Manage and protect your school’s endowment and related spending
Many private schools, colleges and universities face an increasingly complicated challenge: How to effectively manage endowment spending. Even with board oversight and sound investment and spending policies in place, academic institutions are grappling with the reality of rising costs and tuition. With the cost of tuition outpacing inflation, this dynamic creates unique challenges not only for schools but also for families that require financial aid.
As an accountant and consultant who works with many nonprofit organizations, including several private schools, I have observed this growing dilemma for endowment decision makers. Any non-profit with an endowment must make smart decisions about investment decisions and spending. For schools, endowments should be managed with careful consideration of future generations of students who will be beneficiaries. How will a school's endowment management decisions today affect opportunities for educational programming, financial aid awards, faculty development or capital investment? The pressure for schools is to constantly weigh the changing needs of the institution against the need to preserve the endowment.
In its simplest form, an endowment is a portfolio of assets donated to a nonprofit organization that can realize capital appreciation and income. Donors often restrict the use of these funds to specific purposes and limit an organization's spending to the earnings on the endowment fund. Endowment returns are designed to help the organization meet budgetary needs, ranging from program support, improvements to facilities and financial aid. Schools — and other nonprofit organizations — should consider these aspects of managing an endowment to maximize the value of the endowment to meet its diverse set of spending obligations:
• Look carefully at how endowment funds are spent: Endowment funds are often pooled into a single investment account. While most organizations are diligent in “unitizing” investment returns to the various endowment funds, they don't always spend from specific endowment funds. When you create your school's operating budget, analyze the endowments with accumulated earnings available for spending and allocate expenditures from the funds that take into account the organization's spending needs. In other words, spending will come from a subset of endowment funds to meet the current operational needs. This will result in the organization drawing a higher percentage from certain endowment funds, but still comply with the overall endowment spending policy.
• Be strategic about development: While considering the challenge of how to effectively manage your endowment, the logical conclusion may be to raise more money. While securing more contributions to the endowment is an ongoing effort for most schools and nonprofits, consider ways to focus capital campaigns on specific needs. Consider a capital campaign to upgrade facilities in order to expand program offerings or accommodate growing enrollment.
• Revisit your mission and goals for the endowment: As your school considers its spending policy and strategy for restricted endowment spending, you may also benefit from revisiting your mission and goals. How will your spending policy support your school's goals? If all of the available earnings from your financial aid endowment are spent annually, how will your organization meet its students' financial aid and other needs in years with a down market?
The generosity of donors in creating endowments comes with a significant fiduciary duty for prudent management. It's important that the gift is spent consistent with the donor's request. That starts with sound management of the endowment, both with the investment policy and, equally important, the spending policy. By discussing these challenges with your board and professional advisors you can create policies guiding endowment investment and spending — policies that will fulfill your organization's needs today and into the future.
Jason Leblanc, a CPA and director at Albin, Randall & Bennett, can be reached at jleblanc@arbcpa.com
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