Should Nonprofits Treat Endowments As Rainy Day Funds Or Cut Programs To Preserve The Endowment?

To tell the truth I've learned a lot from these comments. Not long ago I read a book in which there was a lot of good information about nonprofit law (here is the torrent http://bytesland.com/view/THE-LAW-OF- ... INANCE-AMP-MANAGEMENT-SER ) and I was going that many companies will dismiss personnel but will not touch the fund. Because, very often the fund is the key to personal prosperity. But after reading the comments now I understand the real reason of remaining the funds untouched. People are interested in a long and productive work of the organization, that is why sometimes it is important to save the work of the organization at all costs.

Laura:
Donor direction aside, the issue is not whether an organization should / should not do something. The issue is the thinking that each organization puts into its own decision about this issue. These are values discussion that can only be effective if they happen within each organization - not from an external sense of "should."

The ideal time to have these discussions is not when crisis hits, but when the group is doing alright. Questions for boards to consider as they craft the organization's guiding principles / values statements include:

"When we have tough decisions to make, how do we know which is the right one?"

"When making tough decisions, we will always err on the side of ______________."

Or more specifically, "When we face tight budget times, which of the following should we sacrifice?
• Program quality?
• Number of programs we provide?
• Or is it not ok to sacrifice any of these items? (In which case, what shall we do?)"

Decisions about "what to do" are really first rooted in these values questions. The more a group knows what it stands for ahead of time, the more aligned their decisions will be with the difference they intend to make in their community.

I hope this is helpful.

Hildy

From LinkedIn by Hildy Gottlieb

With the new law on UPMIFA being passed accross most of the country,. this is a topic which has been pondered by many organizations this year and will need a lot more consideration.

Where we are talking about a true endowment, the donor gave the money to be held in perpetuity and the earnings to be used for programs. Under UPMIFA, organizations can now spend form the endowment, even if the value of the investments are less than the amount of the donors gift IF the board determines it is prudent to do so.

With the current investment environment, many endowments are valued at less than the donors gift. Many would argue that it is not prudent to spend until the market value rises, but is this consistent with doners wishes? Would the donor want your program to end or suffer because of this temporary (likely) decline in the market value? Most would say no.

However, it is certainly not consistent with the donors intent to spend all of the endowment, which would then leave no money for the future of the program. I think it is imporant for organizations to create a long term trend of what the endowment market value will likely be over the long term future and the expected spending (considering that $1 today does not have the ame spending power as $1 20 years form now).

This long term approach will help oorganizations to balance both sides. Spending from an underwater endowment may be necessary to preserve the overall health of the organization as long as the spending is not so much that it prevents the fund from being able to recover and sustain the organization for the long term.

I for one, believe this same aproach should be used for board endowed (unrestricted) funds.

From LinkedIn by Rebeka Mazzone, CPA

I think the difference is dipping into an endowment for a one-time downturn in this recession rather than cutting programs/services. But only after the budget has been reviewed in detail and is as "tight" as possible. The critical juncture is board and executive not getting into a "habit" of doing it. Once boards and staff believe it is OK, it becomes practice and I have experienced the negative consequences in three organizations that spent their endowment to nothing and only then looked for other options they could have tried earlier.

From LinkedIn by Bob Glowacki

I think it's important to distinguish between reserves - for those rainy days - and endowments. It's also important to honor donor intent, your own investment and endowment policies, and the laws regulating the use of endowments, specifically those addressing dipping into principle. That said, organizations are being faced with extraordinary circumstances and sometimes the endowment appears the only means of staying afloat.

You might want to take a look at a short response I wrote to a question on this subject that appeared in On Nonprofits, a monthly Q & A, April 2009. The title: Tapping an Endowment During a Down Market: http://www.CoreStrategies4Nonprofits.com/down_market.html

From LinkedIn by Terrie Timkin

Hi Laura:

Interesting question! I would say that any endowment that has a specified purpose (specified by the donor) must be used for that purpose alone. I know of npo's that have gotten into serious trouble using endowments for operations when that was not the donor's intention.

However, it seems a very good idea for an npo to put away money for a rainy day fund. Perhaps a percentage of what is raised in the annual campaign or a specific campaign for this purpose.

It is so important for someone(s) in each npo to watch how money raised is spent to ensure that endowments are used appropriately. NPO pro's have lost their jobs when they (knowingly or not) don't provide this oversight.

Thanks for asking the question!

Marcia
NonProfit National Resource Directory
www.nonprofitnationalresourcedirectory.com
marcia.bloomberg@gmail.com

The program is king! If an endowment must be used to preserve the programs, do it! That is of course if the program is worthy of saving. That being said, the endowment should be the last resort. It can't be used because of its convenience. All practical and timely fundraising methods should be attempted first.

