Dispute Over an Underwater Endowment Shines a Light on University Gift Fees

Inside Philanthropy
Michael Scutari

In 2001, attorney Michael Moritz gave his alma mater, Ohio State University, a $30.3 million endowment gift, restricted for purposes that include four faculty chairs, student leadership awards, and 30 full-ride law school scholarships awarded annually. A year later, he tragically and unexpectedly passed away.

In 2016, his wife Lou Ann Moritz and son Jeffrey Morris received a report from the university and found that the $30.3 millionendowment gift had shrunk to $21.9 million. In addition, OSU hadn’t been awarding 30 full-ride scholarships per year. “Some years, it was 12, most years it was 15,” Jeffrey Moritz told me. “Every dollar they take out of the fund is one less dollar for scholarships. That’s one more dollar studentshave to pay with debt or their parents’ money.”

The familydiscovered that the fund was underwater—its value had shrunk to less than the original principal—in part due to investment performance, but OSU was also taking an annual fee of up to 1.3% from the endowment to pay for development department expenses like staff salaries, travel and event costs.

OSU trusteesauthorized the fee to be taken out of both unrestricted and restricted endowments in 1994 as the school launched a development campaign, but only began putting language in donor contracts in 2008. The Moritz family contends OSU took out the fee without Michael Moritz’s consent, since it was not in the contract.

“We just want them to hold up the commitment they made to my father and other donors—give the scholarships and stop taking the development fees out of the principal of the funds,” Jeffrey Moritz said. He is attempting to reopen his father’s estate to enforce his gift, but two judges have denied the request. The case is currently with the Ohio Court of Appeals.

While OSU did not answer questions about the current state of the endowment, the number of scholarships awarded, or how much it has levied in fees, the university stands by its approach as common and transparent practice. Benjamin Johnson, OSU’s director of media relations, media and PR, said in a statement that every year, the university sets an endowment distribution rate that balances the current income stream with the fund’s long-term purchasing power, and that rate includes fees and expenses. “These fees are lawful and recognized by Ohio law as a ‘prudent’ cost associated with managing an endowment,” he said.

The dispute may sound like a case of a breakdown of communication between a school and a donor, but it may be representative of a larger problem in higher ed funding. Fundraising experts told me that donors are often unfamiliar with universities’ byzantine gift fee structures. And while donors likely realize schools must charge a fee to pay for the fund’s money manager, they may not be aware that a separate annual fee sometimes supports fundraising operations.

A Spectrum of Fees

John Taylor has studied university fee programs since the late 1980s and was responsible for crafting and implementing North Carolina State University’s first-ever fee program in 2010. He told me that what he defines as “gift assessment fees,” or fees applied to donated funds, are common, but show up in various shapes and sizes and with different names. They can be one-time or ongoing, with payments to the university’s financial managers or to support the development team.

For instance, UCLA Foundation’s gift policy reads: “It is the policy of the UCLA Foundation and the University of California, Los Angeles that a portion of the gift principal and/or income is used to provide essential support necessary to UCLA’s overall operations. For purposes of partially defraying the costs of the University’s operations, a one-time fee based on a percentage of all gifts received is retained by UCLA. The fee is currently 6.5%.”

Again, the terminology can vary by university. Development officers may use terms like “operational fees,” “administrative fees,” “development fees” and “stewardship fees.” Fee structures differ depending on whether the gift is endowed or a one-time donation.

Donors are usually not fazed when such fees go toward overseeing a fund’s financial performance; after all, they pay firms like Fidelity and Vanguard to oversee their own investments. But donors may be less supportive of the sort that bankroll development activities such as prospect dinners, fundraisers’ salaries and officers’ travel expenses—assuming, of course, they realize the fee exists in the first place.

Endowment Management Fees

At the heart of the Moritz/OSU dispute is an annual fee assessed on an endowment.

Brian Flahaven, senior director for advocacy for the Council for Advancement and Support of Education (CASE), told me that endowment management fees are indeed very common. Flahaven cited the 2019 CASE College and University Foundation survey, which found that 90% of the 99 surveyed institutions charge an endowment management fee. Of the 61 foundations affiliated with public research/doctoral institutions that completed the survey, 100% have an endowment management fee. “These 61 foundations would be most similar to Ohio State in terms of institution type and endowment size,” Flahaven said.

Endowment management fees usually range from 1 to 2%, and are calculated in different ways. “It never ceases to amaze me how many different models institutions use,” Taylor said. In some cases, the annual cut is based on the original gift amount, but in others, it’s based on the fund’s size at the end of each year. In addition, Taylor said universities almost always take the fees only from a fund’s annual investment returns, and only if there is enough income left after funding the program required by the endowment agreement.

In 2018, the Columbus Dispatch reported that OSU’s fee has been at 1% since 2007. And according to the Associated Press, starting in 2000, OSU trustees empowered the university to take the feeout of an endowment’s principal.

The Law Governing Endowment Funds

There’s no national law on endowment management, but there is a uniform state law implemented in almost every state—the Uniform Prudent Management of Institutional Funds Act, or UPMIFA. It was created in 2006 in an effort to standardize practices and assure donors that their endowments would be managed prudently to avoid going underwater.

