Who's Watching the Endowment?


By Kurt Herdman

As we approach the fiscal year-end for many not for profits, I find it is a great time to take stock of the state of your organization’s endowment.   Endowment management tends to focus on the overall investment management of the endowment funds, which is certainly an important component of endowment management, but is your endowment actually operating in compliance with relevant law governing endowments (Act 141 in PA, and generally UPMIFA in most other states)?

The first question you should ask is if your organization has a formal endowment policy adopted by the board of directors.  If your organization has not adopted a formal endowment policy, your organization absolutely should.  In Pennsylvania, not-for-profits with a formal written endowment policy can generally elect to spend 2 to 7 percent of the average market value of the endowment funds over the past three years (absent any other donor restrictions).  If an organization has not adopted a written endowment policy, then generally the organization is restricted to follow trust law, which will only allow the organization to spend actual interest and dividends absent other donor intent.  Under Act 141, the Organization’s board of directors should adopt this spending policy on an annual basis, and should also have a prudent investment policy “consistent with the long-term preservation of the real value of the principal” of the endowment funds.

Another key area to focus on is to make sure that any restrictions from endowment donors are appropriately accounted for, including any purpose restrictions.  This often requires close coordination between accounting and development departments, and can often get lost in the shuffle, particularly if discussions between the donor and the organization are not written.  Establishing strong lines of communication between development and accounting departments are absolutely critical for effective endowment management.  

Lastly an organization should have strong oversight over the endowment process, including appropriate oversight at the board level.   Discussions at the board level should include:

  • What should be the endowment spending policy, and is the organization following the policy?
  • What are the overall investment objectives, and does the current asset allocation fall within those overall objectives?
  • What is process to evaluate the endowment investment managers?  Have they met performance objectives?  Are their fees reasonable?
  • Are roles and responsibilities appropriately defined among the various parties (i.e. investment managers, management, and board members)?

Ultimately, an endowment can often be one of the most critical assets of an organization.  An appropriately managed endowment fund will result in a never-ending funding stream, which can help an organization fulfill its mission forever.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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