BUILDING AN ENDOWMENT: LONG TERM FUNDING FOR YOUR ORGANIZATION
Many organizations decide they want to provide a long term funding source for their organization, so they build an endowment. An endowment is a fund of money which throws off income to fund operations. It can provide additional income when times are good and cushion the loss of donations (or state funding) when times are bad.
- There are several types of endowments.
A permanent endowment is one on which your donors have put restrictions about the use of the money. This is the most common type of endowment. You need to have a written document that outlines the purpose of the endowment as well as how much you can spend (see below). You cannot remove the restrictions without the donor’s consent and even the permission of the Attorney General.
A quasi-endowment is a fund on which the Board has put restrictions. The Board can also remove those restrictions without the permission of any other party. These can be set up and eliminated by Board resolution.
- Endowments are governed by the Uniform Prudent Management of Institutional Funds Act. This is a statute in effect in almost all states that outlines how the organization can manage the fund. It permits a considerable amount of Board flexibility, and gives criteria for setting investment and spending policies, as well as how to allocate increases in principal between principal and income. The act provides that spending between 5% and 7% is considered prudent under the Act. Illinois did not include that provision in its own version of the statute, but it is still a useful benchmark.
- Provide an investment policy and a spending policy. You need to consider how much risk your organization and your donors can tolerate in investing the principal. We recommend an investment committee to consider this. You also need to discuss this with the donor.
- Build a reserve before starting an endowment campaign. Remember that a permanent endowment is a restricted fund which you can only access under very limited circumstances. Usually you will need a supermajority of the Board, permission of the donor, and permission from the Attorney General. You therefore need to have a reserve in case you need more than the endowment fund might provide. Donors will consider it good stewardship as well.
- Effect on financial statements. If you have an endowment, make sure that it is shown appropriate on your financial statements as permanently restricted or temporarily restricted.
This is a brief overview of what you must consider in building an endowment. If you have questions or a considering an endowment campaign, please call us.