that money hasn’t grown in terms of size and scale, you’re potentially going to be able to not be able to give as many scholarships to students in the future as you would have liked. That makes it harder for students later.”

Either way, somebody’s hurting. And figuring out the middle ground between the ethics and the finances is tough when somebody loses no matter what you do.

Then, you have to decide who you prioritize. Of course, that’s not easy, either.

“You may, for instance, use funds to keep professors hired and not have to furlough or fire staff. But by changing that designation on an endowed fund, in the future you might not have the money you’d like to help out a student group or scholarship,” Bauman said. “It becomes a question of should the University’s ethical commitment be to the workers who have given decades of their life at the institution, and therefore you should do whatever you can possible for the workers, to the potential financial detriment of students? Or should that commitment be to the students of UW, and therefore you try to give as many scholarships out as you can, but then you have to furlough staff?”

A large concern too is that if you harass your donors too much, they might not want to give your institution money in the future at all, and everyone loses.

“In some cases, an endowment office will just not try to engage with donors in that way because you might potentially alienate donors,” Bauman said. “If you go to them like ‘you cared enough about your cause to give this money to this program. We want you to consider not doing that. And also, we don’t have a plan for how we’ll fund that program after we reallocate your funds and we’ll have a hole in our budget one way or the other.’ They might not want to donate again after that.”

To sum it up — it’s complicated.

Endowment Outlooks

Given the complexities, the outlook might appear rather bleak. Fortunately, the WFAA is making efforts to secure funding for COVID-19 related expenses.

“When UW-Madison faces periodic crises, we often initiate special fundraising campaigns, such as the Student Support Campaign — last spring when the COVID crisis hit — [the] COVID Research Campaign or the recently announced campaign to support Diversity, Equity and Inclusion programs. These campaigns are determined in collaboration with campus leaders,” Pritchard said. “But once donors make gifts for a specific purpose, we would never divert them to another purpose, however noble that may be. Instead, we raise new funds for the new critical purpose.”

And what might be of some comfort to students, especially those fearing long-term university stability and the consequent long-term value of their degree, is that UW’s investments are anticipated to return to new heights in the long run.

“The endowment portfolio is invested for the long-term. While COVID-19 caused short-term volatility in the markets, it has not materially impacted how the endowment portfolio is invested,” Pritchard said. “However, the commitment to investing donor funds to support UW-Madison for 20, 30 years and decades beyond necessitates taking an appropriate amount of risk. WFAA has donor funds that are over 60 years old and they have benefited UW-Madison in accordance with donor intent in spite of all that has happened in our world during that time period.”

For students who want to keep an eye out on their institution’s finances, Pritchard said one resource was the WFAA’s reports on gift usage, which they publish annually. Bauman suggested looking into Department of Education filings, and in general, information UW is required to make public, like faculty salaries.

Bauman added that staying aware of how the finances of your school works is relevant.

“I think making students aware of this stuff is important,” Bauman said.