FAQ’s for Nonprofit Endowment Building

What is a nonprofit endowment fund?
A nonprofit endowment is a long-term fund held and managed by The Community Foundation on behalf of a nonprofit organization. The commonly accepted definition for permanent endowment is a fund which is kept in perpetuity where earnings provide regular operating support or support for a specific project for the benefit of the organization. The very word “endowment” encourages donors to believe that the fund is intended to exist forever.

Why build a permanent endowment?
Building a permanent endowment provides organizations with future stability and a foundation from which to grow, not contingent on the success of current or future fundraising efforts. Having an endowment fund provides a constant source of annual income while demonstrating security and long-range financial planning.

What’s the difference between an endowment and an operating reserve?
An operating reserve is a board- designated fund reserved for specific or emergency needs. While the fund may be invested (not just held in a savings or checking account), the principal is available to the organization in a time of need. In an endowment fund, principal is permanently restricted from use.

Does the Foundation offer an “quasi” nonprofit endowment available in the event we need access to the endowment’s principal?
Yes. The Foundation offers two endowment alternatives for nonprofit organizations – a permanent endowment and a “sustaining” endowment. The “sustaining” endowment is intended for the long term (but not necessarily permanent) support of the nonprofit. Extraordinary distributions may be made to the nonprofit from the fund, if requested by a vote of the nonprofit’s board and approved by the Foundation’s board of trustees. This provides the nonprofit organization access to the endowment in the event of a financial or administrative emergency.

Financial and Investment firms also offer investment management services. What are the benefits of placing assets with the Community Foundation?
The Community Foundation is a nonprofit organization and our only business is community philanthropy. The advantages of working with the Foundation include:
– Participating in a diversified investment portfolio with over $3.6M in total assets under management (as of July 2017)
– Investment oversight from a dedicated investment committee of financial and business professionals who have extensive experience in investment and financial services.

What is the minimum for establishing a nonprofit endowment?
In the interest of fostering sustainability within the nonprofit community, the Foundation offers charities with the opportunity to establish a fund with a $5,000 deposit, provided the organization has a strategic plan for increasing the fund to $25,000 within a reasonable period of time. Continued contributions and donations to the fund are encouraged and can be made at any time in any amount.

What are the fees and what do they cover?
There is no fee to establish a fund and a nominal fee for managing the fund. The current administrative fee is 1% of the fair market value of the fund.

How much will be distributed from the fund each year?
The spending policy is 4% of the average asset value over the preceding twelve quarters. Distributions are made annually. Organizations can elect to leave the annual distribution amount invested to be used at a future date.

Who owns the fund and how are the funds accounted for?
Nonprofit funds are legally owned by the Community Foundation and are accounted for in accordance with the Statement of Financial Accounting Standards No. 136. To comply with this standard, the community foundation records an offsetting liability for the fair market value of the agency nonprofit funds. Organizations report the fair market value of the fund as a beneficial interest in an asset held by the community foundation.

Does our organization need to have an investment policy? What if our board of directors has already adopted one?
No. Organizations with funds managed by the Community Foundation do not need an investment policy. As a component fund of the community foundation, these funds are subject to our Statement of Investment Objectives and Policies.

Are there any additional services we would receive if our assets were managed by the Community Foundation?
Yes. In addition to investment management, nonprofit fund holders benefit from the following services:
– Clear and concise reporting of all financial activity
– Processing gifts of securities and tangible property
– Planned giving expertise

What happens to our endowment at the Community Foundation if our organization goes out of existence?
To preserve donor intent, the charitable earnings will be redirected by the Community Foundation’s Board of Directors to the most similar cause that can be found.

Why would a donor choose to leave money in their will or invest in an endowment for local organizations through the Community Foundation rather than giving directly to the local organization?
Donors may feel more comfortable leaving money for the benefit of their favorite organizations through the Community Foundation. The first U.S. community foundation was established in 1914, and now there are over 700 nationwide that share the same mission – to preserve community assets for the purposes designated by donors. Locally, the Community Foundation of the Brazos Valley has a 15-year history of meeting donors’ wishes and building long-term, revenue producing endowment funds to benefit the community forever.

Why do donors decide to make major gifts through the Community Foundation instead of making a gift directly to an organization?
There are 3 main reasons that individuals make major gifts to organizations:
They believe the organization is strong, viable and will be around for 25 or more years.
They believe the organization can manage and administer a very large contribution.
They believe deeply in the mission of the organization.
Donors may feel more comfortable using the community foundation because of its history of successfully managing long-term investments and for the greater assurance that principal will not be invaded by the agency.

