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The Language of Endowment Funds for Independent Schools


November 11, 2019

Independent schools (K-12) face many of the same challenges as private colleges and universities in the U.S. including declining or flat enrollments, increasing tuition costs, and escalating operating costs. As a result, fundraising and endowment management are increasingly more important for independent schools to attract and retain students. While fundraising is critical to support special projects and capital improvements, endowments are important because they can provide long-term financial resources to your school.

An endowment is a donation of money or property which provides a means to finance the present and future needs of a school. It is a valuable source of income year-over-year and, if managed correctly, even a small endowment can grow into a sizable amount of money.

With a permanent endowment, a school cannot touch the donated money, which is also referred to as the principal investment. These funds are protected to preserve and grow the assets of the endowment. For example, if a donor gives $10,000 to a school, the entire amount of money must be, and continue to be, invested. The donation itself can never be spent, regardless of the circumstances or financial needs of the school.

The amount donated – or endowment principal – is invested and annual income in the form of interest, dividends, and capital gains is then available for the school to spend.

Generally, true endowment funds are governed by an agreement between the school and the donor that designates how the interest, dividends or capital gains can be spent. A named or restricted endowment requires the school to spend the assets in a specific way. For example, the donor could require that the endowment be used to provide financial aid to students. In this case, endowment funds cannot be used for any other purpose, even if the school desperately needs the money to fund capital improvements, invest in technology or provide teachers with training. A general or unrestricted endowment, on the other hand, allows the school to spend the earnings in any manner that it feels is appropriate.

Schools can create an endowment-type fund to set aside money for long-term needs and have the fund function like a true endowment. This is called a “quasi-endowment” or fund functioning as an endowment. The distinction is that the school can, at its discretion, spend both the principal and earnings in a quasi-endowment. There are no restrictions because the money was designated by the school and can be re-designated for another purpose at any time. True endowment funds are permanently restricted by the donor and the principal can never be spent.

Endowment Management

Endowments are typically managed by a board and investment advisor. Guidelines are developed for the endowment that include policies on accepting donations, spending, investment strategies, as well as fiscal and audit policies. Your spending policy should include recommendations on how much income can be spent in any given period, as well as how much money must be reinvested to grow the available funds to at least keep pace with inflation. Your investment policy should strive to maximize the total return on investment in interest, dividends and/or capital gains. It is important to consider the original intent of the donor and the time value of money in your investment policy. Money should be invested in a manner that protects the principal while generating enough income to support the cause designated by the donor.

Laws have been enacted to protect endowments and provide guidance to school boards and investment advisors. The Uniform Prudent Management of Institutional Funds Act (UPMIFA) was enacted in 2006 to replace the Uniform Management of Institutional Funds Act (UMIFA) of 1972. Both provide rules on how charitable institutions can invest endowment and non-endowment assets. The UPMIFA, which has been adopted by most states, also sets standards for endowment spending and the preservation of the original gift in accordance with donor intent. Under the UPMIFA, donor intent extends to the original gift, as well as earnings on investments. UPMIFA provides guidance to boards by imposing duties to protect and maintain the donation in accordance with the donor’s wishes.

Endowments are valuable to independent schools for more than financial reasons. Endowments can help attract and retain students. Independent schools can be ranked on the size of their endowments. The higher the ranking, the more prestigious the school is considered. Parents of prospective students make decisions on where to send their children based on many variables, such as the school’s reputation, financial aid package, and sometimes even the size of its endowment. Independent schools can benefit from endowments in numerous ways, as long as they accept the requirements of this type of funding and clearly understand the language and principles of endowments.

If you have any questions regarding endowment management for your independent school, please contact us at 609-890-9189 or click here to contact us.          

About the Author

Chris is a Partner and divides his time between Klatzkin’s Newtown and Hamilton offices. He focuses on serving the audit, tax, and compliance needs of independent schools and nonprofit organizations. Chris works with schools and organizations in New Jersey and Pennsylvania to navigate compliance issues, audit concerns, and tax planning matters. He has experience with...

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