Can Nonprofits Use Their Endowment Funds to Assist Communities in the wake of COVID-19?
As the COVID-19 pandemic continues to impact all corners of life both locally and nationally, we have received questions from our nonprofit clients regarding the use of their endowment funds to help support their targeted communities. In addition to a quick review of Minnesota’s endowment fund law, below are some action items to consider when faced with these spending decisions.
In 2008, Minnesota’s endowment fund law changed. The change eliminated the concept of “historic dollar value” – the amount below which a nonprofit couldn’t spend an endowment fund’s corpus. The law was replaced with a “prudent” use requirement. Accordingly, for most endowment funds today, a nonprofit is allowed to spend as much of an endowment fund as the nonprofit determines to be prudent given the current economic situation, taking into consideration other available funds of the nonprofit, the intent of the donor to maintain the fund in perpetuity, and the needs of the nonprofit. The prudent spending standard of today’s does not allow for unlimited spending of endowment funds but provides much-needed flexibility in tumultuous times.
What cannot be changed without donor consent or another legal process is the substantive restriction on the nonprofit’s use of the funds. So, for example, if an endowment fund is restricted to supporting people with disabilities in the county, the fund cannot be used for supporting people in any other county without the donor’s actual consent (a spouse or heir cannot consent for a deceased donor) or a legal process.
Action Items to Consider:
- Consider all documentation related to endowments. Find and review endowment fund documentation (letters, agreements, emails) to make sure you know exactly what each fund’s restrictions say. Standard language like “keep this fund in perpetuity” or “you can spend income only” is considered general endowment fund language subject to the prudent spending standard. But there may be some specific endowment funds that say, “under no circumstances can organization spend more than 3% of the fund in any given year.” In those specific language cases, the donor intent controls, and the organization cannot spend in excess of that restriction. Review your current endowment spending policy (if you have one).
- Meet with regard to endowment funds with general endowment fund language. The Board is the ultimate decision-maker related to prudent spending of endowment funds. The committee responsible for managing endowment funds should meet, review the current endowment spending policy, the current endowment fund amounts, all the factors that are required to be considered before using an endowment fund in a way outside the usual practice of the nonprofit, and management proposals regarding recommendations as to endowment fund spending. This committee should make a recommendation to the Board.
- The Board should meet and make a final decision. This can be done at a regular or special Board meeting. The Board should pass resolutions documenting that it has reviewed the current spending policy, the endowment fund amounts and restrictions, and all the factors that must be considered in determining how much of an endowment fund to spend, and authorizing spending of the endowment fund of a certain amount or up to a certain amount. If the authorized spending exceeds the current spending policy, board minutes should state specific reasons for deviating from the policy and set a date to review the spending actions taken.
- Keep your audit firm apprised of the process. We recommend sharing draft resolutions with your CPA firm, so they are not surprised at the end of the year, and to enable them to give input to the process.