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Make Endowment Funding Your Non-Profit’s Ally

Income from endowment funds may be able to help your non-profit meet operating expenses, ease cash-flow problems, and supplement next year’s annual budget. However, you need to pay attention to several factors, including investment performance, inflation, operational changes, and (the only factor you can truly control) your non-profit’s spending policy.

Know your restrictions

If endowment funds contain donor-imposed restrictions, your spending policy needs to defer to those. Assuming funds are not restricted, non-profits in every state except Pennsylvania must conform to provisions of the Uniform Prudent Management of Institutional Funds Act (UPMIFA). Among other things, UPMIFA:

  • Allows non-profits to include appreciation of invested funds as part of what is ‘spendable’ in addition to realized gains, interest, and dividends
  • Provides guidance for ‘prudent’ decisions, suggesting that spending more than seven percent of an endowment in any one year is not prudent
  • Makes it easier for non-profits to identify new uses for older and smaller endowments that may be dedicated to obsolete or impractical purposes

Because UPMIFA is complex, consult your financial advisor on how it affects your organization.

Define your percentage

Your spending policy should define how much of your endowment fund’s income can be spent on operations each year. Generally, this is defined as a percentage (between 4% and 7%) of a rolling average of endowment investments. A rolling average helps even out the ups and downs of market returns and prevents the endowment’s contribution to any one budget year from being significantly lower than contributions to other years.

However, this approach does not address whether your endowment fund will be able to maintain a similar level of funding for future operations. Also, because investment returns usually do not correspond to the inflation rates that affect your operating budget, your spending policy should be based on more than recent returns.

To factor inflation into your spending policy, you might start with a relatively conservative, inflation-free investment rate of return. Then, adjust it for inflation to arrive at a spending rate you can apply on a year-by-year basis

Increase spending power

A smart endowment spending policy can allow your asset base to grow and, therefore, increase your fund’s chances of maintaining or growing real spending power for future years. Contact us for more information.

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