Q and A and Chats from our Open Forum, May 5, 2020
NOTE: Don’t Miss our Open Forum this Friday, May 15th. It will cover the results of our survey of UU congregations on the impact of the pandemic on this year’s stewardship campaigns and fulfillment. You should have received the Zoom link in your email. If not, contact us (email at the bottom of this page).
On Friday, May 5th, Stewardship for Us had a lively conversation with those who were able to join us on Zoom, and apologize to others who experienced technical difficulties trying to access this session. As promised, here is a recap of our conversation, and we also suggest you revisit the May 5th blog by Mark Ewert, Using your Endowment During Financial Emergencies.
Q & A:
Q: What is the principal? What is a good definition of principal? Of corpus? What’s the difference between the two?
A: The principal – often synonymous with corpus, is the cumulative total of the gifts made to it, regardless of when they are made. The interest and dividends derived from each gift are not part of the corpus or principal, regardless of the length of time since the gift(s) were contributed. ‘Corpus’ can also be considered the same thing as an endowment, or the total of an institution’s investable assets.
The question arises because if earnings are reinvested into the endowment, then the fund grows. Has the corpus grown? Is that new amount now not available? Or, if the congregation receives a living or estate gift and the board decides to give it to the endowment, is that now part of the permanently restricted corpus, or might it be regarded differently? And, what if there is more than one fund in the endowment with different rules, one where the corpus cannot be touched and one (or more) where the corpus can be disbursed?
These are issues where the congregation should have members or consultants do research and provide education so this definition can be agreed upon by the board and other leaders.
Q: What is the difference between an endowment and a reserve fund? Do you recommend congregations have both a reserve fund and an endowment, and for different purposes?
A: The guiding document for an endowment should be distinct from that prepared to establish a reserve fund. A quasi-endowment, which is an endowment where the Board can choose how it is used, yet under normal circumstances follow guidelines, is also different from a reserve fund. A reserve fund is often set up by a church’s board as liquid, unrestricted assets that has its own agreed-upon guidelines, can be used, for example, to support operations in the event of an unanticipated loss in regular income, or for repairs and improvements of modest cost – not capital campaign-size improvements. It can also be used for other designated purposes as determined by the board. A reserve fund can be funded by unanticipated income such as bequests, or special fundraising, or by its presence as a line item in the annual budget process. When a congregation is able to have both a reserve fund and an endowment, the reserve fund can be the first line of defense during vulnerable economic times and may prevent having to dip into the Endowment.
Q: What portion of endowment grants are used to serve the congregation vs to serve the community? Is there even a perceived optimum ratio?” “In our Fellowship we earmark 50% of our operating budget each year to social action. Would it be appropriate to allocate 50% of Endowment to social action and 50% to Fellowship needs as well?
A: First, Stewardship for Us recommends that congregations prepare a Gift Acceptance Policy. This will provide guidance on accepting gifts, or not accepting certain types of gift, what the congregation will do with them once received, whether or not and to what extent the gift is restricted or unrestricted, and what the donor can expect from the congregation. With this document in place, the question then becomes whether the congregation should allocate a percentage of the annual interest/dividends on the unrestricted principal to serve the community. While a congregation may feel strongly about its role in the larger community, it may be optimal not to tie the hands of those who must make financial decisions for the fiscal health and sustainability of the church by having formalized terms for endowment distributions.
Q: How do others deal with state requirements for “prudent management”?
A: There is a Federal law called the Uniform Prudent Management of Institutional Funds Act, or UPMIFA. It is implemented at the State level, so each congregation should check with its State laws regarding rules that your endowment needs to follow. Here is a useful resource:
Q: Is there a recommended amount to have in your endowment based on the size of your congregation? Is it wise to have a goal in mind for the Endowment size – to achieve and then to maintain?
A: Most congregations, when they start an endowment, set a minimum amount that that fund needs to reach before any disbursement from the fund or its earnings can be made. Beyond that, yes, having a goal in mind is a good idea, both for building a planned giving program to suit the goal, and for long term planning purposes. Note: making projections about planned gifts is a separate and complex subject. That goal might be based on a range of factors including: size of the congregation membership, the size of the annual budget, the projected resources the building and grounds might need to be maintained, the programmatic ambitions of the congregation, etc.
Having too small endowments or reserve funds creates obvious risks. A too large endowment also creates risk. First of all, it can risk harming the member’s sense of their role as stewards, if they believe their own gifts will not matter, compared to other available resources. A too large endowment can also challenge our values around social justice and the need to make a difference for others, going beyond our own comfort and security. If there is a clear, defined use and purpose of the endowment, totally separate from the annual operating budget, then a large endowment may not necessarily adversely affect stewardship by the members. There are plenty of examples of UU congregations with a too-large endowment leading to poor stewardship, and ones with a too-small endowment leading to financial risk.
What experience have you had with the size of your endowment: what it has allowed you to do, and what adverse effects it might have? We would love to hear from you!
Congregational Leaders Shared During the Open Forum:
“We have at times used a small portion of the endowment’s allowable annual disbursement amount to help with an emergency. A request comes from our finance committee to the board and this then goes to the Endowment trustees. Back to the board for final approval. A current example is a $15,000 grant for the next Fiscal Year for building and grounds issues that may come up.”
“If our reserves go below a specified amount, we have to budget for a 1% net income (contribution to the reserves) the following Fiscal Year, until it achieves that amount again. Regarding the reserve requirement, in the current context, we have to postpone the 1% rule for a year, because of COVID 19. We have an endowment and distribute a 3-4% average of its earnings over the last three years. Our bylaws say it should be used for special projects, and not operations – but this year we put the disbursement in our budget.”
“Our guidelines have a provision saying we can use up to 10% of the endowment principle in case of an emergency. We also decided that donors to our endowment fund would have to sign a form saying they accepted that the money they donated would be used in accordance with our endowment guidelines.”
“We have not made it to our endowment’s minimum required amount to start using funds, as per our bylaws. Nevertheless, endowment funds may need to be used. At this point a budget team made up of Board members and Finance Committee members are developing our FY 20/21 operating budget and we need lots of communication with the congregation to explain that the new budget may need to change from years past. We are considering a budget proposal where we would go to the congregation to use some Endowment funds; this will require a 2/3 majority vote. We need to involve the Endowment Committee in this and keep up the communication with our congregants.”
“We have had an endowment that has been distributing 5% of earnings since 1998. Current bylaws require a 2/3 vote to “invade principal.” We now are considering revising the rules through a bylaws change, toward greater than 5% disbursements for several years. The congregation will be asked to vote on this along with approving annual budgets.”
“Our endowment can use interest (earnings on the principle) only for projects outside of operating expenses. Using principle would involve a congregational vote. Endowment Trustees have good communication with the Congregation and Board of Trustees. While remaining true to the Endowment by-laws written 30 years ago, we are trying to look at the bigger picture that has changed radically from what we were envisioning 4 months ago. We are talking!”
Liz Coit, Kay Crider, Mark Ewert, Barry Finkelstein and Rachel Maxwell are part of the Stewardship For Us team. Please send your questions and topic suggestions for our blog or online Friday Forum discussions to team@stewardshipforus.com
Over a 25-year career in resource development, Liz has led fundraising efforts including major gifts campaigns for Prosperity Now, Center for Community Change, Ms. Foundation for Women, and Legal Momentum (formerly NOW Legal Defense Fund). Liz has been a member of All Souls Unitarian Universalist Church in Washington, DC since 2003. Reach Liz at Team@StewardshipForUs.com