Underwater Funds
Definition of Endowment Fund:
The Michigan Department of Treasury (see letter) defines an endowment fund as "a fund of permanent capital or principal, only the income of which is used for charitable purposes, and/or includes a fund invested on a total return basis as contemplated by MCL 451.1203 and/or pursuant to a written investment and distribution policy that is intended and expected to maintain the corpus of the fund over time."
Some community foundation endowment funds are once again experiencing market values less than the original gift amounts (underwater). The last time markets fluctuated enough to cause this situation (2000-01), a subcommittee of CMF members outlined the following 4-step approach to dealing with underwater funds. What's appropriate for one foundation is not necessarily appropriate for another.
How to Handle Underwater Endowment Funds
- Review status of endowment funds – is the market value below the original gift amounts? (underwater)
- Study applicable governing documents to see if they limit the ability to disburse any portion of principal.
- Fund agreements
- Endowment investment/spending policy
- Articles of Incorporation & bylaws
- Examine the foundation’s options with the Investment/Finance, Executive Committees and Board of Trustees which may include:
- Modification of Spending Policy
- Modification of fund agreements
- Educate donors about the effect the stock market has had on the foundation’s ability to make grants from their fund and explore options with donors.
How are Michigan Community Foundations Dealing with Underwater Endowment Funds?
On April 15, 2009, CMF conducted a conference call with its member community foundations to discuss spending policies and underwater funds. Read the minutes from the call, download the materials from the call or listen to the audio:
CMF hosted a preliminary discussion on underwater funds in fall 2008 (read minutes from the call). Two main themes emerged from this conversation:
- Communicating with donors is key to helping them understand how the current financial crisis has affected their funds and the various options they might consider to meet their grant making wishes.
- A Hybrid Spending Policy is one option to consider that allows interest and dividends to be disbursed for underwater funds.
Questions?
Contact David Lindberg, vice president of finance and administration, via e-mail or call 616.842.7080.