Making Sense of Your School’s Finances: Endowments and Restrictive Funds 

Quick Hits: 

  • Endowments are a point of ambiguity for school officials, as the policies and stipulations tied to them can be difficult to navigate. 
  • There are two main types of restrictions placed on endowments: permanent and temporary. 
    • Permanent: Restrictions for the life of the gift; administrators can only spend the returns from the endowment, not the principle, and can only spend based on the stipulations of the donor. 
    • Temporary: Restrictions with a time or event-specific date of expiration. After that date, funds can be spent without restrictions on the institution. 
  • Our team at St JFS are experts in navigating, and managing, endowment funds for Catholic institutions.

We know that there is a great deal of ambiguity surrounding endowment funds in Catholic schools. For many of you, you’re used to receiving funds for specific purposes, but the recent increased scrutiny of nonprofit organizations, perception of the Church’s liquidity, and some unfortunate scandals (see here and here) have made it important for Church leaders to ensure proper processes and competencies are in place to protect them and their organizations. These funds, normally donated to the institution, come with certain policies and parameters that can be ambiguous for administrators and staff members if not clarified when received or if there’s need to parse out prior restrictions that were not well documented by your predecessors. Navigating this financial nuance can seem overwhelming – so we wanted to break down exactly what the two most common restriction types are, and how your institution can make the most of endowment funds in the coming school year. 

The first hurdle administrators must overcome regarding endowment funds is what kind of restrictions are placed on the endowment. There are two main types of restrictions – permanent, and temporary. 

Permanent Restrictions 

Permanent restrictions on endowment funds are those that, like the name suggests, are permanently tied to the gift or funds as specified by the donor. These restrictions mean that the institution can not spend the principal amount of the endowment, but are instead limited to spending the interest gained from those funds in ways that are aligned with the original restrictions applied by the donor. Sometimes and endowment policy can also unrestrict a certain percentage for annual use.

These are also referred to as “true endowments”, as the principal amount donated or given is meant to be kept in perpetuity by the institution. This makes the job of the financial advisor, or investment manager, even more important, as the return on investment (ROI) will determine the funds available to administrators. One thing to be cautious about is someone naming an account “endowment” when they don’t actually mean the funds are permanently restricted. We’ve encountered numerous instances where a school named an investment account “St. X Endowment Account” but the funds were never restricted by a donor. It’s important to only name a fund “endowment” if you mean to permanently restrict the dollars.

The main takeaway regarding permanently restricted funds lies in the money available to administrators and leaders for spending. The principal amount of these funds are not available to school leaders. Only the interest earned on the funds (the “profit”) can be spent, and the spending must be in line with the wishes of the donor. 

Temporary Restrictions 

Temporary restrictions on endowment funds are where things can get a little more confusing – but with the right management, navigable. Temporary restrictions exist for a certain term (usually up to a certain event – time period, death of the donor) which, then upon that time, the principal funds are available for spending. 

These funds present both a unique challenge and a unique opportunity to the institution. While spending will be limited during the restricted term, leaders also know that upon the expiration of that term the funds will be available for use as needed. Your organization can also free up these funds by satisfying another condition of use. For example, dollars would be considered temporarily restricted if a donor gives towards buying a new van. Once you’ve purchased a van, you can un-restrict the dollars spent towards that purchase and free up those funds.

The right management and record-keeping regarding temporarily restricted funds is crucial to the proper allocation of resources. Administrators will want to ensure they are managing the funds so that ROI is maximized in the term period, then funds are properly allocated once the term has ended.  

Our team at St JFS are experts in navigating, and managing, endowment funds for Catholic institutions. If you want to hear about a specific case we’ve dealt with, see the story below about a long-time client that we walked through a complex process of determining the proper restrictions of a fund in a way that gave the principal confidence to use the funds and community and diocesan collaboration so all stakeholders moved in unison. Have questions on a recent gift, or wondering what exactly the stipulations are for your endowment fund? Reach out to our team, and we can work alongside you to ensure that your school is making the most of endowment gifts.