I recently joined the foundation board of the local community college and learned that the foundation had made a loan to the college several years back. The college president is asking the foundation board to make a distribution from the foundation that would retire the loan. This appears to circumvent our spending policy and I question how to fulfill my fiduciary responsibility.
What is the purpose of the foundation? If the purpose is to support the college, as I presume it is, the request is one that ought to be considered seriously. Giving a grant to retire the loan would be primarily a bookkeeping transaction. It would remove a liability from the college’s balance sheet while reducing the foundation’s assets equally. It wouldn’t give the college more cash to spend currently.
If the foundation considers the loan forgiveness as a grant in the year of the transaction, it will likely exceed your current spending policy. But a spending policy is discretionary and is not even legally required for funds that are not “true” endowment, i.e. funds given by third party donors to be held in perpetuity with only the income to be used for charitable purposes. Assuming that you didn’t lend the college funds that are considered true endowment and loaned only funds that were not permanently restricted by their donors, you can distribute as much or as little of that money as you think appropriate.
You obviously create a “moral hazard” if you allow the college to borrow for a few years and then have the loan forgiven upon request. You might want to impose some discipline on the college by not retiring the loan, or by retiring only part of it each year for several years. But you have to look at the college’s need in comparison with the foundation’s need in making your decision. Your fiduciary duty is to the foundation, to use your best judgment in good faith to help it fulfill its mission of supporting the college most appropriately.
If the college controls the appointments to the foundation board, of course, it may be able to replace directors who don’t believe that forgiving the loan is consistent with their fiduciary duty with new directors who have no such compunction. But you have to do what you think is correct, without regard to whether or not you keep your position.