The University of Kentucky must pay back $7.6 million it spent from endowments that have suffered in volatile stock markets.
UK dipped into some of the endowments' principal to continue the salaries and programs funded through Bucks for Brains, which allowed universities to get matching state dollars for private donations that support research and endowed chairs and professorships.
UK made the decision to repay the money after prolonged discussions with the Council on Postsecondary Education, or CPE, Kentucky's higher education's governing agency.
In the past, and with the permission of donors, UK has spent 4.25 percent from those endowments each year to fund salaries and programs no matter how the investments performed in the stock market. Now, the CPE says UK may spend only whatever income is derived from the endowments, if there is any at all.
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Council officials noticed that UK was spending endowment principal in 2010 and have been talking to UK all year. CPE president Bob King said there is a clear understanding that when state funds are used to match private donations, the principal is not supposed to be touched.
Much of UK's Bucks for Brains endowments are used for endowed chairs and professorships, meaning they pay for salaries. When the markets collapsed in 2008, the endowment incomes fell, but the obligations to faculty did not.
"So the choice the university made was to dig into principal to cover those obligations to faculty," King said. "They understand that by doing that you have capacity to impair the ability of the endowment to produce the kinds of earnings you need going forward, so they have agreed to replenish those funds and to refrain from spending any more than actual earnings."
Had UK decided not to repay the endowments, King said, the issue would have been made public in reports to the legislature, which might have affected future decisions about funding for the Bucks for Brains program.
UK has not figured out where it will get the $7.6 million, but the agreement with CPE is already worrying some on campus.
"It does seem to reflect a misunderstanding on best practices on managing endowments at CPE, and it could hurt students ... that's one of my greatest concerns," said Ken Troske, who is the William B. Sturgill Professor of Economics at UK, an endowed professorship that was set up through Bucks for Brains.
Troske said modern endowment theory holds that you should set an amount to spend and stick to it, even if the stocks return a much higher percentage. That way you're cushioned through bad times. If it means spending some principal through those bad times, presumably, it will be returned when markets go back up.
Unfortunately, the economic downturn that started in 2008 has left more recent endowments underwater without the financial cushions that protect older ones. Angie Martin, UK's treasurer, said that out of 530 endowments created through Bucks for Brains, 400 were underwater at the end of last year. The $7.6 million will return them to their original levels.
Bucks for Brains has been a major economic and academic boon for UK.
Since 1998, according to UK, more than 12,000 donors have given the school $230 million in gifts, which then were matched by the state for a total of $460 million. That money created 78 endowed chairs, 190 professorships, 280 fellowships, scholarships, lectures, enrichment funds, research support and an endowment for the William T. Young Library.
The Bucks for Brains program also is credited with nearly doubling UK's overall endowment, which was at $915.9 million in 2010.
Because much of the Bucks for Brains money is used for salaries, which can't be cut indiscriminately, the $7.6 million probably will have to come from higher fees or cuts to programs and research. For example, Troske said the Gatton School might have to consider higher student fees for some of its programs.
"We will try to move money from one pocket to another pocket," said Martin, UK's treasurer.
The agreement gives UK seven years to pay back the money because "we don't want to hurt the programs that are currently being supported," Martin said.
"We hope we can find non-recurring funds to keep programs going," she said.
Still, nearly every college at UK will be affected because they all have Bucks for Brains endowments. The most were given to the College of Medicine, with 104; engineering, 46, and the College of Agriculture, 37.
Faculty trustee Joe Peek, another economics professor, said he worries that this new rule will force UK to be erratic in its spending as the funds earn money some years and don't earn any in others.
"You don't spend more in the boom years and less in the tough years; you should smooth through it," he said. "This can really affect students and programs because they rely on Bucks for Brains expenditures based on the income flows out of those endowments. When we shut down a program, that's not short-term, that's devastated a program forever."
King said the University of Louisville, which has the second-largest amount of Bucks for Brains money, has not had as many problems because it has rules against dipping into principal.
"To UK's credit, the decisions they've made about replenishing these funds will serve them and the Bucks for Brains program very well," King said. "It's the responsible thing to do."