Navigating Financial Challenges with Your Nonprofit’s Endowment
Posted by Cathleen Karpik on July 30, 2025
Even the most financially disciplined nonprofits can face unexpected budget shortfalls, especially when a major funding source disappears. While reserves and realistic budgeting are essential, organizations with endowments have an additional tool at their disposal: endowment income. When managed wisely, this income can help stabilize operations during turbulent times.
Understanding Endowment Flexibility
Before tapping into your endowment, it’s crucial to understand the restrictions and policies that govern its use:
- Restricted vs. Unrestricted Funds: Only unrestricted or self-generated funds can be used freely. Restricted funds must be used according to donor intent.
- Legal Framework: Most states follow the Uniform Prudent Management of Institutional Funds Act (UPMIFA), which sets guidelines for prudent investment and spending. UPMIFA guidance suggests nonprofits generally shouldn’t spend more than 7% of their endowment annually.
Crafting a Thoughtful Spending Policy
Your endowment spending policy should clearly define how much income can be used for operations each year. Most nonprofits use a rolling average of investment returns over 3 - 5 years to determine a spendable percentage, typically between 4%- 7%. This method helps smooth out market volatility and ensures consistent support across fiscal years.
However, this approach doesn’t guarantee long-term sustainability. It’s important to consider whether your endowment can continue supporting operations at the same level in the future.
Accounting for Inflation
Inflation can erode the purchasing power of your endowment income. To address this, consider:
- Starting with a conservative, inflation-free rate of return (i.e. 3%)
- Adjusting for inflation (i.e. 2.5%) to arrive at a spending rate (i.e. 5.5%)
This method helps align your spending with real-world costs without overreacting to short-term investment gains.
Preserving the Future
A reasonable spending policy should protect the endowment’s principal and allow it to grow over time. If your current policy risks depleting the fund, it’s time to reassess. You may need to reduce spending or seek alternative funding sources to meet operational needs.
Final Thoughts
Your nonprofit’s endowment is more than a financial cushion; it’s a strategic asset. By implementing a prudent, inflation-aware spending policy and respecting legal guidelines, you can ensure your endowment supports both current operations and long-term sustainability.
Need help analyzing your financial strategy or revising your endowment policy? Reach out to our nonprofit team if you have any questions.
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Cathy is responsible for engagement management and coordination of services to various exempt organizations. She has experience working with community and private colleges, nonprofit organizations, various governmental entities, and school districts in the areas of auditing, single audits, taxation, information returns, and financial reporting. Cathy has extensive experience with private and community colleges and regularly receives specialized training and updates on federal student financial aid programs by recognized national experts.