The concept of “endowment” has been around for several centuries. Throughout history, many entities had the foresight to set capital aside and spend only the income that is produced to support a cause in perpetuity. The endowment is not only a gift to contemporaries, but to future generations.
The easiest way to understand the purpose of an endowment is to imagine a pool of money which earns income that a nonprofit entity can use to further its mission. The original amount used to create the endowment should remain intact; only the income generated is designated for use by the entity.
In many cases, endowment purposes will be unique to the entity controlling the assets. The goals of a college endowment fund will vary from that of a community foundation. Despite differences in how one entity might use an endowment, organizations that create an endowment typically do so for the same reason: to have an uninterrupted positive impact on their community. It signals that an organization has long-term goals and intends to have a constructive influence in the community for an extended time. In many cases, the establishment of an endowment can also become a beacon to other donors that their donations or gifts will be used properly. This can garner confidence in the community and lead to larger gifts from more donors. The dual tenets of positive change and everlasting outcomes are key contributors to establishing endowments and continuing a cause into perpetuity.
Types of Endowments
Charitable asset pools can vary greatly in size and have different purposes and rules. There are reserves (operating, cash, gift annuities), charitable trusts, foundations and donor-advised funds, to name a few. The Internal Revenue Service specifically identifies three types of endowments:
- Permanent endowments are endowment funds that are established by donor-restricted gifts and are maintained to provide a permanent source of income, with the stipulation that principal must be invested and kept intact in perpetuity, while only the income generated can be used by the organization.
- Term endowment includes endowment funds established by donor-restricted gifts that are maintained to provide a source of income for either a specified period of time or until a specific event occurs.
- Board-designated endowments or quasi-endowments result from an internal designation and are generally not donor-restricted and are classified as net assets without donor restrictions. The governing board has the right to decide at any time to expend such funds.
It is important to note that endowments are different from rainy day funds that are available to cover short-term or immediate needs such as unbudgeted operational shortfalls. Many organizations keep a cash reserve for these types of scenarios. The goal of an endowment is mainly to cultivate a pool of cash through donor gifts, grants or contributions that can be invested and provide funding for the community, the entity and the future. The creation of an endowment is an asset for the community at large. If an organization is starting an endowment, it is important to conduct a readiness assessment that addresses current and long-term needs. In most instances, the donative intent is for the endowment fund to exist in perpetuity.
Perpetuity, as in forever?
Forever is a long time, and keeping the endowment afloat and adhering to the donor’s intentions requires discipline. There are several factors to consider when undertaking the fiduciary responsibility to manage an endowment for its intended purpose.
First, an organization will need to develop policies for governance and oversight of the endowment. The most critical step needed on the path to forming an endowment is education. It is essential that board members are educated and aware of the intricacies involved in endowment creation and management; there is no “one-size-fits-all” solution. One example of a “standard of care” for overseeing assets is the Uniform Prudent Management of Institutional Funds Act (UPMIFA). UPMIFA is not applicable to all endowments, but it is illustrative of the type of factors to consider when managing an endowment. For more information on UPMIFA, please see our white paper, Good Nonprofit Governance Starts with the Board.
Arguably, the two most powerful arrows a nonprofit entity will need in its fiduciary quiver are an investment policy statement (IPS) and a spending policy centered on its mission statement. An organization’s IPS will document its investment objectives, constraints, allocation parameters and risk appetite. The investment program’s success is commonly measured by its ability to support its spending or distribution policy while preserving purchasing power and allowing for the modest growth of the endowment. As such, it is important to document spending rules in order to form the baseline of investment decision-making. Based on PNC’s experience, the keys to long-term endowment success are the creation and adherence to a disciplined investment and spending policy.
How can PNC help?
Forming an endowment can be a cumbersome process, and there are some resources that will need to be dedicated to the endowment’s supervision. Larger endowments (such as universities and hospitals) often employ entire departments of staff to manage the fund. This can be expensive and present a strain on operational efficiency. In most cases, endowments that do not have that type of resource or capability available to them will hire an investment manager to handle those duties. This can be much more cost effective than managing the fund internally and lead to greater investment return.
PNC has decades of experience: We have worked with over 3,000 nonprofit organizations across the country and have dedicated specialists to create and improve upon a disciplined process for endowment management. With a robust list of solutions tailored for nonprofit organizations, we welcome the opportunity to engage nonprofit entities in planning, implementing and maintaining their endowment programs to help achieve long-term success.
PNC caters to clients in the nonprofit sector with a national practice group (NPG) that is dedicated specifically to Endowments & Foundations. The Endowment & Foundation National Practice Group studies and reports industry trends, regulatory changes, and sociocultural shifts.
Additionally, the NPG provides educational resources to our endowment and foundation clients to give you access to strategic insights. This team helps organizations address their varied investment, operational, distribution and capital preservation challenges.
Some of the primary advisory services provided include:
- investment strategy and portfolio management;
- responsible investment programs based on mission and values;
- planned giving services;
- administrative, processing, and sub-accounting services; and
- online access.
PNC’s Institutional Asset Management team can help address the complex stipulations of organizations and donors with customized and comprehensive solutions from our investment and administrative teams.
PNC’s focus on community impact and philanthropy goes beyond the services provided by the Endowment & Foundations team. A company-wide initiative, PNC Grow Up Great®, started in 2004 with the focus on preparing children during their pre-K years for success in school and life. Today, the initiative has served more than 4 million children with approximately 747,000 employee volunteer hours completed. Philanthropy is in our DNA.
Please let us know how PNC can help you start, grow, preserve, and maintain your endowment.
For more information, please contact Henri Cancio-Fitzgerald at 704-551-2843 or firstname.lastname@example.org.
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