Funding notes

A Closer Look at Quasi-Endowments

The concept of an endowment is well known to anyone in the nonprofit world — restricted funds that create indefinite investment income for a specific purpose.

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

Quasi-endowments — also known as “board designated endowments” and “funds functioning as endowments” — are established by the nonprofit organization, not by specific donor intent. 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. A more specific definition can be found in Statement of Financial Accounting Standards (SFAS) 117:

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

Does It 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 for 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 for establishing a quasi-endowment, boards are well advised to first take some appropriate steps:

• State how the fund will be used. Polices can be constructed 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 delineate what funds can and cannot become a part of the principal of the quasi-endowment fund. For example, 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 investments — for example, a committee, a bank trust department or an investment broker.

Accounting for Quasi-Endowments

Quasi-endowment funds are earmarked 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.

Quasi-endowments are reported on Line 27 (unrestricted net assets) at Part X of IRS Form 990. They are also reported on Part V (Endowment Funds) of Schedule D (Supplemental Financial Statements).

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 it:

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

For more information on this topic or to learn how Baker Tilly specialists can help, contact our team.

© 2024 Baker Tilly US, LLP