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Managing Your Charity’s Endowments Responsibly?
Sharron J. O'Donnell, CPA
Senior Manager and Director, Not-for-Profit Services
January 25, 2010
By 2008, Harvard University had amassed an incredible $37 billion in endowments, accounting for nearly a third of its operating revenue. A year later, the value of those endowments had fallen by nearly $10 billion. The impact on the University's budget was immediate, including frozen salaries for faculty, early retirement offers to 1,600 employees, and the loss of tuition assistance to needy students.
Critics point to risky investment strategies, illiquid assets, and an approach that de-emphasized more conventional investments in Treasury bills, preferred stock, and bonds.
While Harvard's endowment history is particularly dramatic, it does illustrate the importance of prudent governance with regard to policies for managing endowment funds and associated risk―and it provides a cautionary tale, even for much smaller organizations.
Governance with regard to charitable funds is a critical board and executive responsibility. If you're on the board of―or an executive with―a charity that has significant endowments, you should be aware of important legal requirements and best practices.
For charities in Washington State, the Uniform Prudent Management of Institutional Funds Act (UPMIFA) provides a uniform set of rules for managing, investing, spending, and modifying restrictions on endowment funds. Related guidance from the Financial Accounting Standards Board (FASB ASC 958-205) addresses financial reporting classifications and enhanced disclosures for endowment funds.
As a board member or executive, you should make certain that your organization examines its policies and reporting procedures to ensure that they include factors required to be considered under UPMIFA. You should also ensure that your accounting records accumulate the information required to be disclosed by FASB ASC 958-205, as outlined below.
In addition, all investing and spending decisions should be well documented to demonstrate compliance with your organization's policies, as well as other considerations outlined in UPMIFA that ensure endowment funds are invested and spent prudently.
Review (or Document) Your Organization's Endowment Investment Policy
Your organization's endowment investment policy should demonstrate that the following factors are specifically taken into consideration:
 general economic conditions
possible effect of inflation or deflation
expected tax consequences, if any, of investment decisions or strategies
role that each investment or course of action plays within the fund's overall investment portfolio
expected total return from income and the appreciation of investments
resources of the charitable organization
needs of your charitable organization and the fund to make distributions and to preserve capital
asset's special relationship or special value, if any, to the charitable purpose of your organization
Review (or Document) Your Organization's Endowment Spending Policies
UPMIFA abolishes previous spending limitations based on the historic dollar value of the fund. As a result, you should review or develop your endowment spending policies to address the following factors:
duration and preservation of the endowment fund
purposes of the institution and the endowment fund
general economic conditions
possible effect of inflation or deflation
expected total return from income and the appreciation of investments
other resources of the organization
investment policy of the organization
You should also take steps to ensure that all appropriations from endowment funds are specifically identified when appropriated and are clearly documented in budgets or separately, as appropriate.
Develop and Communicate Your Organization's Provisions for Modifying Restrictions on Charitable Funds
The new law also updates provisions that govern the release and modification of restrictions on the management, investment, or purpose of charitable funds in order to provide for more efficient management.
Charities can release or modify restrictions with the written consent of the donor or, under certain circumstances, with court approval. As a result, your organization should develop and communicate to donors its policies governing management of their endowments and, when applicable, clarify with donors any additional spending restrictions for their donated funds.
Review Small or Obsolete Endowment Funds with Regard to Restrictions
Under certain circumstances your Washington charity may be able to release or modify the restriction without the approval of the donor or the court―generally when a restriction relates to an older fund (more than 20 years old) with a relatively small dollar value (currently, less than $75,000). You should review your current endowment funds to determine whether it is appropriate to remove or modify any restrictions on the funds.
To remove or modify a restriction, you must determine that the restriction is unlawful, impracticable, impossible to achieve, or wasteful and you must notify the attorney general at least 60 days in advance of releasing or modifying the restriction.
Review (or Document) Your Organization's Policies with Regard to Net Asset Classification of Donor-restricted Funds
In the absence of a donor stipulation, your organization must establish a policy in accordance with relevant law that governs the amount of a donor-restricted endowment fund to be permanently retained.
The permanent retention policy should describe your organization's interpretation of the requirements of Washington State law and specifically address treatment of the following:
original gift amount
additional contributions
income
Develop or Modify Your Accounting System to Maintain Records for Required Disclosures
Your organization must be in a position to disclose the following for each financial reporting period:
composition of endowment by net asset class at the end of the period, in total and by type of endowment fund, showing donor-restricted and board-designated funds separately
reconciliation of beginning and ending balances, in total and by net asset class, for specified line items
Governance with regard to charitable funds is a critical board responsibility. The professionals in our not-for-profit practice are available to assist you in developing or enhancing your organization's policies to reflect current best practices for managing, investing and spending endowment funds.
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