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Prudent Management of Endowments

By Keith Clark-Hoyos
(previously published in Chi Ki Transformation)

Keith ClarkA far-too-underutilized-resource in churches and nonprofits is the building of a strong endowment.  Some of our organizations have them, some don’t and, sadly, some really don’t know.  As I performed an audit on a local church recently, I came across several investment accounts that had not been touched for several years.  As I inquired about them with the staff, they couldn’t tell me anything about the history of the investments, neither could the treasurer.  The investment committee who made decision about where the money would be invested had some idea of where the funds came from, but couldn’t say if there were any specific purposes attached to the funds.  They didn’t need them for operations at the time, so they just held on to them for that “rainy day” that might one day come.

So what were these funds?  Someone cared deeply about this congregation and its future when they gave that money (tens of thousands of dollars in each of the multiple investment accounts).  Someone gave that money believing they were giving it to God for a special purpose that this church would serve.  That inspiration, that generosity, that sacrifice; all lost in the quickly fading corporate memory of the small local church.  Changing volunteer leadership, reduced staffing, changes in the congregational makeup, and poor keeping of records all contribute to the loss of corporate memory.  Then there is the list of financial crises and political challenges.  Oh and that one person who decided to clean out the storage closet.

Gifts to a nonprofit organization or church seem to be very simple transactions, and actually they are.  The problem is that we don’t always understand the language and often, we don’t fully understand the obligations that come with the gift.  Words like “endowment” are strange to us and in many of our congregations, the term is used incorrectly.  We usually think of the endowment is the pot of money we can’t touch, except to use some portion of it for special needs.  It’s that investment we see on the Treasurer’s report that we all feel good is there, but don’t quite understand.

The word endowment, simply put, is funding given to the organization.  It is special in that it is given with some special purpose.  This special purpose becomes a restriction on the use of that funding.  It could be that the purpose is restricted by purpose (e.g. for a new education building) or it could be restricted for a specific time (e.g. you can use 5% of the fund each year for ten years and then you can use all of the rest). or it could be a combination.  The key is that the gift given to the organization is restricted by the donor in how it will be utilized.

Keeping clear and complete records of the purpose and how the organization is managing the gift in accordance with the donor’s wishes is a large responsibility.  Not only out of respect for the donor, but by law.  There are laws in each state that govern how an organization must manage gifts given with restrictions.  Your organization is obligated to follow those rules.

The Challenges I See Churches Face with Endowment

1   Not knowing the restrictions.  This is often due to poor record keeping or making assumptions about the restrictions without digging into the historical records.  Your organization needs to maintain a file with the original documents and keep your governing body aware of the restrictions on gifts given to the organization with restrictions.

2   Not knowing the rules.  In many cases, the well-intentioned volunteers charged with the finances of the organization just don’t know what they need to do.  And then there are those who always knew what we’ve always done and don’t know that the rules changed in California in 2009.  Your organization needs to understand the rules that govern the management of these funds.  You need to know and understand Uniform Prudent Management of Institutional Funds Act.

3   Co-mingling.  When a governing body of an organization chooses to take unrestricted funds and ‘add them to the endowment,” they are “designating” these unrestricted funds for the same purpose as funds in the endowment.  There is nothing wrong with designating the funds for the same purposes.  However, it is important that the organization understands there is a difference between the designated funds and the restricted funds.  Designated funds are funds that the governing body has determined the purpose.  Restricted funds are funds the donor has determined the purpose.  The most important difference is that with designated funds, the governing body can change the purpose (since they are the ones who set it), while the restricted funds purpose can only be changed by the donor.

4   Changing The Purpose Or Restriction.  In the simplest terms, whoever determines the purpose or restriction is the ONLY one who can change that purpose or restriction.  This is a huge issue, especially after the donor has passed away.  Often, the organization has changed, the community has changed, the needs of those the organization serves have changed.  Many church leaders have the impression they can ask the heirs of the donor for permission to change the restriction of a gift.  THEY CANNOT.  Only the one who gave the gift with the restriction can change it.  The only other option is to contact the attorney general and follow a process of requesting the donation restriction to be changed or released.

5   Accepting Costly Gifts.  A generous gift is not always a beneficial one.  Sometimes, the restrictions and/or obligations that come with the gift are more harmful than helpful to the organization.  Consider the politically motivated gift that is intended to move your organization away from the determined mission, towards a purpose you and your leadership never planned to go.  Consider the gift that obligates the organization to develop ongoing funding for a program or maintenance for a building that your current budget wouldn’t support.  Your organization needs a good Gift Acceptance Policy that provides guidelines for how decisions will be made when an unusual gift is offered.

Organizations that have worked to build strong endowments have created an income source that is critical to their growth.  Before you solicit funds for your organization’s endowment, be sure you understand your obligations and the rules that apply to the management of the funds for which your organization will become a caretaker.

For help in developing your policies and procedures, contact Keith at Chi Ki Transformation or visit ChiKiTransformation.com to learn more.

About the Author:

Keith Clark-Hoyos has an M.A. in Ministry, Leadership & Service from Claremont School of Theology, a Certified Public Bookkeeper and a Certified QuickBooks Advisor. He has a background of serving the Church as the Executive Associate Conference Minister for the United Church of Christ in Southern California and Nevada, as well as, over twelve years in retail and sales.

 

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