How can I stop my Church from withdrawing money from the “principal” of our endowment? Our church raises $100,000 a year but spends $250,000. Our pastor says we should be thankful we have the endowment for this purpose.
The first question is whether the “endowment” is really endowment. True endowment is donor-restricted money received from a donor who says to hold the principal in perpetuity and spend only the income for charitable purposes. In general terms, the principal of that money may not be spent.
Much of the money that charities call “endowment,” however, is actually set aside by the Board of the charity and is not restricted by the donor. Such funds are often called “funds functioning as endowment” or “quasi-endowment.” For financial accounting purposes they are “unrestricted,” while true endowment is “permanently restricted.” The Board-designated endowment is essentially a reserve fund of the organization, and as such can be spent by the organization for proper organizational purposes.
In those states in which the Uniform Management of Institutional Funds Act still applies, appreciation above the historic dollar value of the original gifts may be spent under certain circumstances. (See Ready Reference Page: UMIFA Sets Rules for Charitable Endowments.") In those states in which the Uniform Prudent Management of Institutional Funds Act has been passed [which by 2021 includes all states except Pennsylvania, the rules may allow more leeway in spending. (See Ready Reference Page: "New UPMIFA Sets Rules for Management of Charitable Funds.")
Obviously, unrestricted reserve funds cannot be spent continually without facing serious financial issues. But whether to spend the reserve funds is a decision for the Board and such spending is not illegal. If the “endowment” is true donor-restricted endowment, that raises a different issue. The Board does not have the unlimited right to spend principal from true endowment. If the Board doesn’t respect its limitations with true endowment, the Attorney General should be very interested.
Thursday, February 3, 2011