Donor Giving: The Good, the Bad, and the In Perpetuity

1. Planned Giving Council Donor giving: the Good, the Bad and the in Perpetuity Kay Walther September 28, 2017 Blazek & Vetterling

2. Overview • Understand for donor restricted endowments and long term funds based upon language used in fundraising solicitations. • How reporting to donors impacts the financial reporting for use of restricted contributions. • Impact of UPMIFA on endowments and other long term donor restricted funds. Blazek & Vetterling

3. Blazek & Vetterling

4. Contributions A transfer of cash or other assets to an entity (or a settlement or cancellation of its liabilities) in a voluntary nonreciprocal transfer (a transfer “without consideration”) by another entity acting other than as an owner. • Nonreciprocal • Unconditional (vs. conditional) • Can be a promise to give (vs. intention to give or to recommend) • Cash or other assets OR cancellation of liabilities • Voluntary Blazek & Vetterling

5. Donor Restrictions • Unrestricted funds for general support • Temporarily restricted funds for specific program or project support • Permanently restricted funds for a specifically named endowment fund Blazek & Vetterling

6. Types of Endowments • Board designated endowments (unrestricted) • Term endowments (temporarily restricted) • Permanent endowments (permanently restricted) Blazek & Vetterling

7. Board Designated Endowments (quasi-endowments) • A quasi-endowment fund is a Board-designated fund that is treated like an endowment where only earnings are used. The principal is not permanently restricted as is the case with endowment funds, but it is the plan of the Board to use only the investment earnings from the fund for current programs. The intention is to provide a growing source of additional unrestricted income. This is consistent with many donors’ wishes to support programs for the long run. The principal can be increased annually at the direction of the Board. Blazek & Vetterling

8. Term Endowments • The terms of these endowments are set up by the donor and are similar to permanent endowment funds, except, after the expiration of a stated period of time or occurrence of a specified event, all or part of the principal may be expended, depending on donor wishes. These funds are normally considered temporarily restricted. Blazek & Vetterling

9. Permanent Endowments • Result from contributions and other inflows of assets whose use by the organization is limited by donor-imposed stipulations that neither expire by passage of time nor can be fulfilled or otherwise removed by actions of the organization. • These gifts fall into one of two classes: • Gifts of assets such as land or works of art, donated with the stipulation that they be used for a specified purpose, be preserved, and not sold. • Assets donated with stipulations that they be invested to provide a permanent source of income. Blazek & Vetterling

10. Types of Permanent Endowments • General Endowments are those bequests and gifts where the use of the investment return is for the general purposes of the institution. • Specific Endowments are those bequests and gifts where the use of the investment return is for a specific purpose or activity so designated by the donor and which can only be used for that purpose or activity. Blazek & Vetterling

11. Endowed Fund Agreement • Names the fund • Describes the purpose • Documents the investment policy to be used • Provides an escape clause in case the purposes become obsolete or impractical • Signed by • Donor • President • VP for Development • VP for Finance Blazek & Vetterling

12. Solicitation - Examples • I hope you will join us in both honoring Dr. John Smith and advancing the work of the center. A gift of $2 million would establish an endowed chair, dedicated to the Center’s Director, for which we would be delighted to discuss naming opportunities. The Chair Endowment is managed as part of the College’s overall endowment. The corpus of the chair remains intact, and each year a portion of the total earnings is distributed to the chair holder for use, while a portion is reinvested in the endowed fund, ensuring growth and support in perpetuity. --Baylor College of Medicine solicitation for permanently restricted funds Blazek & Vetterling

13. Examples • A nonprofit organization receives an endowment gift from the donor. The donor stipulates that the endowment policy is distribute no more than 5% of the market value of the investments in any given year. Is this a permanent endowment? • A nonprofit organization receives a donation of land that must be used only as parkland. Is this a permanent asset? • A nonprofit organization receives a marketable security that the donor stipulates cannot be sold. Is this a permanent endowment? How do you record the unrealized gains on the investment? • A nonprofit organization receives an endowment gift from the donor. The donor states that only the interest and dividends can be expended at the direction of the Board of Directors. How do you record the gains/losses on this endowment? Is the interest and dividends temporarily restricted or unrestricted? • If a donor states that they will give you a matching grant to your permanent endowment fund if you can match it with equal funds, are the matching funds permanently restricted? Blazek & Vetterling

