Starting an Endowment

An endowment is a tool that allows nonprofits to extend the impact of a large sum of money. Consider the following scenario: your organization is given $100,000.

Imagine if you invested that $100,000 and committed to never spend the principal amount. However, every year, you would receive a distribution from the returns generated by your investment. This would create a source of income that you could rely on in perpetuity. This is the power of an endowment.

While endowments aren’t suited for every organization or scenario, under the right circumstances, they can be powerful tools to support financial stability and longevity. Having independent sources of revenue can allow nonprofits to worry less about meeting their ongoing needs and free up capacity to plan for the future. 

Long-Term Asset Type	Purpose	Ongoing Management
Working Capital	Covers planned expenses as needed	Replenish on ongoing basis
Operating Reserve	Rainy day savings	Replenish after use
Facilities and/or Strategic Reserve	Capital expenditures for strategic purposes	Replenish as needed
Endowment	Long-term organizational support	Generate income for organization

The income generated from an endowment is used to advance mission objectives over the long term by supporting expenses, which can vary from one organization to another. According to the 2021 NACUBO Study of Endowments, the largest percentage of higher education endowment spending went to student financial aid, followed by academic programs and research.^[2] On the other hand, community foundation endowment spending supported a wide range of activities including grants in support of nonprofit operations, capital projects, and emergency responses to natural disasters.^[3]

While how an organization spends its endowment earnings differs widely depending on an organization’s mission, the reason why they created an endowment is usually the same: to have a sustained, positive impact in the communities they serve. There are two additional reasons – beyond the direct financial benefits – many nonprofits seek to create endowments:

• Demonstrate long-term commitment to their mission. Endowments can signal that a nonprofit has long-term goals and the resources to commit to the work of responding to community needs.
• Build confidence in the organization’s ability to tackle challenges. Establishing an endowment can signal that organizational resources will be stewarded for long-term use towards specific purposes for which the nonprofit will be held accountable. In addition, it indicates the organization has the structure and stability to manage resources for the long term, even in times of crisis or economic instability. This is an important component of building public confidence.

Together, these three reasons for establishing an endowment – financial stability, demonstrated commitment, and greater public confidence – mean endowments can be powerful tools for advancing a nonprofit’s mission in the present and position the organization for deeper impact in the future.

Types of Endowments

The asset pools in a nonprofit’s capital structure can vary in size, purpose, and use. For an organization considering establishing an endowment, there are two primary types (defined by the IRS) to consider:^[4]

• Permanent endowments are established by donor-restricted gifts and are maintained to provide a permanent source of income, with the stipulation that principal must be invested and kept intact in perpetuity, while only the income generated can be used by the organization. Donor restrictions can be made around time or purpose.
• Board-designated endowments or quasi- endowments result from an internal designation and are generally not donor- restricted. Instead, they are classified as net assets without donor restrictions. While the associated spending policy may place limits on how the income generated may be used, the governing board has the right to decide at any time how to expend quasi-endowments, including principal.

Creating an Endowment

1. Know your "Why"

When deciding to establish an endowment, your organization should begin with addressing your “why.” What are the reasons for establishing a pool of assets dedicated to securing the long-term existence of your organization? What types of expenditures will it be used for? The board should be in strong agreement about the endowment’s vision and purpose as endowments are – by design – difficult to change. 

2. Understand added responsibilities

Additionally, you’ll want to make sure there is education in the early stages of this process to make the board aware of the increased responsibility and cost that comes with establishing an endowment. They will be held to a fiduciary responsibility, including the duties of care, loyalty, and obedience. 

Another consideration in this phase is whether the Uniform Prudent Management of Institutional Funds Act (UPMIFA) will apply. While UPMIFA is not applicable in all states, this is a “standard of care” that outlines factors that must be considered when managing an endowment. You can learn more about the ways UPMIFA applies to endowment spending on the PNC Insights page.

3. Separate entity or separate account?

Once key decision makers have a common understanding around the purpose and responsibilities, and the board has passed a resolution to move forward with creating the endowment, you may consider details such as whether you will create a separate entity for the endowment, or a separate investment account. The decision of how to structure an endowment requires consideration of various factors, including legal and tax implications. Organizations should consult with their tax and legal advisors for advice.

Separate Account	Separate Entity
Addendum to bylaws	New legal entity
Establish a new committee to govern the endowment	Create a separate board of directors, mission statement, and internal policies

4. Establish Investment, Spending, and Gift Acceptance Policies

Whichever option you choose, the next step will be to establish an Investment Policy Statement, a Spending Policy, and a Gift Acceptance Policy.

The Investment Policy Statement and Spending Policy determine how your endowment should be invested to reach your financial goals. Creating these policies provides an opportunity to clarify whether the Responsible Investing process can advance your mission objectives. For more information, visit the PNC Insights Page, Four Considerations for Creating a Strong IPS. 

A Gift Acceptance Policy is an important tool for documenting and clarifying donor intent for nonprofits and donors alike. It also provides a framework to manage risk and evaluate gift alignment with your goals. For more information, visit the PNC Insights Page, Building an Effective Gift Policy.