(From LinkedIn by Kevin Feldman)

I completely agree with the writers of this article. I was laid off from a performing arts organization with a sizeable endowment even though all annual fundraising goals and earned revenue goals were met. While the endowment had lost value, it had not gone below the level of the gifts they had recevied. They rarely drew from endowment at all, and never in the recent past had they drawn more than 2.25% (minscule amount!) The worst part about is that they call the endowment the "Fund to Assure Organization's Future". It's sad to see an organization treat its most important resource--its people--poorly when they have real options such as drawing from endowment. It's not only hard on the peole laid off, but on those who are still there and are covering the work of the laid off people. Organizations always have the opportunity to go back to donors and ask them to change the restrictions on a gift if times are really that hard. I agree that the majority of donors want to solve a problem and help an organization succeed -- not just grow its endowment for the sake of having an endowment.

From LinkedIn by Stephanie Kimmel

I would agree with Phil-- I think donors drive the process-- and as long as they fit within Insitutional Priorities -- if there is unrestricted income from endowmnts available for use or quasi endowmnts then that may be used for rainy day purposes--this is why you have spending policies--

From LinkedIn by Hillel Korin

Maarten de vries' reference to "the time the sun is shining again" reminds me of what we used to do when I was the Executive Director of the Alamo College's Foundation. In the good years when return on endowment investments were higher, our payout policy was an average of the past 3 years earnings on investments or 5%, whichever is lower, with excess earnings being placed in a rainy day setaside for when a rainy day came. The result was not having to cut back on support payouts during the "lean" years because we didn't overextend in the "good" years.

(From LinkedIn by Roland DuBay)

Endowments are not simmply rainy day funds. While a certain undesignated portion is often set aside as a "board designated fund" from which the board can allocate to certain needs, there are state by state rules and regs that have to be adhered to and I don't think rainy day funds normally get that kind of attention. When an endowment fallss underwater, and principal has to be further invaded, it's the states' rules governing this issue that must be adhered to. While many states have modified or are in the process of adjusting regulations in order to address the economic difficulties now facing nonprofits, it may not be possible for some nonprofits to just take the money.

There's also a responsibility to donor intent. Endowment giving usually has strings attached and a perception from the donor that their gift will serve the nonprofit in an ongoing manner. Unless its written into an endowment agreement or made clear in another way, how can you just blatently take money given specificially to support something for perpetuity or at least a very long time and spend it to pay the light bill? I realize that we are in unique financial times but we don't know if this is the worst that will ever be. How do we use up the money now - have problems raising new money (unless we just use planned gifts) because no one respects endowments anymore - and then say we have nothing to fall back on if things turn even worse?

(From LinkedIn by Lorri Greif)

I agree with the authors that not-for-profit organizaitons (NFP's) should be "willing" to spend endowment principle, but each NFP's situation will be different depending upon the stipulations of the documents which have established the endowment, and the legal environment in which the NFP operates. Some NFP's have mandates in their governing documents that require preservation of the endowment in perpetuity. In those cases, actions which decrease principle might not be allowed. In my view, this issue comes back to prudent stewardship based on foresight, insight, planning and execution.

Board members need to be aware of, and put into action, a strategic, long-term mindset supported by decision sciences.

There is also the "Living With Uniform Prudent Management of Institutional Funds Act (UPMIFA)" to consider.

(From LinkedIn by Alan Yue)

The question is only valid, if the non profit has also a policy for the time sun is shining again.

From LinkedIn by maarten de vries

I once had a major donor decline a solicitation for endowment saying 'I don't give to other peoples' savings accounts!.' Conversely I work with donors who refuse to give to bricks and mortar unless there is an endowment component to offset increased carrying costs. The answer, of course, is that endowment is both. For the donor who may distrust the nonprofit I routinely advise that s/he consider a donor advised fund managed by a third party.

From LinkedIn by Phil Deely

LA's MoCA is a recent example of this tactic gone badly awry - even with tacit board oversight. It was saved from total collapse by one of the founders - Eli Broad.

From LinkedIn by William Moreno

It's a tough decision when you do not know what the donors would have preferred. Maybe over time, this will become a standard part of endowment agreements, much like "annual withdrawal of income only" type of language.

From LinkedIn by Betty Boyd Meis

With respect to the loan suggestion, I have had a number of clients inquire about pursuing this option. If the endowment is a donor-restricted endowment, then the board is limited in the amount of risk it can take on when it invests the endowment funds. In many states the controlling statute is referred to as the Uniform Prudent Management of Institutional Funds Act (or its predecessor, the Uniform Management of Institutional Funds Act).

