The following article is reprinted with permission from the PEER Network newsletter:
Over the past several months much has been written regarding the importance of promoting planned giving and stewardship programs within congregations. Motivational messages and practical tips involving charitable remainder trusts, lead trusts, and annuities have helped to shape many church endowment programs. However, in the development of a planned giving plan, one key work detail and one crucial document all too often is ignored - the establishment of a written endowment policy. Not a policy detailing how you might raise the funds, but a policy that clearly states how these funds will be protected, managed, and spent.
Many churches will at some time receive a large endowment gift and end up spending it without controls or parameters – be it for balancing an operating budget shortfall, or supporting a building program, or launching a new ministerial initiative. All of these are good causes, but they often run contrary to the donors' wishes, which are to support the church for perpetuity and not for a short term financial lapse.
As an aid to helping secure such donor intents, and as a means to protect the endowment so that it is available for perpetuity, a written and approved endowment policy plays a critical role. Such a policy will be unique to each congregation. There is no one-size-fits-all, and the trustees or finance committee along with the session will need to discuss many items in the course of preparing this document.
It is often recommended that this policy at a minimum include the following four points.
1. The purpose of the fund – Why the endowment fund was established and how the funds will be used. Although some gifts will be restricted in accordance with the wishes of the donor, it may be beneficial to identify, as specifically as possible, how the unrestricted gifts may be used. One church's clear and succinct statement was:
Endowment funds shall be used for purposes and programs contributing to and consistent with the church’s mission; they shall include providing funding for restoration, extraordinary maintenance and capital improvements of property owned by the church; and they shall provide funding for special worship and special educational programs conducted within the church, all as so approved by Session.
Such a statement will help eliminate downstream disagreements regarding tapping into the funds for a special project that falls outside the mission or goals of the church, and helps to protect the clergy, Session and congregation from abusing the fund.
2. The administration of the fund – In good Presbyterian fashion, the Session has the responsibility for the church’s financials. However, the Session may wish to delegate some of this authority to a Board of Trustees, a finance committee, or perhaps a church business administrator. It is beneficial to clearly state what group will be responsible for accepting or rejecting a gift; for monitoring the investments; for tracking the spending; and for reviewing or auditing the funds. How these duties are specifically delegated and how information is reported back to the Session and ultimately the congregation goes a long way in promoting financial transparency and demystifying the endowment.
3. The investment of the fund – There are numerous ways in which the funds may be invested, from passive management using inexpensive index funds to aggressive active managers that hopefully consistently outperform index funds. During this process a discussion will need to center on desired returns versus risk, diversification and asset allocations, and how the funds are to be managed. It is highly recommended that the funds be invested and/or managed by an outside agent. Giving them to a broker who is also a respected church elder has a tendency to be a long-term losing situation for all parties.
4. The spending of the fund – Perhaps the best part of having an endowment fund is being able to spend it. But how much is spent each year is a critical question that needs to be answered before the spending begins. If you plan to use a percentage of the value of the fund you need to decide how much. The industry standard is 5%, but that might not fit your church's financial needs: Is 6% too much? What about 7 or 8%, and how might that impact the long-term value of the fund? Or should you use just the earned interest and capital gains to fund the church’s programs? This last is perhaps the most difficult question to ask, but once decided it will bring clarity to the overall financial picture, promote annual stewardship growth, and avoid encroaching on the funds to solve financial problems.
Once this policy is formed, present it to Session for approval. You are now well on your way to building the endowment fund into one that will truly contribute to furthering the church’s mission and ministry, not just for today but for perpetuity.
Don Lewis is VP for Administration & Finance at Luther Seminary in St. Paul, Minnesota, and a PEER board member.
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