Sponsor Insight

By VonLehman staff |

Every nonprofit dreams of receiving a large endowment that will keep it financially worry-free in the future and allow it to fulfill its mission with ease.

But, in the real world, endowments also carry serious responsibilities, created by the Uniform Prudent Management of Institutional Funds Act (UPMIFA). When managing endowments, nonprofit leaders must keep the following realities in mind:

An investment policy drives fund management

Every endowment should have a comprehensive investment policy that drives the management of the fund. According to UPMIFA, investment decisions must be made in relation to the nonprofit’s overall resources and purposes. And the endowment investment policy should be different from the policy for other investments of the organization.

“Prudent” investment decisions must consider the entire portfolio and be made as part of an investment strategy with risk and return objectives reasonably suited to the fund and the organization. UPMIFA also permits “only investment costs that are appropriate and reasonable.” (UPMIFA applies only to “true” endowments funded by donors, not “quasi” endowments created by boards.)

The endowment’s objectives should guide its investments and management. For this reason, it’s important not to simply adopt a generic objective but to articulate an objective that reflects the organization’s own circumstances. For many nonprofits, the primary goal is to preserve and grow funds for the organization’s long-term stability while providing a predictable contribution to support current activities. As a living document, the investment policy can change over time as objectives or other factors change.

Asset allocation is key

The investment policy will include an optimal asset allocation. The nonprofit’s investment committee must analyze the risk and return of potential investments (including stocks, bonds and alternative investments such as hedge funds and private equity) to determine the best mix and to obtain the total desired return. To maintain flexibility for responding to changes in the investment environment, it’s best to establish ranges for each asset class instead of set percentages. The investment committee should review performance quarterly and adjust the allocations accordingly.

Your spending policy: A crucial component

The investment policy should include a spending policy for the endowment, setting a percentage that can be spent annually. The spending policy will impact the performance of the fund, as well as its ability to fulfill the donor’s intent.

UPMIFA sets standards for endowment fund spending. It provides that an organization can spend as much of a fund as it determines to be prudent for the “uses, benefits, purposes and duration” for which the fund is established.

UPMIFA’s seven criteria to guide annual spending decisions are: 1) duration and preservation of the endowment, 2) the purposes of the organization and the fund, 3) general economic conditions, 4) effects of inflation/deflation, 5) expected total return from income and appreciation, 6) the organization’s other resources, and 7) the organization’s investment policy.

Unlike its predecessor, the Uniform Management of Institutional Funds Act, UPMIFA allows nonprofits to adopt a “total return” strategy that bases the spending rate on the endowment’s total value (including appreciation) rather than on only income. To ensure reasonably consistent cash flows, many organizations using a total return spending policy apply “smoothing” mechanisms to minimize the effect of market volatility. An organization might, for example, use a three- or five-year rolling average calculation.

Benchmarks gauge performance

The investment policy should include benchmarks for evaluating the performance of investments and managers, too. Performance should be assessed over both full market cycles (seven to ten years) and the shorter time periods that compose them.

An investment committee can meet quarterly to review performance, consider recommendations for changes to the investment strategy and rebalance asset allocation as necessary.

GAAP requires disclosures

Whether or not it’s covered by UPMIFA, every endowment must make certain financial statement disclosures under Generally Accepted Accounting Principles (GAAP), which could mean additional record keeping for your organization. Among these are descriptions of the organization’s endowment spending and investment policies, and of the nature and types of permanent or temporary restrictions on the endowment net assets. You also must report:

• The governing board’s interpretation of the law(s) underlying the organization’s net asset classification of donor-restricted funds,
• The composition of the endowment by net asset class at the end of the period, in total and by type of endowment fund, with donor-restricted funds shown separately from board-designated endowment funds, and
• The aggregate amount of the deficiencies for all donor-restricted endowment funds where the fair value of the assets at the reporting date is less than the level required by donor stipulations or law.

Finally, be sure to include a reconciliation of beginning and ending endowments, in total and by net asset class.

Is it worth it?

Nonprofits are under no obligation to accept endowed gifts, but if they do, then they must be willing to comply with the terms of the donor restrictions and perform the necessary administrative functions, both present and in the future. In order to offset administrative costs, the charity may want to consider requiring a minimum contribution in order to accept an endowed gift or charging an administration fee against the income of the endowment funds (proper disclosure required).

Not just a dream

One of the most important roles of your board of directors is managing your endowment funds. Guided by good stewardship, the endowment will contribute to your nonprofit’s financial health and stability — no longer a dream, but a reality.

Copyright (c) VonLehman & Company Inc. All rights reserved.

By Patrick M. Rooney, associate dean |

Barbara Coury didn’t get into fundraising for accolades, but she’s receiving them anyway.

American Red Cross President Gail McGovern recently presented the national organization’s Presidential Award for Excellence — the highest honor a Red Cross employee or unit can receive — to Coury, chief development officer for the Indiana Region, and her development team.

It’s a well-deserved award. During the past fiscal year, Indiana was third in the nation in total dollars raised against its goal, exceeding the target by 124 percent.

What’s the key to their success?

“The Red Cross has increased its emphasis on reaching out to major donors in addition to the vital support we receive from smaller gifts,” Coury says. “In Indiana, we focus on engaging with individual donors and self-accountability. Each fundraiser reports weekly on several key metrics, including the number of visits with donors.”

Those visits are paramount.

“Fundraising is about the donor, what they value, what they want to accomplish, and where that overlaps with the organization’s mission and values,” she says.

Which is why a fundraising career intrigued Coury in the first place. Originally a research scientist, she found that socially isolating. A friend’s role as a major gift officer at Purdue University appealed to her.

“To go out and interact, tell people about your organization and engage them — I thought that was important,” says Coury.

She became a development officer at Purdue’s Krannert School of Management and came credentialed as a Certified Fund Raising Executive. Following development leadership roles for St. Richard’s School and the Community Health Network Foundation, she joined the Red Cross in 2012.

“I love the Red Cross and its mission. We have services for the military, blood donation, volunteer opportunities, training and more. There’s something for everybody. And the staff and the volunteers care so much. They just want to help someone on their worst day, to make it better.”

What works

Coury shares some of the wisdom garnered during her career:

• Focus on visits. Get out of your office and see people.
• Educate donors about your mission and your work. People know the Red Cross for major natural disaster relief, but don’t realize it responds to three home fires in Central Indiana every day.
• Engage your board in fundraising and help them succeed. This extends your reach and you need their circles of influence. That’s where the magic happens. Executives complain that their boards don’t fundraise, but nonprofits often don’t equip them. Staff them and specify what you need them to do. Provide an elevator speech, tell them whom to call, trust them and hold them accountable. When they succeed, they will feel great about it.
• Celebrate successes. It’s rewarding and it builds confidence.

Coury encourages fellow nonprofit professionals to continue learning, as she has. She earned her Master of Arts in Philanthropic Studies degree through the IU Lilly Family School of Philanthropy’s Executive M.A. program and a Certificate in Fund Raising Management from The Fund Raising School there.

“The executive program’s liberal arts approach to understanding the philanthropic sector is invaluable.

“It gives you not just the skills to help, but an understanding of how and why to help, and it provides the most academically rigorous education,” says Coury. “The people I’ve referred to the program have found it changes the way they think and their life goals.”

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Patrick M. Rooney, Ph.D., is associate dean for academic affairs and research at the Indiana University Lilly Family School of Philanthropy at IUPUI.

[content_box box_type=”normal”]Thinking about continuing your education? Learn more about the Executive Master’s Degree in Philanthropic Studies and check out professional development opportunities offered by The Fund Raising School.[/content_box]