5. Establish and fund investment account, then monitor it on an ongoing basis

Once you’ve created all guiding policies, the next step is to establish the financial account that will hold the endowment’s assets. This includes finding the right investment manager who understands your goals and mission and will take the time to walk you through your options and progress. Your board will have addressed how often the governing committee overseeing the endowment will meet to monitor the endowment. It is a best practice to revisit your investment policy statement on an annual basis. This provides an opportunity to evaluate whether your goals are still reflected in your portfolio and to make any necessary changes.

Key Takeaways

1. With the right messaging, an endowment can attract new and larger gifts to your organization. While an endowment is a new opportunity for donors to support your mission, they may not be familiar with the benefits of contributing to a long-term asset pool. Explaining the purpose and policies governing the endowment can go a long way towards establishing transparency and building trust. 

As with fundraising efforts, your donors will be drawn to the purpose and impact of the endowment. Focus on creating a visual for your donors that demonstrates how their gift will benefit the community in perpetuity as a part of their legacy. You may even consider naming a fund after donors who make gifts at a meaningful level to solidify this legacy. 

2. In the long run, endowments can enhance your organization’s capacity to focus on long-range planning. Many of your programs are intended to serve your communities over the long term, but your fundraising efforts often only cover a few years of expenses at most. An endowment is a long-term source of funds that matches the long-term needs of your organization. By relieving some of the pressure of fundraising to cover ongoing expenses, endowments can allow you to dedicate more of your time to your core mission.

3. Endowments can advance your strategy, but they come with additional responsibilities for boards and staff members. Nonprofit organizations looking to start an endowment often find that they need additional capacity, particularly in fundraising and financial management., As we outline in this paper, there are five stages in establishing an endowment. At each step, it’s important to have a strong service provider who can provide feedback, best practices, and tactical guidance to support your board and staff in making sound decisions. 

How can PNC help?

Forming an endowment can be a cumbersome process that requires expertise and dedicated resources. Larger endowments (such as universities and hospitals) often employ entire departments of staff to manage the fund. This can be expensive and present a strain on operational efficiency. In most cases, nonprofits that do not have that type of resource or capability available to them will hire an investment manager to handle those duties. This can be much more cost effective than managing the fund internally and can also lead to greater investment return.

PNC has decades of experience managing endowments and working with nonprofit clients: We have worked with over 3,000 nonprofit organizations across the country, providing outsourced investment services, creating customized endowment and foundation portfolios, grantmaking, planned giving, and sub-accounting services. In addition to our highly qualified investment managers and financial advisors, PNC has a national practice group (NPG) that is dedicated specifically to Endowments & Foundations. This group consists of a unique assembly of nonprofit and foundation experts who have, in previous nonprofit staff and Board roles, built and managed endowments. They remain accessible to our nonprofit clients to provide financial education resources for our nonprofit clients. With a robust list of solutions tailored for nonprofit organizations, we welcome the opportunity to engage nonprofit entities in planning, implementing and maintaining their endowment programs to help achieve long-term success.

Some of the primary advisory services provided include: 

• Investment strategy and portfolio management
• Responsible investment programs based on mission and values
• Planned giving services
• Administrative, processing, and sub- accounting services
• Online access

PNC’s Institutional Asset Management team can help address the complex stipulations of organizations and donors with customized and comprehensive solutions from our investment and administrative teams. PNC’s focus on community impact and philanthropy goes beyond the services provided by the Endowment & Foundations team. Philanthropy is in our DNA. A company-wide initiative, PNC Grow Up Great^®, started in 2004 with the focus on preparing children during their pre-K years for success in school and life. Today, the initiative has served more than 4 million children with approximately 747,000 employee volunteer hours completed. A full report of our community impact can be found at Corporate Responsibility Report.

Please let us know how PNC can help you start, grow, preserve, and maintain your endowment.

Before your organization takes the steps to establish an endowment, you should take stock of the financial resources and expertise you have to determine whether you are well-positioned to do so. To take stock of your current situation, below are a few points that can serve as starting points for further evaluation:

 

READINESS WORKSHEET
Organizational Strategy	Yes	No	N/A
My organization has a strategic plan.	□	□	□
There is a process in place to measure progress against the strategic plan.	□	□	□
Progress against the strategic plan is shared with internal and external stakeholders.	□	□	□
Business Model Performance	Yes	No	N/A
We distinguish between our operating and non-operating financial results	□	□	□
We evaluate the alignment of our program mix against our mission and impact goals.	□	□	□
Liquidity Needs	Yes	No	N/A
My organization has adequate reserve fund levels to respond to challenges or take advantage of new opportunities.	□	□	□
Development Plan	Yes	No	N/A
My staff and board can tell our financial story and articulate our impact goals.	□	□	□
We have fundraising infrastructure to support establishing and growing an endowment.	□	□	□
We have donors who would be willing to champion and contribute to an endowment.	□	□	□
Staff and Board Capacity	Yes	No	N/A
We understand the current level of investment acumen of our staff, board, and broader network of stakeholders.	□	□	□
We have identified board members who would commit to sitting on a committee to oversee the endowment and pursue further training as needed.	□	□	□
We have identified tools and training our finance team has (and may need in the near future) to manage an endowment.	□	□	□

The Endowment & Foundation National Practice Group builds on PNC Bank’s longstanding commitment to philanthropy and is focused on endowments, private and public foundations, and nonprofit organizations. We seek to help these organizations address their distinct investment, distribution, and capital preservation challenges.

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