Missouri Court Allows University to Reclassify Restricted Endowment Funds Under UPMIFA

At a Glance

• A Missouri state court allowed Webster University to reclassify various donor-restricted endowment funds as unrestricted endowment funds so the funds could be held as collateral to help Webster meet a minimum liquidity ratio requirement.
• This decision underscores that courts may be willing to provide charitable organizations (and more specifically, higher education institutions) with at least temporary relief from donor restrictions to remain financially viable where such restrictions make continued viability impracticable, and thus the restrictions are themselves impracticable.
• Higher education institutions should also take into account important accreditation and regulatory implications when making significant changes to endowment funds, or when taking other significant actions to address fiscal challenges.

Earlier this month, a Missouri state court allowed Webster University to reclassify various donor-restricted endowment funds as unrestricted endowment funds so the funds could be held as collateral to help Webster meet a 75% minimum liquidity ratio requirement set forth in a loan agreement Webster entered into in 2011. In re Webster University, No. 24SL-CC00511 (Mo. Cir. Ct., St. Louis, Mar. 1, 2024) (unpublished).

Pursuant to Missouri’s version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA, R.S. Mo. §§ 402.130–402.148), “if a particular … restriction contained in a gift instrument on the use of an institutional fund becomes … impracticable … the court … may modify … the restriction … in a manner consistent with the charitable purposes expressed in the gift instrument.”

Webster cited several circumstances that had led to the significant decline of its liquidity (19% liquidity ratio at the end of Webster’s 2023 fiscal year), including: (1) the impact of the global COVID-19 pandemic, (2) rapid increases in inflation and interest rates in recent years, and (3) population trends that have led to a diminishing number of traditional college-aged individuals in the United States.

Without reclassification of the restricted funds, Webster would have been unable to achieve the required 75% liquidity ratio. And if the issuer of Webster’s outstanding bonds were to provide notice of an alleged breach of the loan agreement due to Webster’s failure to maintain the required liquidity ratio, Webster’s viability as an educational institution could be impacted. Thus, Webster argued that “the current crisis in higher education and its impact on Webster University made the restrictions currently present on the [funds] impractical.”

As required under UPMIFA, in connection with filing its petition, Webster notified the Missouri attorney general of its plans to remove the restrictions on the funds. The attorney general’s office declined to object.

The court agreed with Webster, finding that releasing the donor restrictions was consistent with and related to the purposes for which the funds were created — “to promote high-quality learning experiences by well-qualified professors for all students, regardless of financial need.” Nonetheless, the court made clear that reclassification of the funds was a temporary adjustment, and that donor restrictions must be reinstated once: (1) Webster experiences at least one full year of budget surplus, (2) the ratio of unrestricted assets to outstanding long-term indebtedness is 100%, and (3) Webster is compliant with all bond or loan-related agreements.

Analysis

This decision underscores that courts may be willing to provide charitable organizations (and more specifically, higher education institutions) with at least temporary relief from donor restrictions to remain financially viable where such restrictions make continued viability impracticable, and thus the restrictions are themselves impracticable. This decision also emphasizes that donor intent remains a paramount consideration, such that, even when given a measure of relief, institutions must remain committed to effectuating that intent to the greatest extent possible.¹

In addition to UPMIFA considerations, higher education institutions should also take into account important accreditation and regulatory implications when making significant changes to endowment funds, or when taking other significant actions to address fiscal challenges. Postsecondary accrediting agencies maintain various standards regarding an institution’s financial policies and practices, and they may become concerned about the impact of increased endowment fund usage on long-term fiscal viability. Accrediting agencies also may impose special monitoring on institutions that they believe to be facing financial exigency. Similarly, the U.S. Department of Education in recent years has substantially revised its “financial responsibility” requirements for continued institutional participation in the federal student financial aid programs, including enumerating various fiscal events that institutions must report to the Department and that may require institutions to provide it with letters of credit. (The most recent changes to these federal regulations are summarized here.)