By Doug Hasler, CPA, Director at Blue & Co.

Whether your organization is considering soliciting donor-restricted permanent endowment contributions as part of a new capital campaign or you already have endowment funds, it is very important for organizations to have comprehensive endowment policies that address acceptance, administration, investing, and spending. Inadequate policies can have long-term effects on the organization’s ability to utilize such funds effectively in furthering its mission because of the perpetual nature of permanent donor-restricted endowments.

An organization’s gift acceptance policy should encompass the acceptance of donor-restricted endowment gifts. In addition, the policy should be reviewed by legal counsel for compliance with applicable laws. As just one example, interpretation of the State Prudent Management of Institutional Funds Act (SPMIFA) varies depending on the organization’s state domicile.

Endowment funds should follow policies established by the board of directors, and those policies can evolve over time to respond to changing circumstances. Donors should be aware that the gifts will be invested, managed, and drawn upon subject to the organization’s endowment policies as established and periodically updated from time to time by the organization’s board.

Key Endowment Policy Considerations

Some of the major topics to be addressed in establishing endowment policies include endowment fund creation, endowment fund investment policies, endowment spending and distribution policies, and endowment accounting and reporting policies. In this first article of our two-part series, we will address these first two topics.

Endowment Fund Creation 

Minimum dollar threshold for a donor to establish a restricted endowment fund

• Two common minimums are $25,000 and $50,000.
• Assuming a four percent draw rate as an example, these provide $1,000 or $2,000 annually for the organization to use (in today’s dollars).
• Organizations are not required to set a minimum dollar threshold. Organizations that do not require a minimum often follow a strategy that encourages endowment giving with the hope others will contribute to those endowments once they are established. In our experience, this may result in organizations having a larger number of very small endowments that provide no real programmatic benefit but take additional time to administer.

Time frame to allow funds to grow to the minimum dollar threshold

• Organizations commonly use five years to allow all gifts to a fund to grow it to the required minimum level. The policy should address whether funds that have not yet reached the minimum threshold will be allocated investment return and draws for spending.

What happens to funds that have not reached the minimum threshold within the required time period?

• The policy should make it clear as to what will happen to the accumulated gifts to the fund if the fund does not grow to the required funding level by the end of the specified funding period.

Endowment Fund Investment Policies 

Return objectives and risk parameters

• Most organizations invest the endowment on a long-term total return basis given the perpetual nature of donor-restricted endowments.
• Policy development to consider the combination of achievable investment return with spending rates, along with the expected cost of inflation.
• Consideration of risk/reward tradeoffs in selecting the investment strategy.

Strategies the organization will use to achieve return objectives

• Establish an investment committee – Set expectations for membership and responsibilities, such as suitable expertise to evaluate investment advisors, portfolio risks, and endowment return.
• Establish endowment investment strategies in consultation with the organization’s investment advisors.
• Evaluate the portfolio on an annual basis in consultation with the organization’s investment advisors.
• Endowment funds may need to be invested separately from other non-endowment funds of the organization, because of differences in risk tolerance and timeline for spending of non-endowment funds.

In our next article, we will explore more detailed strategies and policies for managing and spending endowment funds effectively.

If you have questions about establishing endowment policies at your organization, contact your local Blue & Co. advisor today.