Who should get the $63M endowment money of UArts? Depends on who you ask

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Three months ago, the University of the Arts closed its doors to students, staff and faculty.

It has since filed for bankruptcy. Merger talks with Temple University fell through, and now the school and its assets are slated for auction so that the Center City real estate will be used to repay creditors.

And now a key question of the financial puzzle — what might happen to its $63 million endowment as of August 2024 — may have an answer.

The university’s bankruptcy triggered an unusual circumstance where the university may request a redistribution of its endowment.

Typically, endowments are restricted pools of money that cannot be touched because they are  tied to legal trusts that go into effect as part of a living will or a last will and testament.

Meanwhile, claims from University of the Arts faculty and staff still seeking unpaid wages for labor and other benefits are winding through the court system. As for students, lawsuits have been filed seeking class action certification in court.

But this endowment redistribution process is playing out in the Court of Common Pleas of Philadelphia County Orphans’ Court Division, a somewhat obscure court that handles such cases dealing with trusts.

Here’s the heavyweight fighters in the ring right now over the UArts endowment: a dozen universities, in collaboration with UArts board chair Judson Aaron, which have now accepted former UArts students to continue their education and trustees representing the interests of sizable donations made by a local philanthropist who was the granddaughter of a Campbell Soup executive and notable inventor.

“It is unusual because it’s not that common for universities to go belly up,” said Dean Baker, senior economist at the Center for Economic Policy Research. “But it’s getting more common.”

Neither attorneys representing various trusts created by Dorrance Hill Hamilton, nor the universities, responded to interview requests for this news story. Mrs. Hamilton died in April 2017.

This fall, there are 724 students who are now at new universities, of which, 321 enrolled at Temple University in North Philadelphia and 114 transferred to the Moore College of Art and Design — according to the court petition.

The universities with “teach-out” agreements that enrolled former UArts students are pitching to judge to divide the $63 million endowment in this arrangement:

• 44.3% for Temple University
• 15.7% to Moore College of Art and Design
• 12.4% to Drexel University
• 10% to Bennington College
• 4.9% to Point Park University
• 3% to Arcadia University
• 2.7% to Maryland Institute College of Art
• 2% to Montclair State University
• 2.9% to Rowan University
• 1.1% to The New School
• 0.28% to Alfred University
• 0.28% to Marywood University

If the endowment was split up this way, Temple University stands to receive $28 million from the University of the Arts endowment. Moore College of Art and Design could get $9.9 million. Drexel University stands to get $7.8 million from the deal. The other universities would get the remainder respective to their enrollment of former UArts students.

The universities argued in court that “the best alternative use of the endowment in its entirety which would fulfill as nearly as possible donors’ charitable intentions of providing educational opportunities to students in the area of visual, performing and related arts, is to distribute the funds held in the endowment to those nonprofit and public partners that accepted University of the Arts transfer students in proportion to the number of transfer students enrolled.”

And that the money can be “first used to provide scholarships to any University of the Arts students” who attend those teach-out schools, according to the universities’ petition.

But Dorrance Hill Hamilton trust representatives asked the Orphans’ Court judge to intervene and stop such a transfer because it wasn’t her intention to donate money to a public university that is already funded with taxpayer money.

“Mrs. Hamilton’s considerable charitable giving during her life was directed at support for primary or secondary education programs with any support for any educational programs at post-secondary higher educational institutions having been associated with trade schools, nursing programs and specialty degree programs and the like,” according to the petition to intervene.

During her life, she established the Dorrance H. Hamilton Endowment Fund at the University of the Arts and “much of the reported $63 million endowment held by the University” stems from her donations. The Hamilton Endowment Fund totaled about $25 million — from four payments of $6.2 million that were supposed to be transferred to the university’s endowment account. The stipulation was that the university couldn’t spend more than 5% of that money each year to offset operating costs, according to the petition to intervene.

“When making gifts to the University, it was never Mrs. Hamilton’s intention to support publicly funded colleges or universities with a vast student body offering a wide range of degrees and programs,” attorneys argued in the petition.

Instead, the goal is to refund the endowment money to the Hamilton Family Charitable Trust for redistribution through its educational programming grants process, according to the petition.

“The trustees have the right to request an account of those funds to determine whether the University properly administered the funds it received,” according to the petition. “The education fund is the entity that best fulfills Mrs. Hamilton’s intentions with respect to the Hamilton Endowment Fund given the closure and anticipated dissolution of the university.”

The trustee of the Hamilton fund is attorney Francis J. Mirabello, who did not respond to comment for this news story.

But this may be an uphill battle for the trustees in court, Baker, the economist said.

“The funders, the people who contribute to [the endowment] lose control over [the donation]. It’s not their money at that point,” he said. “They might not see their contributions used for the purpose they would most like to have seen but again they lose control over it. But they are getting a tax break from the government for that. So [they] got 40 cents on the dollar basically from the government as compensation for [their] $10 million contribution. So the fact that [they] lose control over it to me at least doesn’t seem outrageous.”

While there has been political pressure by students, faculty and staff to spend the endowment on unpaid debt such as collective bargaining agreements with workers — that’s not the purpose of an endowment, Baker said.

“Endowments are typically to help [universities] defray the ongoing operating costs,” he said.

For example, if a school has $100 million in the bank, that’s invested in the market to grow and slowly taken out over time each year to offset operating shortfalls, he said.

“Typically, you say [as a university] you’re going to spend say 5% or 6% a year from the endowment based on its earnings and new contributions,” he said. “Universities like to keep the size of the endowment steady and if it’s not actually growing they try to set their spend out rate at a point where they can at least keep it stable.”

As a nonprofit, the University of the Arts is actively being dissolved. That means its endowment must be redistributed to similar charitable causes, but that concept is subjective, and is ultimately under the purview of Pennsylvania’s attorney general, nonprofit law experts previously told WHYY News.

The oldest building in the University of the Arts’ historic Philadelphia real estate portfolio, built in 1826 and sits at the intersection of Pine and South Broad streets, still bears the name of a former university board member and benefactor Dorrance H. Hamilton. The Hamilton Hall building was dedicated to the donor in 1996, according to University archives.

In June, that building was a place for art-making, protesting and rallies by students, staff and faculty members stunned, saddened and enraged by the sudden closure of the school.

By September, all of that visual art had been scrubbed away. There’s no more musicians or street artists or dancers. No remnants of the protests, students or fight.

Instead, about a dozen people were seen sitting on the steps seeking shelter and respite on a recent weekday in September.

The building’s plaque still stands but it’s unclear for how much longer.

Things to remember: UArts took out $50 million in municipal bonds and still owes about $45 million. Just like a for-profit company bankruptcy, the university must repay its debts to secured creditors as a priority. That means its campus buildings, estimated to be worth $94 million, could be sent to the auction block to raise cash for creditors. If the university doesn’t have enough assets to satisfy its debts, some creditors won’t get paid.

Note: Obtaining records for Orphan’s Court is not as easily accessible as most other courts. For example, the records can be seen on a computer terminal inside Philadelphia’s city hall, and copies obtained for a whopping $3 a page. No cameras or other recording devices are permitted.

Disclosure: The Dorrance Hill Hamilton trusts have donated to WHYY as supporters of this NPR member station.