The Purpose of an Endowment
An endowment provides a source of funding in perpetuity and may be critical to non-profit organizations in order to realize their mission and achieve high quality programs. An endowment fund is typically created by an organization to ensure a permanent source of annual income for the operating budget or special projects. By definition, endowment funds are intended to remain invested and, over time, to be allowed to grow in a way that will preserve the buying power of the fund. Endowments generally fall into two broad categories that characterize the nature of restrictions placed upon them; true endowments and quasi endowments.
True endowments, sometimes referred to as permanently restricted endowments, are assets donated to an organization with the stipulation that only income (and possibly appreciated growth) is to be dispersed. The buying power of the principal remains inviolate in perpetuity. Restrictions may also have been specified by the donor upon the use of the endowment. Upon receipt of these endowment funds, an agency incurs a legal obligation to adhere to the donor’s restrictions.
Quasi endowments, sometimes referred to as unrestricted endowments, represent donations and other available funds which an organization’s governing body has decided to retain as endowment and to utilize income from these funds in a matter similar to that of true endowments.
Benefits of an Endowment Program
The result of a proper endowment program is that a donor is assured that gifts made to the endowment fund will benefit the organization for years to come. This permanence has the added benefit of encouraging donors to make gifts and grants to an organization because of the legacy aspect of their support.
An organization’s endowment should always be controlled by investment and spending policies of the governing body that use strict guidelines developed with the investment managers that are designed to insure the continued growth of the principal portion of endowment in order to maintain the spending power of the fund in perpetuity. The governing body must also insure that true endowment income and appreciated growth is, as a first priority, always spent in accordance with any restrictions set forth by donors at the time of their gift or grant.
Typically, endowment withdrawals are used to:
- Provide funds for a donor restricted use.
- Provide an organization safety net
a) to increase funds available for emergencies and
b) to protect organizations operating budgets during economic downturns
- Provide income for special programs
- Provide a source of growth of operating dollars or for capital needs beyond or between fund-raising campaigns