“In Perpetuity”—Use or Misuse of an Endowment in the Face of Institutional Failure

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July 19, 2013; Wall Street Journal


NPQ reported recently about the arrest of a New York mayoral candidate at a protest over the closing of Brooklyn’s Long Island College Hospital (LICH). The Wall Street Journal now reports that a major donor and longtime board member gave LICH more than $100 million in an endowment that is now gone, used primarily as guarantee for capital expansion loans as well as payments and collateral for malpractice settlements.

The political and operational issues surrounding the present conditions and future of the hospital are compelling, with a judge’s order forcing the financially troubled hospital to remain open and rumors of plans by the State University of New York (SUNY) Downstate, the current owner, to sell or develop the property with its “harbor views of the Statue of Liberty.” A press release on the SUNY Downstate web site states that the hospital is currently losing $15 million a month and has accepted voluntary resignations from a number of physicians and senior administrators. While denying there are immediate plans to close the hospital, it does not make a commitment to keep the hospital open. According to the news release, as of July 18 there were only 18 patients in the hospital, and efforts were being made to transfer them to other hospitals.

Against this backdrop, it’s easy to lose sight of the philanthropic intent of Donald and Mildred Othmer. A $50,000 investment with Warren Buffett in 1961 turned into about 14,500 shares of Berkshire Hathaway in 1969. They never sold their shares, which would be worth over $2 billion today. Mr. Othmer was a board member of the hospital for 22 years. He and his wife gave a $135 million endowment to the hospital in the 1990s, “‘to be held in perpetuity,’ according to their wills.”

Enter the leaders of Long Island College Hospital and the courts. In the years following the establishment of the endowment, the hospital secured court approval—several times—to use the endowment’s principal to cover immediate needs. Why? The court accepted the argument that the Othmers intended for the hospital to continue in operation, and using the endowment principal was necessary to avoid the hospital’s shutdown. The legal principle of “cy-près,” or “as near as possible,” is used in cases where the intent of a deceased person is weighed against the needs of others later. However, lawyers interviewed for the Wall Street Journal article note that the principle is rarely used to change the provisions of a charitable endowment.

Using this legal argument as precedent, is any philanthropic endowment safe from being converted to immediate use? Couldn’t any nonprofit’s board and executive develop situations that would provoke a crisis by overcommitting to capital expansion, failing to exercise due diligence over the nonprofit’s financial affairs, or neglecting to pursue a persistent and effective fund development strategy? There are those in Brooklyn who are asking these questions of LICH now, but it’s probably too late to find and hold anyone accountable, much less to save the hospital from closing.

We would love to hear from readers on their views about the uses of endowment principal and about endowments in general.—Michael Wyland

  • Mike Mercilliott

    The reality is SUNY Downstate a part of the State of New York a public university took over a hospital that (Long Island College Hospital) LICH that was loosing millions each year. Downstate was loosing millions each year from the hospital is owned at that time. Even a kid from elementary school could have told you if they are both loosing money the addition of the two would still be to loose millions each year. So why was SUNY allowed to take over a hospital with the checks and balances New York has? No realistic plan was ever put into place to restructure LICH or Downstate. Downstate has had court orders to keep LICH open and they still have tried to close it. The courts has refused to hold Downstate in contempt. Why, what are they going to do? Order NYS to pay? New York State has acted above the law in this case. The draining of the endowment fund for questionable is part of the same. What is anyone going to do? SUNY Downstate has acted above the law and the NY courts are reluctant to do anything about it. The laws apply topeople and not a state? Well in New York that is the case. The reality is donors should think twice before giving to a organization that flaunts the law and drains a endowment like this. This whole case of New York State, SUNY Downstate, and LICH will be studied in universities for many many years to come.

  • Charlie Bernstein

    On the one hand, anyone who’s seen the movie The Art of the Steal, about the raid on the Barnes Museum in Pennsylvania, will know that no bequest is 100% safe or sacred. On the other hand, here in Maine we’re grateful that when the late Governor Percival Baxter donated what’s now called Baxter State Park, including Mount Katahdin, to the people of Maine, the terms so air-tight that eighty years later, developers still haven’t cracked it.