Every nonprofit organization benefits from endowments. They can provide financial stability and serve as a nest egg of capital to generate income. It’s important to remember that not all endowments are built the same. Managing and spending these funds needs a responsible and strategic approach. A well-defined endowment spending policy dictates how the funds are utilized and should align with the organization’s mission while simultaneously being financially sustainable.
This is often easier said than done. It takes a lot of hard work to make an endowment grow at a sufficient rate so it can be maintained indefinitely. Nonprofit leadership needs to consider spending policies that make sense while remaining tactful enough to appease donors and often public opinion.
Key Considerations in Crafting an Endowment Spending Policy
There are a number of factors to consider when creating an endowment spending policy. These include:
– Endowment Size: The size of the endowment directly impacts how much can be spent annually without depleting the principal.
– Financial Needs: The organization’s current and projected financial requirements must be evaluated on a regular basis to establish a spending framework that aligns with these needs.
– Donor Intent: Understanding the original donor’s purpose for establishing the endowment is essential, and can be tricky. Adhering to their wishes maintains the integrity of the gift, but not all gifts have simple terms–more on this later.
– Risk Tolerance: The organization’s investment committee’s risk tolerance influences how investments are managed to generate income for spending. Leadership that refuses to accept any risk may limit the endowment’s growth potential.
– Spending Mechanism: The policy should delineate the method of spending, whether a fixed dollar amount, a percentage of market value, or a combination of both.
Types of Endowment Spending Policies
– Simple Spending: This approach allows a fixed percentage of the endowment’s market value to be withdrawn annually. It provides stability but can be impacted by market fluctuations.
– Inflation-Adjusted Spending: With this policy, a fixed percentage of the endowment’s market value is withdrawn, adjusted for inflation. It safeguards against the erosion of spending power over time.
– Targeted Spending: This flexible approach permits varying withdrawal amounts for specific purposes, accommodating diverse needs within the organization.
Potential Complications
Nonprofit leadership needs to be bold enough (as fiduciaries) to act in the best interest of the nonprofit and the endowment. This means that they may need to negotiate with a donor for better terms that actually benefit the organization and their goals. Gifts that come with unreasonable or political strings attached may do more damage than good.
In 2018, Stephen Schwarzman, the CEO of Blackstone Group, donated $25 million to his alma mater, the Lawrenceville School in New Jersey. The donation came with a stipulation that the school would be renamed after Schwarzman. The school’s board of trustees initially agreed to the stipulation, but after facing public backlash, they decided to renegotiate the terms of the donation. The school ultimately agreed to accept the donation without the requirement of renaming itself.
Another example comes from Kenneth Griffin, the founder and CEO of Citadel, who donated $2.6 billion to Harvard University, requesting that the graduate school of arts and sciences be named after him. The donation is the largest single gift ever made to an American university but has received a lot of criticism due to Griffin’s political affiliations. Ultimately, this could harm their ability to raise funds from donors who don’t align with Griffin’s ideals.
Guidance From Fairlight
An endowment spending policy is an important tool for ensuring that an endowment’s funds are used wisely and effectively. By carefully considering the organization’s mission and financial needs, you can create a policy that helps achieve long-term goals. If this sounds daunting, you don’t have to do it alone!
The team at Fairlight Advisors can help your organization with financial planning, investment portfolios, and even provide training to leadership and board members. Let us guide you through this exciting chapter of your organization’s success story. For a free consultation, call 1.844.309.6248 and schedule today!
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