Armanino Blog

Manage Donor-Restricted Endowment Funds During a Crisis

by Stacie Cornwell
March 25, 2020

Nonprofit organizations could see a significant impact on the power of their donor-restricted endowment in these uncertain times. Here are some helpful tips for managing your endowment.

Endowment Investment Policies and Value

We all know that the market has taken a significant hit recently because of the COVID-19 pandemic, and some analysts are predicting a depression. Keep calm and don’t panic.

Your endowment is no doubt composed of a variety of investment strategies, including public equities, private equities and hedge funds or alternative investments. The market for public equities has been down about 25% over the past several weeks. The performance of your private equity funds and hedge funds could vary depending upon conditions. You should assume those categories will show losses as well, as those funds involve a higher risk. It is also possible that hedge funds could help to soften the downturn of public securities because they are such a broad asset class.

All nonprofit organizations should be discussing their current portfolio and investment strategies with their investment managers and custodians. You may want to reallocate funds out of poor performing securities, but keep in mind that just like in economic downturns of the past, the decline may be temporary, and there is potentially more to gain in the long run with your current strategy.

Also, if you are utilizing investment managers and Chief Investment Officer functions of big investment brokerage firms, you should have access to the latest available information and investor calls. Attend those! Stay informed!

Endowment Spending Policies

If your organization has not revisited its spending policy in recent years — or if your organization does not have an endowment spending policy — now is the time to act. You will first and foremost want to make sure that your spending policy reflects appropriate state laws surrounding prudent endowment spending. The Uniform Prudent Management of Institutional Funds Act (UPMIFA) was revised a number of years ago to allow continued spending of underwater endowments. However, this must be done prudently and in accordance with a spending policy.

Generally, the corpus of a permanent endowment cannot be spent, and many attorneys believe that a permanent endowment cannot be used as collateral for debt. Boards need to tread carefully if looking at ways of utilizing endowment funds outside the existing spending policy.

Utilize Endowment Earnings for Impact

Consider potential ways that endowment spending could work for your organization. For example, if you have typically spent a certain percentage as directed by donors on scholarships for students, consider whether the donor would allow those scholarships to help students obtain technology (such as laptops) if they are challenged by the current online learning reality.

If your endowment provides funding to connect clients with community services and resources, consider the impact of virus restrictions on those resources and how your endowment dollars can continue to serve clients. For example, this could include supporting restaurants and pop-ups that provide meal services, or getting toiletries, hand sanitizers and life-saving products to underserved populations to help fight the spread of this terrible virus.

Your Relationship With Your Endowment Donors

Now is the time to deepen relationships with donors who have given to your endowment. As in times of past economic crisis, we have seen endowment donors release the restrictions on endowment gifts to allow those funds to support the operations and programming of the nonprofit. In more extreme cases, donors have allowed the nonprofit to fully release the donor endowment to function as a board-designated endowment, giving the nonprofit more flexibility to utilize those funds.

Talk to your donors about ways to bridge the short-term needs of the organization through the endowment fund. Be prepared to discuss several alternate scenarios for utilization of the endowment. Test your cash flow models, stress test them, and then test them again. Have a plan for a long-term reinstatement of the endowment. We know that may be hard to predict right now given the markets, but part of your plan should be to identify, through cash flow modeling, when cash will become available to build back the endowment.

Additionally, seek out extra dollars from your donors. They may not donate toward the endowment, but they may provide additional unrestricted funding.

Endowments Held at Community Foundations

If your organization receives grants from an endowment at a community foundation, there may be flexibility now more than ever as to the use of the grants. Call your grant manager at the community foundation and talk with them about needs and flexibility.

Keep Your Board Informed

We cannot stress this enough. Keep your board members involved in your endowment status. Create a way to disseminate information to them in real time or on a recurring frequency so they can be involved in helping the organization make informed decisions about your endowment.

The most pressing information your board should receive includes: summaries of market performance, the performance of your portfolio to the market, any changes or re-allocations on donor intent, updates to spending policies and change in spending based on the needs of the community and clients your organization serves. Your board should also be involved in the various discussion points noted throughout this article and with your investment advisors as needed.

Your Armanino teams are here and happy to help. Reach out to our experts if you have questions or need some assistance. For other information on managing your organization through disruption, visit our COVID 19 Resource Center

March 25, 2020

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