If you were  gifted $100, invested it, and then ended up with $106 the following year, many might see that as a win. Dollars were, in relatively short order, turned into more dollars. There are $6 that weren’t there before.

Now let’s say that you need to spend about $5 for holding onto those assets and,  due to inflation, a dollar invested last year isn’t worth quite as much as this year’s dollar. All of a sudden, that $100 is $98 or $99 dollars instead of $106. You’re suddenly hoping that investments go well just to keep more of what you’re already holding.

This overly simplified example, depicted on a relatively tiny scale, is the reality facing many endowments. William Jarvis, market strategy and delivery executive for U.S. Trust, discussed this state of affairs and findings from the  NACUBO-Commonfund Study of Endowments, during his session entitled “The Way Forward: Governance and Investment Policy for Endowed Nonprofits” at the 2018 American Institute of Certified Public Accountants (AICPA) Not-For-Profit Industry Conference in National Harbor, Md.

To understand how endowments have performed recently, one has to go back to 2009. Policies were put in place at central banks around the world to prevent a depression. These policies helped prevent ruin, but also distorted traditional investment risk and return. A foundation might traditionally distribute about 5 percent of its endowment every year. When you factor in 2 percent for inflation, you all of a sudden need returns of 7 or 8 percent to keep above water, Jarvis said.

Those sorts of returns have not been the norm. In fact, negative returns have been associated with four of the past 10 years, including average loss of 1.9 percent in 2016. Returns in 2017 were significantly better, 12.2 percent on average — a product of the current political administration’s deregulatory agenda. Some have panned such effects as temporary, according to Jarvis, though professionals at U.S. Trust remain more optimistic.

Even factoring in a strong 2017, the NACUBO-Commonfund Study of Endowments shows higher-education endowments otherwise struggling to earn the 7-to-8-percent minimum needed, Jarvis said. Three-year endowment returns stand at 4.2 percent through 2017 (down from 5.2 percent in 2016), with five-year returns at 7.9 percent (up from 5.4 percent in 2016) as compared to 4.6 percent (down from 5.0 percent in 2016) over 10 years.

Endowment returns in 2017 favored larger organizations slightly, 12.9 percent for endowments of more than $1 billion, sliding down gradually to 11.6 percent for endowments of less than $25 million. Jarvis attributed this to the benefits of a more diversified portfolio among larger endowments, which can generally afford more staff management. Smaller institutions are generally far less dependent on endowments for year-to-year expenses, relying more heavily on tuition. Larger institutions such as Ivy League universities, on the other hand, might lean on endowments for as much as 30 to 40 percent of operating costs.

Jarvis, while responding to audience questions, predicted healthy growth in the global and U.S. economy as Baby Boomers retire and Gen Xers and Millennials ascend. Younger workers are becoming increasingly productive and the suburban housing market has improved as such individuals settle down and start families. As some nonprofit endowments struggle to keep pace, Jarvis added that he has seen some organizations drop spend rates. Private foundations are stuck at a 5-percent minimum, but other organizations have dropped down as far as 3.8 percent, Jarvis said. Leaders at such organizations have taken the approach of being honest with donors. They might want their money spent toward organization missions, but economic realities make standard higher spend rates troublesome.

Jarvis further recommended that organizations, especially those with boards hesitant to diversify investment portfolios, perform stress tests based on various past scenarios. “You need to think about what keeps you up at night and face it,” he said.

Tax implications were also briefly discussed, coming in two forms — organizational and donor. Large higher-education endowments now face a 1.4-percent excise tax that warrants monitoring. Such revenue increasers are seldom repealed and might someday spread to other nonprofits. Jarvis predicted that such taxes might turn donors off from contributing to endowments, decentralizing typical endowment assets as donors instead write checks, utilize donor-advised funds, and create private trusts. Utilization of DAFs spiked among upper-middleclass donors at the end of 2017.

Donors face reduced incentives for giving following the near-doubling of the standard deduction to $24,000 for joint filers. About 30 percent of filers itemize, a figure that Jarvis expects to be cut in half moving forward. Inertia can be a powerful tool, particularly among households that see reduced tax bills in the coming years. They will continue writing their annual check to their alma mater. Over time, however, Jarvis predicts that donors — particularly upper-middleclass donors — will change behaviors due to reduced incentives to give