In these uncertain times, nonprofits with donor-restricted endowment funds could see a substantial impact on the power of those funds. Below are some tips for managing endowment funds during the COVID-19 pandemic.
Investment Policies for Endowments
Many nonprofit endowments are comprised of a range of investments, which includes public equities, private equities, and alternative investments or hedge funds. The functionality of your hedge funds and private equity funds may change based upon market conditions — conditions that have been increasingly volatile due to the COVID-19 pandemic. Investments in these categories may show losses as well, since those funds involve a greater risk. It’s also likely that hedge funds might make it possible to balance any downturn in public securities since they include a broad class of assets.
Nonprofits with donor-restricted endowment funds should be talking about their investment strategies with their financial advisors. You might wish to reallocate money out of poorly performing securities, but bear in mind that the decline might be short-term, and your current investment strategy may offer more of an upside over the long run.
Nonprofits that use investment managers and large investment firms will have access to the latest information and investor calls. Be sure to participate in these calls so you can stay informed.
Spending Policies for Endowments
In case your nonprofit hasn’t reviewed its spending policy lately — or does not have one — now is the time to act. You’ll first want to make certain that your investment policy adheres to state laws regarding prudent endowment spending. Several years ago, the Uniform Prudent Management of Institutional Funds Act (UPMIFA) was revised to enable continued spending of underwater endowments. Nevertheless, this should be done prudently and in compliance with a spending policy.
In general, the principal of a permanent endowment can’t be used to fund operational expenses or as collateral for debt. Boards have to tread very carefully when looking for ways to utilize endowment funds outside the current spending policy.
Use of Endowment Earnings
Consider possible ways that endowment funds might work for the nonprofit. For instance, if a nonprofit has usually paid a specific percentage as directed by donors on scholarships, determine whether the donor would allow those scholarship funds to aid pupils in obtaining technology (laptops, tablets, etc.) in case they’re challenged by virtual learning.
If your endowment funding helps link people in need with resources and community services, consider the effect of virus restrictions on those materials and exactly how your endowment dollars are able to continue serving your constituencies. For instance, this might include supporting pop-ups and restaurants that offer meal services, or perhaps getting toiletries, life saving items, and hand sanitizers to underserved populations to help stop the spread of COVID-19.
Keep the Board Informed
Keep the board members informed about the status of the nonprofit’s endowment funds and spending. Disseminate information as soon as it is available so the board can stay engaged in supporting the nonprofit’s informed choices about the endowment.
The most vital information the board should receive includes: market performance summaries, portfolio performance compared with market performance, updates to spending policies, any reallocations or changes based on donor intent, and any change in spending based on the needs of the nonprofit’s community and constituencies.
The Church Law Center of California assists religious and secular nonprofits with governance challenges. We can help your organization examine its board procedures and develop good practices. To find out how we can be of help to your organization, call us at (949) 892-1221 or reach out to us through our contact page.
