Not-for-profit organizations have long turned to endowments for help, providing the necessary financial resources to carry out their mission, now and into the future. The largest and wealthiest generation in U.S. history, the baby boomers, are expected to transfer trillions of dollars of assets in the next few decades; this could be the time to launch an endowment fund.
All endowments are not created equal. With a permanent endowment, the original gift is usually intended to be held into perpetuity, with only certain income available for use in operations. With a term endowment, organizations are generally allowed to also use the principal after the designated term has ended. Either way, though, not-for-profit organizations need to consider several key issues before making the move.
Balancing the Pros and Cons
Endowments appeal to not-for-profit organizations for several reasons. For example, the funds provide financial stability and can help ensure that programs stay focused on areas the board and donors rank as most important. An endowment also can reduce the headaches and uncertainty often experienced when you are forced to rely solely on work-intensive annual campaigns, special events and fundraising. Think less event planning and more time to devote to the actual mission of the organization
Endowments can help attract additional donors, as well. Having endowments demonstrates that the not-for-profit has earned the trust of other donors and will be around for the long haul, and let you approach donors from a position of strength and confidence, rather than neediness.
Be forewarned, however: An endowment can turn off potential donors, who might think the organization does not really need their contributions. Administrative tasks to manage endowments also could suck up staff time, diverting it from the organization’s current needs.
Managing Assets and Spending
Not surprisingly, endowments come with some handcuffs. The Uniform Prudent Management of Institutional Funds Act (UPMIFA) lays out the standards for managing and investing endowments. Not-for-profit organizations need to establish written investment policy for any endowment that satisfies those standards by addressing, among other things, asset allocation and spending.
An organization board’s investment committee, with input from an investment advisor, when necessary, should determine the best allocation across asset classes, for example, stocks, bonds and real estate, to earn the desired return on investment. If board members do not have expertise in this area, consider hiring an investment manager to advise the committee. Each investment decision must be made in the context of the endowment’s total portfolio, taking into account the risk and return objectives of the endowment and the organization.
When it comes to spending, UPMIFA allows spending or accumulates at a rate the board determines is prudent for the endowment’s uses, benefits, purposes and duration, subject to seven specific criteria. These include the purposes of the organization and the endowment, general economic conditions and the organization’s other resources. UPMIFA also allows spending on the expected total returns of the endowment, including earnings on original principal and appreciation.
Taking a Different Route
If a traditional endowment does not seem like a good fit, do not worry, an organization can establish a “quasi endowment,” also known as a board-designated endowment or funds functioning as endowments. A quasi endowment could work well if your organization is not quite ready for a full-blown endowment campaign, but wants the financial stability and other benefits associated with endowments and has the funds to set aside for this purpose.
Unlike traditional endowments, quasi endowments are established by the board, not the donor. They are usually funded by unrestricted donor gifts or excess operating funds. Organization will find a quasi-endowment to be more flexible than permanent or term endowments because the board can change its designation(s) at any time and for any reason. Even better, they are not subject to UPMIFA.
Planning for the Complexities
If an organization decides to pursue endowment of any kind, keep in mind that the arrangements are more complicated than for funds raised through ordinary fundraising or capital campaigns. An organization will need to make sure it has, or can acquire, the requisite expertise in areas, such as drafting investment policies, managing the investments and related financial reporting.
For more information, contact Marva Flanagan at [email protected], or call her at 312.670.7444. Visit ORBA.com to learn more about our Not-For-Profit Group.