We have investments that we call "Permanent Funds," but we are looking into starting a true endowment. Many questions have come up including:
- Potential purpose and use of an endowment.
- How do we fund an endowment?
- How do you govern and maintain legal compliance?
- Who would lead the endowment?
- How will the endowment interface with ongoing Foundation activities organizationally and administratively?
I'd be interested in the expert opinion on any/all of these questions.
Thank you in advance!
Financially prudent education foundations typically have a reserve, savings, "permanent fund" or other accounts that are restricted in use. When you are talking about an endowment fund specifically, the corpus, or the endowed amount, remains constant and is typically not available for spending on programs, operations or otherwise. The earnings on the endowed amount, however, are eligible for allocation by the board. It is a sustainable way to receive income and is part of a diverse revenue stream. Endowments are set up for many reasons, perhaps it is the intention of the donor, for example. This attracts some donors since their gift would be perpetual. Many foundations convert their reserve account to an endowed account once it has reached a preferred amount. The typical range is around $1M since the earning on much less would not yield little income. The earnings on an endowment fund can be used either as restricted by the donor (and accepted by the foundation) or the foundation may determine the purpose. Some foundations do not spend the earnings and increase the endowed amount. The endowment can be funded through the budget allocations annually, an endowment campaign or can be funded in any way chosen by the board. To maintain compliance, you should have a donor agreement in place if the funds come from a restricted gift. The board should not consider converting the permanent fund into an endowment fund if they ever expect to use the funds. There are some foundations that create a quasi-endowment fund to allow for spending in the case of emergencies. If the foundation decides to launch an endowment campaign, some donors will not give to a quasi-endowment since they want their donation to be perpetual without opportunity for the corpus to be spent. When we work with education foundation establishing this type of account, we recommend that the Finance/Governance Committee (task force) have governance over the endowment account and activities. It is not a complicated process and typically the structure is recorded in the minutes. We recommend you open a new bank account to keep it simple. Many foundations have multi endowment accounts and if it gets complicated, the foundation may need to rely on an accountant versed with nonprofits to make sure the earnings and activities are recorded correctly.
We have many individual named endowments, but I think what you are wanting to create is more of a general endowment. We have one general endowment which we promote to our supporters seeking financial support for the perpetuity of funding any of the foundation programs including operating expenses. The General endowment consist of Donor Directed Gifts which are recorded as such and permanent in measure. We also adhere to the Texas Uniformed Prudent Management Institutional Funds Act in that we only are utilizing the earnings and not the principal of these types of endowments Additionally, we have a "quasi" endowment that our board of directors elect to place any additional unrestricted funds into for financial growth opportunities. We can access those funds at any time to cover any expenditures the foundation may need the additional cash flow for or to just as Theresa indicated offset the operating cost. These funds are not under the TUPMIFA and can be utilized in its entire holding since they were UR funds to begin with.