Nonprofit Funding: A Closer Look at Quasi-Endowments

The concept of an endowment is well known to anyone in the nonprofit world, which is restricted funds that create indefinite investment income for a specific purpose. There are two principal categories of donor established endowment funds as follows:

• A true endowment fund – funds received from a donor with a restriction that the resources be used to create a permanent source of support for the organization.
• A term endowment fund – funds for which the donor stipulates that the principal may be expended after a stated period of time or upon the occurrence of a certain event.

But more nonprofits are now utilizing a third type of endowment that is known as a “quasi-endowment” in order to gain some flexibility in funding special expenditures or future projects.

Quasi-endowments, which are also known as “board designated endowments” and “funds functioning as endowments”, are established by the nonprofit organization itself, not by specific donor intent. Under a quasi-endowment, principal and income may be utilized at the discretion of the organization.

Unlike permanent and term endowments, the board can end its restriction for any reason and remove any funds from the quasi-endowment at any time it chooses.  Quasi-endowments are established using either donor or institutional funds, typically excess operating support and revenue or unrestricted bequests.

An organization’s board may earmark a portion of its unrestricted net assets as a quasi-endowment to be invested to provide income for a long but unspecified period. The principal of a quasi-endowment, which results from an internal designation, is not donor-restricted and is classified as unrestricted net assets.

Does A Quasi-Endowment Make Sense for Your Organization?

There are a variety of reasons a board might establish a quasi-endowment. For example, a nonprofit may not be ready to launch a true endowment campaign, yet it wants to provide some stability by investing resources and using only the interest in operating expenditures. Likewise, a board might establish a quasi-endowment if a donor is not ready to establish a true endowment (i.e., a donor-restricted endowment).

Whatever the reason may be, governing boards are well advised to first take some appropriate steps in order to establish a quasi-endowment:

• State how the fund will be used. Policies can be structured in such a way that, while it is legally considered unrestricted, a quasi-endowment will function much as a permanently restricted endowment fund. On a practical note, some boards structure their quasi-endowments so that interest and dividends must accumulate until they reach a certain point, at which time the income can begin to be used. Just as important as stipulating how the funds will be used is outlining the mechanism by which the restrictions placed on the endowment by the board can be reversed.
• State what funds will be used. Clearly define what funds can and cannot become a part of the principal of the quasi-endowment fund (i.e. a statement might prohibit certain contributions from being added to board designated funds).
• Establish an investment policy. Outline how the quasi-endowment fund will be invested and who will oversee the selected investments (i.e. a committee, a bank trust department or an investment broker).

Accounting for Quasi-Endowments

Quasi-endowment funds are designated by the board, rather than by donors or regulators, to act like permanently restricted funds from which income is available for general operations or certain specific purposes. Accounting standards established by the Financial Accounting Standards Board (FASB) require nonprofits to report quasi-endowments as unrestricted funds.

Is Your Organization Ready for a Traditional Endowment?

The timing may never be better to cultivate traditional endowments for your nonprofit. Researchers say the generational transfer of baby boomer wealth could result in at least $6 trillion for charity during the next 50 years.

Starting an endowment takes time, and nonprofits should move carefully. But your organization may be ready if the following apply:

• Has at least a 10-year operational history.
• Regularly meets its budget.
• Has a stable board and staff.
• Has reserves equal to at least one-fourth of its annual budget.

If you have questions or need additional guidance on quasi-endowments, we’re here to help. CONTACT US