How to effectively manage your school’s endowment spending

by Jason LeBlanc, CPA

Many private schools, colleges and universities are facing an increasingly complicated decision: how to effectively manage endowment spending. Even with board oversight, sound investment and spending policies in place, academic institutions are grappling with the reality of rising costs and tuition. Amidst an economic climate where tuition increases continue to outpace inflation, this dynamic creates unique challenges for both schools and middle-class families who require additional financial aid or will be priced out of the educational opportunity.

As an accountant and consultant who works with many non-profit 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 around how to manage the endowment, with a careful eye on investment decisions and spending. For schools in particular, endowments should also 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 non-profit organization that can realize capital appreciation and income.  Donors often restrict the use of these funds to specific purposes and limit the organizations’ 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 necessarily appropriate their spending from specific endowment funds. As a result, the spending policy percentage is spread across all endowment funds without regard to meeting restricted purposes or the needs of the organization.  When working with the board to create your school’s operating budget, analyze the endowments with accumulated earnings available for spending and allocate expenditures from the funds that maximize/prioritize 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 while remaining compliant with the overall endowment spending policy.
  • Be strategic about development. While considering the challenges of how to effectively manage your endowment, the logical conclusion may be “raise more money.” While securing more contributions to the endowment is an ongoing effort for most schools and non-profits, consider ways to boost your development efforts through capital campaigns focused on specific needs. For example, a capital campaign to upgrade facilities in order to expand program offerings or accommodate growing enrollment. There are many considerations in deciding to undertake a capital campaign, and our firm recommends engaging a consultant to help in making that decision.
  • 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 for the endowment. 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 down-market years?

The generosity of donors in creating endowments comes with a significant fiduciary duty for prudent management to ensure the gift is spent consistently with the donor’s request while preserving the endowment for the benefit of future generations of students. That starts with well thought out management of the endowments, both the investment policy, and equally important, the spending policy. Discuss these challenges with your board and professional advisors to create endowment investment and spending policies that fulfill your organization’s needs today and long into the future.

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