The legal analysis is too involved to post here, but a quick rule of thumb is that if a third party lender will not lend to the charity, it is probably not an appropriate investment for the charity's endowment.

Depending upon the circumstances, it may be possible to access funds in excess of of the historical spending rate, but state law and any controlling gift instruments should be carefully reviewed before attempting to increase spending from the endowment.

From LinkedIn by Ellis Carter

http://charitylawyerblog.com

It depends.

If the purpose of the nonprofit is to eradicate something (HIV/AIDS, malaria, TB) they should spend their endowments, even in down times. Spend, Spend, Spend! As much as you can spend efficiently.

If the nonprofit is created to serve a never-ending cause (public radio, ACLU), they should probably adjust their expenses during economically difficult times.

A third category is non-profits who serve a cause which become markedly worse in troubled-times (such as care for the homeless). It would stand to reason that they should spend in economically difficult times, and replenish in boom times.

(From Idealist News/Reddit by furyg3)

There are many issues in this succinct statement. Some of this is in fact governed by the law - as a non lawyer, i will stay away from those, but before making any policy decisions, i would strongly urge checking on applicable state and federal laws.

However assuming that the legal issues are resolved, I can say that this is by no means a new issue. In fact, over the years, i have facilitated numerous board discussions about this very question and most of those discussions pre-dated the current financial challenges.

As others have noted, first and foremost is to protect designated endowment gifts. Even if and when legal, any organization which earns the reputation of invading the principal of those funds risks the loss of credibility the next time they ask someone for an endowed gift.

Wat about board directed endowments [bequests or surpluses directed by the board to the endowment.. One hopes that the board fully understood that cash reserves are not the same as endowments; once put in an endowment, it should always be treated differently. It is not good practice or ethics to treat an endowment as just another cash reserve. If an organization wants to retain the flexibility suggested by the article, it shouldn't call those funds endowment funds but rather reserves and treat them that way.

Having said that, there are indeed times when the endowment can save an organization. It is important, to my mind, if the board does choose to take from the endowment, that the first approach is as a loan. If connected to a muliyear plan which includes repayment, it shows that the board is choosing to borrow from itself, but taht the endowment is still sacrosanct.

If that isn't sufficient, a board should never approve any grants from the endowment without advance notice. Grants from the endowment toward operations should be treated liek a by-law change and require a supermajority and notice.

If that isn't sufficient, an organization needs to look at its realistic viability. If an honest assessment is that the org is faced with years of drawing down the endowment, it is probably a sign of an organization which is in deep trouble and has not only short term cash flow problems.

Finally, it is true that some [but very few] organizations have fattened their endowment coffers beyond an appropraite balance with operating needs. In those cases, there are real mission questions which a board needs to ask - if there is too much money and not enough programs, the organization has probably outlived its usefulness or isn't doing enough. Endowments can provide cushions to the ebbs and flows of economics and fads in philanthropy; they should never insulate an organization from assertively and creatively fulfilling its social purposes for existing.

(From LinkedIn by Richard Marker)

All good points. I think that folks may be worried about legacy gifts where the donors can't be reached.

(Frpm Twitter @nplocal)

Reply from @cprdoc:

Re: worried about legacy gifts is like focusing on the fortune in a fireproof safe yet skimp on alarms & extinguishers w/ gas leak.

1st, would a sincere donor balk if money is being used justly?2nd, in the np world, isn't it preached to "talk" w/ the donor?

3rd. Consider grant funders? Aren't they just as restrictive w/ funds? BUT they will listen to reasoned, well-planned execptions.

(From Twitter @cprdoc)

Interestingly, tho, the folks I've already heard from have said "must honor donor's wishes" and not spend. Thoughts?

(From Twitter @nplocal)

Given that endowments were meant for "rainy days", the irony is they now exist more as a matter of pride at the expense of purpose.

(From Twitter @cprdoc)

A lot of times endowments are only board restricted not donor restricted their for the use of the funds should be a board decision. That being said before using the funds as rainy day funds I would suggest re-evaluating all of your programs to make sure they are running efficiently and effectively. However, I also agree with Roland that if a donation was made to the endowment by a donor then those funds need to be used specifically for what the donor intended them to be used for. I would also check your organizations financial policy to see what your policy states as reasonable uses for the endowment fund.

(From LinkedIn by Shannon Woodcock)

Unless a nonprofit has indicated in its policy that an endowed fund created by a donor in good faith would be used for a rainy day, and has shared that policy with the donor, I would have to say creatively reduce programs to preserve the integrity of the donor's gift intentions. One should also try to keep a balance between endowed and non-endowed reserves for rainy days.

(From LinkedIn by Roland DuBay)