Many private colleges and universities are running into serious cash problems. Some colleges may be so short of cash that they can’t pay employees or vendors, or bondholders. 

The president and board may be lured to dip into large cash reserves in restricted or endowment funds. Drawing down cash from these sources could lead to unwanted legal consequences.  

For instance, if they intend to draw restricted cash from government grants for operations. They could face government investigations and legal action.  If they do make the mistake of drawing cash, the government agency will ask that the funds be immediately returned to the restricted fund, leaving the college in no better condition. 

By the way, there is probably, no possibility that a government entity would approve use of their grants for other purposes. Moreover, time may be wasted going through the government only to discover that they will not approve an alternate use of their grant(s). 

Drawing on endowed cash can be as fraught as taking funds from government grants.  In most states, extracting cash from endowment funds requires: approval of donors if they are alive, or approval by the attorney general for deceased donors. In either case of drawing money from gifts by living or deceased donors may require review by the state attorney general. Going to the attorney general may take months for approval.  

As a final note, bondholders may look askance at colleges using endowed fund that are not stipulated to cover bondholder payments or operational cash.  Some bondholders may see this action as a breach of bond covenants and could call for immediate repayment of the outstanding balance. No college leader ever wants to receive a breach of covenant letter. 

Therefore, colleges should become aware of future cash problems so that they are not trying to solve the problem the week before cash is needed.  That is, begin the process immediately to receive approval to use endowed funds for operations.