What are some of the considerations before deciding to partner with the Community Foundation?
Considerations include the size of the annual operating budget, scope of the mission, capacity of staff and Board, and age of the organization. Many organizations find it advantageous to work with the Community Foundation because they benefit from the instant credibility that comes with partnering with the community’s trusted partner in philanthropy, where major gifts are stewarded regularly and investments produce solid returns to benefit the community.

In the case of an emergency, can we get our money back?
Endowment funds provide a permanent source of revenue. Funds should not be committed to an endowment that will be needed for operating expenses.

Does our organization need a fund? How does an endowment or charitable fund fit an organization’s financial plan?
A healthy and stable nonprofit organization meets its operating budget from a variety of revenue sources. An endowment or carefully-managed sustaining endowment fund provides annual income or accessible resources for long-term needs.

What happens if there is an emergency and we need money from a true endowment?
For funds in an endowment, the crisis must be resolved with other financial resources. If funds have been directed by your donors to an endowment, then it is your fiduciary duty to treat those funds as such. If the funds are not restricted, your organization has more flexibility for their use.

Should we set up our own foundation to hold our endowment?
The administration of a public or private foundation requires significant expertise, staffing and financial resources that could otherwise be used to further your organization’s mission. Establishing another entity may not protect your assets from a future board that wants to direct endowment funds toward another use.

Why should we choose CFBV?
Financial and investment firms also offer investment management services, but the CFBV is a nonprofit organization and our only business is philanthropy. Ensuring the stability of your organization is essential to our mission.

Who will manage the investment of our fund?
CFBV’s investment portfolio is professionally managed by independent fund managers. The Foundation’s board has established an investment policy to govern the investment of the Foundation’s resources, and an Investment Committee [comprised of board members and community representatives] meets quarterly with fund managers to review the performance of the investment portfolio.

How does the CFBV invest nonprofit funds?
CFBV invests nonprofit funds in a balanced, diversified portfolio that includes equity, alternative and fixed income components. The portfolio is broadly diversified across all asset classes for long-term growth.

What does it cost?
The administrative fee is 1% of the average fund balance. The minimum annual fee is $100, which is charged quarterly. Each fund pays a prorated portion of direct costs of investment management and fees.

What services will we receive?
– Clear and concise quarterly reports reporting all financial activity.
– Acknowledgement of all gifts to fund from donors.
– Processing gifts of securities and tangible property.
– Assistance to meet with donors who are interested in leaving a gift or establishing a fund for your nonprofit organization.
– Periodic meetings by foundation staff with board of directors and/or committees.

How do we receive distributions from our fund?
Each year, spendable income is calculated based on the terms of your fund agreement and the CFBV’s spending policy. The Foundation’s current spending policy is an annual amount equal to 4% of the fund’s average balance over the past 12 quarters. Spendable income can be distributed or rolled over for a later time. Distributions are not made from funds with a balance below $5,000.

Can we withdraw funds from our endowment in addition to annual income?
When your fund is established, you determine the future availability of funds over a $25,000 minimum balance. You may choose funds to be readily available to the organization, to require the approval of your board and the Foundation’s board, or to permanently restrict principal from future availability.

Who owns the fund and how are funds accounted for?
Nonprofit funds are legally owned by the Foundation and accounted for in accordance with the Statement of Financial Accounting Standards No. 136. To comply with FASB Statement 136, your organization reports the fair market value of the fund as a beneficial interest in an asset held by the Community Foundation; for the Foundation, these funds are an asset with an offsetting liability.

Will having an endowment reduce annual giving?
An endowment that is part of a comprehensive development program should not negatively impact annual giving. An endowment may appeal to donors considering a gift to the organization in their estate plan or when their finances allow a significant gift.

Who gives to endowments?
Those closest to your organization–current and former board members, donors and volunteers — are the best candidates. Making an endowment gift will appeal to people who are motivated to make a long-term impact on your mission.

If we establish a fund will you help us raise money for it?
The Foundation cannot directly help you solicit donors or run a fundraising campaign. We are available to discuss your ideas, assist with complex assets like closely-held stock or real estate, or help donors with planned gifts like charitable remainder trusts and charitable gift annuities.

Does having a fund affect our status for grant funding from the CFBV?
No. Organizations with a fund at the Foundation are still eligible to apply for grant funding and are not favored over other organizations in our community grant process.

What happens to the fund if our organization goes out of existence?
If an organization dissolves, then the Foundation continues to hold the assets in the fund. Annual spendable income will be directed toward a similar organization or cause identified within the Brazos Valley.