Spending Policies for Endowments

A tailored endowment spending policy is essential for nonprofits to fulfill their mission effectively. By understanding your organization’s unique needs and defining clear objectives, you can create a roadmap to financial stability and long-term success.

A Spending Policy Defined

A spending policy outlines guidelines for governing how a nonprofit allocates its financial resources. It accounts for budgeting, internal expenditure levels and the distribution of funds for  programs, administrative costs and reserves. A good spending policy should consider the impact of market volatility, seek to build reserves and provide for long-term growth.

Creating a Spending Policy

Conduct your due diligence before implementing a spending policy, including a thorough assessment of your current financial position, revenue sources, expenditure patterns and long-term objectives. Doing so will lay the foundation for a spending policy that is aligned with your mission and strategic priorities. At a minimum, a good spending policy should articulate your goals, define the spending rate and determine who is responsible for monitoring and enforcing the policy.

A strong spending policy also serves as a bulwark against financial instability by promoting disciplined financial management practices and responsible investing policies, and by building financial reserves. It can empower your organization to make informed decisions about resource allocation, expenditure prioritization and risk management, enhancing your ability to adapt and thrive in any operating environment.

Clearly Articulate Goals
A spending policy should explain the purpose and sources of the endowment’s spending. The corpus of an endowed fund is generally not used to cover annual operating expenses. Most endowed nonprofits seek to grow the corpus in excess of spending rates and inflation, so that the inflation-adjusted value (i.e., purchasing power) of the underlying corpus increases over time, while the excess earnings can be used t o support the operating budget. This can allow an endowment to maintain and grow the organization’s assets and help ensure that sufficient funds remain available to support the organization’s mission.

It may be tempting to draw on the endowment to fund current programs and activities, but neglecting t o build reserves
can hinder a nonprofit’s ability to weather economic downturns or fund future projects.

Define the Spending Rate
Most states have adopted the Uniform Prudent Management of Institutional Funds Act (UPMIFA), the current regulatory framework for endowments which establishes fiduciary guidelines for managing most nonprofit funds. The UPMIFA spending guidelines do not provide a specific method for determining a spending calculation. Since most endowments are not subject to minimum spending requirements, they can set their own spending rate, which can vary by jurisdiction. A best practice is to start with a practical rate, typically 4-5%, that is sustainable and allows you to maintain purchasing power over time.

Determine Who is Responsible for the Policy
Determine who within your organization has the fiduciary obligation to monitor distributions and is permitted to approve and/or amend the spending policy. Setting an appropriate spending policy establishes guidelines for how an organization and its future staff and trustees will handle endowed funds. The board typically has discretion to establish the spending policy, and the investment committee, finance committee and staff monitor and implement it.

Promoting Transparency for Stakeholders

Transparency and accountability are essential principles that underpin public trust and confidence in nonprofits. A strong spending policy promotes transparency by clearly outlining how funds are allocated and utilized and establishes mechanisms for oversight, monitoring and reporting to ensure resources are used responsibly. By establishing clear rules for spending, organizations can mitigate the risks associated with financial mismanagement and budgetary shortfalls. All of this is crucial for maintaining the trust and confidence of donors, grant makers and other stakeholders whose support is essential for the organization’s continued operation and impact.

Preserving Your Endowment’s Assets

Your nonprofit is focused on protecting assets and ensuring that funds are used to further the organization’s mission. A well-defined spending policy can help the board of trustees manage and plan current and future distributions, and maintain the health of the corpus. By implementing prudent and transparent spending policies that balance current distributions with long-term preservation of capital, endowments can ensure their continued ability to support their respective institutions and make a lasting impact on the communities they serve.

This material provides information of possible interest to Glenmede Trust Company clients and friends and is not intended as personalized investment advice. When provided to a client, advice is based on the client’s unique circumstances and may differ substantially from any general recommendations, suggestions or other considerations included in this material. Any opinions,  recommendations, expectations or projections herein are based on information available at the time of publication and may change thereafter. Information obtained from third-party sources is assumed to be reliable but may not be independently verified, and the accuracy thereof is not guaranteed. Outcomes (including performance) may differ materially from any expectations and projections noted herein due to various risks and uncertainties. Any reference to risk management or risk control does not imply that risk can be eliminated. All investments have risk. Clients are encouraged to discuss any matter discussed herein with their Glenmede representative.