Sample Endowment Spending Policy

Please note that these are samples and should not be used without careful review.  This is not intended to be legal, financial or accounting guidance - but as a guide for your organization to write its own material according to your local needs, requirements and restrictions.  Please consult with your own professional advisors.


PURPOSE

The purpose of this Policy is to set forth the principles and guidelines for spending the (organization’s) endowment and quasi-endowment fund(s) to achieve the following goals:

         Safeguard the fund(s) for future generations

Enable the maximum amount of spending that can be maintained over the long term.

Ensure that Fund income is as stable and enduring as possible.

         Ensure that the stated wishes of donors are honored.

Spending Objectives

      A.     Generational Neutrality

The (fund) is considered to be permanent, and its benefit to future generations should be equal to its benefit to the current generation. The key is that the amount spent annually should remain as close to constant as possible, when measured over time on an inflation-adjusted (“real”) return basis. Investments and spending are to be coordinated in a manner so that the Fund’s income will maintain its real purchasing power into the future.

 B.      Maximum Sustainable Spending

Income from an endowment is to be spent, not hoarded.  Until income is spent, it achieves nothing to undertake the great commission given to us by Jesus Christ.  It is the (organization’s) policy to use the earnings of the (fund), on generation-neutral basis, to help meet the needs of the (organization) and fulfill its mission.

C.      Minimize Volatility of Amount Available for Spending

Because many of the needs and uses of the (fund’s) income are recurring, or ongoing in nature, the (fund’s) asset management policies and spending strategy are structured in a way that attempts to minimize the year-to-year volatility of the amount available for spending.

     D.     Donor-Imposed Restrictions

Those who manage and spend endowment funds exercise those duties in a special position of trust and responsibility, both to the beneficiaries and to the donors.  When the (organization) accepts endowment gifts that are restricted by the donor (either time restrictions or use restrictions), those restrictions will be honored to the extent permitted by law.

Spending Strategy

A.    Total Return

Funds available for distribution will be determined by using a total return principle, i.e., return derived from dividends and interest as well as realized and unrealized capital gains.[i] The funds available for distribution during any one year will be limited to a percentage of the market value of the corpus that is based on a (3-year or 5-year) rolling average,[ii] with measures taken at the end of each of the preceding (12 or 20) quarters.  The market value for this purpose will be taken net of the fees for investment management.

B.      Any unexpended funds from those available for distribution in a given year will be accrued and will continue to be considered available for distribution in subsequent years unless otherwise designated by action of the Investment Committee with the approval of the (governing board). Expenses related to the management and administration of the FUND will be deducted from the funds available for distribution.

C.      Honoring Donor-Imposed Restrictions

In order to monitor ongoing adherence to donor-imposed restrictions, the (governing body) is to periodically review a report of endowment disbursements. This Policy recognizes that there may be cases where a restricted use becomes obsolete or overfulfilled, or becomes inconsistent with the (organization’s) needs or mission.  

Note: A true endowment is established if a donor makes a gift and restricts it to an “Endowment” Fund, often defining its use.  If the (organization) promotes its Endowment Fund and receives gifts of any size for the Fund, those funds are equally restricted. If a purpose is announced and donors give to an Endowment Fund for a named purpose, the funds are restricted as to purpose as well. If the (organization) receives an unrestricted bequest that is placed in the Endowment Fund, or if the (governing board) decides to put excess funds into the Endowment, those funds remain unrestricted. This part of the Endowment Fund can be spent down by the (governing board) within the established distribution rules. This is considered a “quasi” or unrestricted endowment.

 

[i] A “total return” spending policy establishes value based on income, dividends, and capital appreciation (depreciation). An “income only” policy considers only the interest earned and dividends paid.

 

[ii] Some organizations use a five-year rolling average to smooth out the ups and downs of the market. Organization just starting out that do not have a multi-year average sometimes apply their spending rule to 90% of the first year’s net average value.