Regardless of what mission a nonprofit organization might have, most come down to the simple idea of leaving the world a better place than they found it.
Endowments can help organizations when it comes to sustainability — the ability to carry out activities that will achieve an organization’s mission while also developing and maintaining its capacity for mission relevance into the future. But not every organization has an endowment. How can an organization build an endowment? Having reserves — or at least to start, proper reserve strategies — can help organizations get to an endowment.
Ben Aase and Keven Truhler, principals with the Sage Intacct Practice at CLA (CliftonLarsonAllen), presented ideas to think about when it comes to reserves and building endowments during a session titled “Rethinking Reserves Strategies,” at the #SageTransform conference.
The pair explained a data-driven, risk-based method for determining reserves, primarily through two phases.
In the first phase, identify risks to major departments and business lines:
- Review current policy and practice
- Collect data, through surveys and interviews
- Facilitate stakeholder sessions
In the second phase, quantify identified risks and build appropriate policy:
- Quantitative modeling
- Draft policy recommendations
- Governance approvals
Benefits of an endowment should be spread equally across all generations, neither over- nor under-spend on the current and future generations. “We are the stewards for all future generations.”
There are two primary goals to building an endowment. First, to have a significant and stable flow of funds today. Second, to maintain long-term purchasing power. The ideal spending policy acts as a shock absorber keeping short-term spending relatively stable but gradually allow changing endowment values to filter into changes into spending.
In practice, a target spending rate equates to about 5.25%. Yet if inflation is at 3%, that would require annual endowment returns of 8.25% just to keep up with inflation plus spending rate.