“Ohio State manages all endowment funds in accordance with state law. Ohio State is subject to Ohio’s UPMIFA, which sets forth the standard of care for prudently managing and investing endowment funds,” OSU’s Johnson said. “Development fees are a respected and widespread practice among universities and charitable institutions because fundraising activities contribute significantly to the growth of the long-term investment pool, which is a vital component of universities’ overall funding and necessary for furthering their charitable and educational purposes.”

According to Law Professor Susan Gary, who served on the committee that wrote UPMIFA and consulted with Moritz family attorney David Marburger on the case, OSU is misreading the law. In an email to Inside Philanthropy, Gary said, “When Mr. Mortiz made his gift to OSU, he wanted specific restrictions on the purposes for which the gift could be used. OSU agreed to those restrictions. The restrictions involved how the money would be spent, and the purposes for which the money could be spent did not include development fees. Although administrative fees for the management of a fund are permissible (the cost of maintaining the fund itself), distributions for other purposes are not.”

Gray went on to say that the UPMIFA provides the charity with options for releasing ormodifying the restriction if it decides that it cannot continue to comply with a restriction imposed by a donor. However, “the law does not allow the charity to modify a restriction because doing so is convenient, beneficial to the general purposes of the charity, or easier.”

A Questionable Practice?

The prevalence of endowment management fees suggests that they’re an acceptable way for development officers to keep the fundraising machinery humming. But at their core, the fees find development officers “asking for money that is going to be used for their compensation so they can continue asking for money,” said CPA and Inside Philanthropy contributorFrank Monti.

In a sense, officers are essentially engaging in a form of commission-based fundraising, a practice that, while legal, is “looked down upon in the development industry,” Monti told me. “If the various professional fundraising associations believe it isa questionable practice to compensate development people based on their fundraising performance, the university should easily be able to see that funding the development office out of fundraising performance is equally questionable.”

“Some Donors Might Not Be Aware”

So not everyone likes these fees, but they are legal and on the books at most major institutions. Whether or not universities include them in donor contracts, however, is a different story. The Moritz family is concerned that donors are in many cases not consenting in writing to have endowment management fees taken, and often are not even aware of what they are.

In 2018, OSU spokesman Chris Davey told Cleveland.com that gift contracts didn’t need tocite the endowment fee because those documents were designed to address the purpose of the money, and state law and university policy apply whether or not it’s detailed in the document.

I asked John Taylor if universities always explicitly list endowment fees in donor contracts. “Not always,” he said. “Most will refer to ‘administrative fees,’ but will not mention specific percentages. That would make it challenging to update all the agreements when those fees change.”

Taylor said that some agreements “may not be that clear, but reference a formal endowment policy that does include both fee information as well as funding mechanics for generating income. Those also change often and do not belong in the agreement.” Universities “will also remind donors of the possibility of a fee on gift receipts and pledge reminders and publish this information on their website.”

Once the donor makes their gift, many institutions proactively remind them that they’re paying an annual fee in receipts, pledge reminders, and in the annual endowment performance report, Taylor said. “Keep in mind, though, that there are probably just as many institutions that are not as proactive.”

In the university’s statement, Johnson said that “Ohio State has always been thoroughly transparent about the development fee, which went into effect in 1994, several years before Michael Moritz’s gift.”

But transparency can be in the eye of the beholder. CFA Institute’s Richard Franz, who co-wrote“University Endowments: A Primer,” told me that “as transparency is one of the key aspects of achieving a longstanding and fruitful donor-institution relationship, a university would be well advised to explicitly state the fees in the contract.”

Taylor says, “Unfortunately, not all institutions are quite as public with this information as others. The information is there for the asking, but not all donors ask. So yes, some donors might not be aware.” On the other hand, Taylor has also “run into instances where a donor indicated they did not know about a fee but signed an agreement that mentioned the fee. So some donors may not be ‘aware’ because they have forgotten.”

Recent Developments

The Moritz family and OSU remain in legal proceedings. Jeffrey Moritz is attempting to reopen his father’s estate so he can legally enforce the gift. Two judges have denied the request, and he’s appealing the ruling.

Meanwhile, the family is sounding the alarm about the dispute. This summer, they launched theHonor Bound Initiative, whose mission is “to serve as a watchdog to shine a spotlight on what Ohio State has done, and is doing, with the millions of dollars it receives from its supporters.” It also hired public relations firm Headwaters Media to publicize the initiative.

OSU’s Johnson finds the timing suspect, painting the communications campaign as a last ditch effort following losses in court. “Jeffrey Moritz has lost in court in front of every judge who has heard his case,” he said.

Do Your Due Diligence

Time will tell if OSU and Moritz can resolve their differences. In the meantime, experts say prospective donors elsewhere should make sure that gift contracts explicitly list fee amount(s) and how the university plans to calculate them. They should also request an annual endowment performance report.

Donors will also want to think about what specific fees they’re willing to pay. Again, most donors acknowledge that universities need to assess investment management fees to pay money managers. But others may not be so comfortable with development offices taking endowment management fees, however prevalent they may be, to cover salaries and expenses.

In fact, UO’s Gray told me that if she were representing a donor making a large gift, she “would try to negotiate with the university to reduce or remove” endowment management fees.

Taylor said development officers need to be as transparent as possible with donors from the outset. “When explained correctly to donors, they fully understand and appreciate the need for fees.” However, “if the institution has not mentioned anything about a fee during the cultivation and solicitation process, they should certainly ask.”