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| Re: Quasi Endowment - more information needed
Posted by Tony Poderis   on 1/3/2008, 9:00 am, in reply to "Quasi Endowment - more information needed"
VIP Poster
Congratulations. It’s obvious that the good work you do was appreciated so much that the thoughtful and generous donor’s bequest was planned in advance to have you continue your mission for well into the future.
Endowment defined:
Endowment funds are for an organization to invest rather than spend, the income from which is used by the organization to meet ongoing expenses, cover capital expenditures, or fund special projects and programs.
Since the bequest is “restricted” only to the “setting up an endowment,” it seems clear that your board has full discretion regarding how much income to spend annually, how it is spent, or even if you choose to return income to the principal. The one key issue in coming to terms with the executor, is to seek to allow your board to invade the principal should there be an emergency in which the organization’s existence is in peril.
In my opinion, there is nothing “quasi” about any endowment fund situation. Any and all parameters of the fund’s use will be detailed in your organization’s financial policy manual. The fund’s intent is clear. There is nothing quasi about it, and the continued use of the expression could lead to a perception of a weak and ill-defined construction of policy.
The key person in your endowment setup is the executor of the deceased’s estate. Knowing the full latitude you have from the donor’s wishes through that official, allows your board of trustees to have as wide a range of options as possible regarding use of income and principal. So, do explore fully, and develop in writing, the “leeway” you have for the full use of the endowment gift.
Jumping ahead to when and if you plan to conduct an endowment campaign to raise funds to add to the current endowment bequest, you may find some guidance from my article:
--- Endowment Funds Go On Forever --- An Endowment Campaign Should Not
http://www.raise-funds.com/1099forum.html
Now, regarding your request for suggestions about how endowment funds may work. Perhaps the Addendum to my article has the answer. However, I cannot be sure. You are seeking “a good resource,” but it seems “policies created” by others are not of use. I would think that is exactly what you need---to create a policy (for the use of endowment funds).
P. S.
In the event it's not what you want, and to spare you the effort to go to my article and read the Addendum, titled: “Making Your Endowment Funds Work,” you and others please bear with me and I will duplicate the copy following for your quicker review:
(Start)
You have just read my article regarding the raising of money for endowment purposes. Anticipating the infusion of such money into your organization, or regarding endowment funds already raised by your organization, we move on to two subsequent issues:
(1) Endowment fund investment, oversight and reporting.
(2) 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 Issue (1) 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 Issue (2), 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 advisors. 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 (corpus).
(A) Endowment Income:
-- determine IF the organization will spend any of the income, a set percentage of the income, or 100% of the income.
-- decide HOW the organization will spend endowment income.
-- plan to be flexible to allow for the reinvestment of any unspent endowment income.
The use, to whatever degree (or not) of endowment income on an annual basis, or as needed, is predicated on two basic projections: that of the organization’s budgeted expenses for the short and long terms; and the cost of desired imminent and future programs, projects, and services.
(1) If the organization decides to spend endowment income, perhaps it will 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
(2) the organization might rule that the income may be only spent to support specific ongoing, or new, programs, projects and services, OR
(3) a combination of both.
(B) Endowment Principal:
-- allow for possible future catastrophic circumstances which could dictate that the organization will need to “invade” some, or all, of its endowment funds. It’s either that sort of provision now, or possibly going 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 do present themselves sometimes. Therefore, it would be unwise for an organization “today” to set an ironclad prohibition regarding any depletion of endowment principal for “tomorrow”---should there be no other choice at a future time of dire need.
When Spending Endowment Income or Principal, Be Aware of Donor’s 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 “designated” endowment funds from donors, the organization must carefully review with the donors the mutual understandings, limits, conditions and expectations of such gifts--and to take 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 Which it Supports as Enduring?
As well, an organization should carefully review an offer of an endowment gift where the income is desired by the donor to be restricted for application to 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 donation regarding an acceptable alternative application of such funds, if and when that time comes.
(End)
I hope this does it for you to some degree.
Tony
Tony Poderis
http://www.raise-funds.com
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