Whether you already have some form or endowment or are about to embark on your first endowment campaign (see the article Endowment Funds Go on Forever But an Endowment Campaign Should Not ) you need to be ready, willing, and able to steward your endowment funds and maximize their impact. And that raises two issues:
- Endowment fund investment, oversight and reporting.
- How, if, and when you spend endowment fund interest and dividends—and how, if, and when you might need to “invade” any of the principal.
You can address the first of these by researching investment performance ratings and practices with your local banks and other companion firms with the guidance of your Board’s Finance Committee. Talking to the leadership and top staff of a few large organizations. Investment and finance committees will be a most useful exercise as well. This article addresses the second issue, and suggests the following guidelines.
Endowment Funds and Income:
To Spend or Not to Spend
A non-profit organization currently holding endowment funds, or an organization which is planning to raise endowment funds for the first time, should give special attention to how the funds will be managed—not from an investment perspective as stated above, but rather how an organization will utilize the endowment income and principal in its operations. This endowment management policy should be instituted with the consensus of an organization’s leading officials and advisers. It should be cited in an organization’s bylaws, as well as entered and defined in its Financial Policy Manual. It’s that important because it represents an organization’s future. The first issue to address would be about how the income from endowment is handled, then attention must be given to the principal asset (the corpus).
First you need to determine if the organization will spend any of the income. If yes, will it be a set percentage of the income or 100% of it? Then you need to decide how the organization will spend that endowment income. Finally, you need to plan to be flexible so that any unspent endowment income can be reinvested. The use, to whatever degree (or not) of endowment income on an annual basis or as needed is predicated on two basic projections:
- The organization’s budgeted expenses for the short and long terms.
- The cost of desired imminent and future programs, projects, and services.
If the organization decides to spend endowment income, it may direct this income toward annual operation expenses in order to provide some relief for an overburdened Annual Fund Campaign, and/or because of a lack of sufficient other gifts and grants. Or it might rule that the income may be spent only to support specific ongoing, or new, programs, projects and services. Or, perhaps the decision will be to pursue a combination of both these choices.
You need to allow for possible future catastrophic circumstances that could force the organization to “invade” some or all of its endowment funds. The choice may be to make that sort of provision now, or possibly go out of business later. However, an organization must work as hard as possible to avoid spending any—or very little—endowment principal. That’s supposed to be money working in perpetuity. Endowment is “forever,” so it does little good to deplete assets which are intended to safeguard the future. But, formidable financial situations can present themselves. Therefore, it would be unwise for an organization to “today’ set an ironclad prohibition regarding any depletion of endowment principal for “tomorrow”—there be little or no other choice at a future time of dire need.
When Spending Endowment Income or Principal
Be Aware of Donors’ Wishes
Decisions of spending endowment income or principal are up to the organization’s leadership. But the leadership must be acutely aware that it’s quite often up to the wishes of the donors of endowment funds as well. That’s where the common usage in the non-profit world of the words, “unrestricted” and “restricted” come in. And an organization’s financial policy must also address those circumstances. Endowment funds are raised mostly by soliciting money from donors on an unrestricted basis. This will allow an organization the flexibility to use its judgment regarding the best ways to spend the endowment income—and if necessary, the principal. While any organization would welcome fair and reasonable requirements connected to restricted, or designated, endowment funds from donors, the organization must carefully review with donors the mutual understandings, limits, conditions, and expectations of such gift—taking special care to avoid conditions set forth by any donor which could cause the organization to stray from its basic mission.
Replace What is Spent
A condition should be set forth in the organization’s financial policy that, should it be absolutely necessary to spend any endowment principal, those funds must be replaced by a designated date—the sooner the better.
Endowment Is “Forever,”
But Is the Program It Supports as Enduring?
An organization should carefully review an offer of an endowment gift when the donor desires that the income be restricted to supporting a specific program or service of the organization—especially a program or service which may have an uncertain future. Since endowment is forever, an organization should be concerned that the life of the endowed program or service might, in fact, be much shorter. If there is any chance that such a “perpetually” endowed program or service could later be discontinued, there must be clear understanding and agreement with the donor at the time of the gift regarding an acceptable alternative application of such funds if and when that time comes.
The Last Word
Winning the trust of our donors is perhaps the most important thing we can do as we put to work any of the funds they contribute to our organization. How well we use and spend the money they give as their “investment” in our mission and vision, is especially critical when those funds are for endowment purposes. There is a sense of immediacy, even a conclusion, when donors give to current operations, programs, projects, and services. But giving to endowment conveys to those donors a sense of something to be effective in the long term and that it is permanent. Thus, these final words are provided to further encourage an exacting and consensus-driven practice when it comes to how those endowment funds are spent.