14. Uniform Prudent Management of Institutional Funds Act (UPMIFA) • Adopted in State of Texas in September 2007 • Provides greater guidance on making prudent investment and spending decisions • Requires charities to focus on donor intent • FSP 117-1 (ASC 958-205) is the accounting profession’s response to these new laws Blazek & Vetterling

15. Definitions • Endowment fund – an institutional fund that under the terms of a gift instrument, is not wholly expendable by the institution on a current basis. • Gift instrument – record(s), including institutional solicitation, under which property is granted to institution as an institutional fund. • Institution – a person, other than an individual, organized and operated exclusively for charitable purposes. • Institutional fund – a fund held by an institution for charitable purposes Blazek & Vetterling

16. Investment Guidelines • Subject to the intent of the donor, an institution must consider the purposes of fund • Exercise good faith and ordinary care of a prudent person • Incur only costs appropriate and reasonable in relation to assets, purpose of institution, and skills available to institution • Make reasonable effort to verify facts relevant to management and investment of fund • May pool two or more institutional funds for investment purposes Blazek & Vetterling

17. Investment Guidelines (cont’d) The Institution Must Consider: • General economic conditions • Possible effect of inflation or deflation • Expected tax consequences • Role of each investment in overall investment portfolio • Expected total return • Other institutional resources • Distribution needs and preservation of capital • Assets’ special relationship to organizational mission Blazek & Vetterling

18. Investment Guidelines (cont’d) • Decisions about individual assets must be made as part of overall investment strategy having a risk and return objective reasonably suited to the fund and institution • May invest in any type of investment consistent with this section • Shall diversify investments unless purpose of fund is better served without diversification • Person with special skills and expertise, or selected in reliance of same, has a duty to use those skills or expertise in managing and investing funds Blazek & Vetterling

19. Delegation of Management or Investment Functions • Institution may delegate management and investment functions to an agent • Institution shall act in good faith • Selection of agent • Establishing scope and terms of delegation • Periodically reviewing performance • Not liable for actions of agent if good faith actions performed Blazek & Vetterling

20. Expenditure Guidelines • May appropriate for expenditure or accumulate as much of endowment fund as institution determines is prudent • What constitutes “appropriation”? • Current Federal tax laws require private foundations to spend 5% of the value of their net investment assets each year. This is the most common spending % that we will see boards adopt. • Assets of endowment fund are donor-restricted assets until appropriated for expenditure Blazek & Vetterling

21. Expenditure Guidelines (cont’d) • A gift instrument must specifically state a limitation to limit authority to appropriate • Terms in a gift instrument designating a gift as an endowment: • Create an endowment of permanent duration unless other language limits duration or purpose • Do not otherwise limit the authority to appropriate for expenditure or accumulate Blazek & Vetterling

22. ASC 958-205 • Provides guidance on the net asset classification of donor-restricted endowment funds for a not-for-profit organization • Improves disclosures about an organization’s endowment funds (both donor-restricted endowment funds and board-designated endowment funds) Blazek & Vetterling

23. Net Asset Classification of Endowment Funds • Permanently restricted funds include: • Amounts donors have restricted in perpetuity • In the absence of donor restrictions, amounts the organization’s governing board has determined must be retained in perpetuity in accordance with the relevant law • Not reduced by appropriations for expenditure • Temporarily restricted: • The portion of the fund that is not classified as permanently restricted is classified as temporarily restricted until approved for expenditure • If approved for expenditure in a future period then time restriction remains • If also purpose restricted, not released until purpose restriction is satisfied Blazek & Vetterling

24. Enhanced Disclosure Requirements • Governing board’s interpretation of the laws that underlies the organization’s net asset classification of donor-restricted endowment funds. • Policy for appropriation of endowment assets (i.e., spending policy). • Organization’s endowment investment policies • Return objectives and risk parameters • How those objectives relate to endowment spending policy • Strategies employed for achieving those objectives. Blazek & Vetterling

25. Reporting to Donors of Endowments Establishing parameters that an organization can use to consistently and effectively communicate with donors in a transparent manner is important. Consideration should be given to the following: • Clearly defining investment return allocations and distribution policies. • Designating a certain percentage to offset cost of raising and administering those gifts. • Internal tracking use of restricted funds for reporting to donors. • Internal reporting of use of restricted funds to management and the board of directors. Blazek & Vetterling