In recent months, institutional endowments, particularly those within higher education, have been subject to heightened scrutiny. This attention has, at times, created tension and contributed to the spread of misinformation, especially among those unfamiliar with the purpose and structure of these long-term funds. This has led to growing confusion about how endowments can be used, potentially weakening their purpose.
What Is an Endowment?
An endowment is a pool of assets that serves as the financial cornerstone supporting an institution's primary objective to fulfill their mission (learn more here).
Debunking common misconceptions about endowments is critical to managing them responsibly.
Misconception 1: They are rainy-day funds
An endowment is not a reserve that institutions can tap into whenever a budget gap appears. Its purpose is to provide consistent, long‑term support by preserving principal and distributing a pre-determined portion of investment returns each year. Further, a large percentage of many endowments is restricted – legally bound to be spent only on specific purposes as instructed by the donor. In rare, truly urgent circumstances—such as natural disasters or severe financial shocks—limited access to unrestricted funds may be permitted, but only under the oversight of the board or investment‑committee to protect the fund’s integrity. Treating the endowment as a fallback for short-term pressures can jeopardize the institution’s mission and years – or in many cases, decades – of disciplined planning.
Misconception 2: They are flexible budget supplements
Although it may be tempting to draw from the endowment for onetime projects or gaps in operational budgets, doing so can weaken its long-term impact. Institutions rely on disciplined spending policies that balance current needs with growth for the future, ensuring the endowment can support the institution’s mission for generations. Many institutions do include a modest, endowment draw in their spending policy, which is typically around 4–5 percent of the endowment’s average value (read more about spending methodologies), as part of their operating budget. This approach provides stable funding, allowing the assets to grow while supporting daily operations. Institutions rely on disciplined spending policies that balance immediate needs with future growth, enabling endowments to support near-term projects while safeguarding their long-term impact.
Misconception 3: They are replacements for fundraising
Endowments are rarely used to cover the full cost of operations for an institution. Distributions usually represent only a fraction of an institution’s annual budget. Healthy organizations view their endowment as one part of a broader revenue mix that includes philanthropy, tuition, and other sources. Fundraising has a complementary role which is to address immediate priorities, aid in launching new initiatives, and support programs that do not yet have sustainable funding. Endowments create a steady base, but philanthropy contributes significantly to growth, innovation, and the ability to respond to evolving needs.
Misconception 4: They are short-term solutions
Even when flexibility is warranted, an endowment is not structured to solve routine or temporary financial challenges. Actions like borrowing against it or spending above policy may offer short-term relief, but that can weaken future earnings, reduce resilience, and restrict the institution’s ability to support mission‑driven programs over time. Following a well‑designed spending policy protects the endowment’s long‑term value, ensures reliable support for operations and strategic initiatives, and keeps it aligned with institutional priorities well into the future.
“The trustees of an endowed institution are the guardians of the future against the claims of the present.” –James Tobin, winner of the 1981 Nobel Prize in Economics.
Conclusion
When managed prudently an endowment can be a perpetual source of support for institution’s programs, strategic priorities, and initiatives. Understanding what endowments are not is critical for effective stewardship. In a time of rising costs, volatile financial markets, and increasing demand for affordability and growth, endowments are more important than ever. They give institutions the stability to navigate uncertainty, plan for the long-term, and sustain their mission for generations.
To learn about what endowments ARE, read our blog "Purpose: What is an Endowment” or download the Principles of Investment Stewardship for Nonprofit Organizations.
