A growing number of states are passing laws designed to make it easier for nonprofit groups to spend money that donors have pledged to endowments, even if investment losses have caused the value of the donation to drop.
Until now, most states prohibited institutions from spending money in an endowment if the balance in the fund dipped below its pledged amount.
If a donor pledged $1-million to endow scholarships, for example, no money could be used to pay for scholarships if investment losses pushed the principal in the fund below $1-million.
“It really drew a line in the sand on an endowed gift,” says Bruce Arick, chief financial officer at Butler University, in Indianapolis. “The new law lifts that restriction. It gives more flexibility.”
The law has been adopted in 14 states on the recommendation of the National Conference of Commissioners on Uniform State Laws and is expected to be ratified in most other states over the next few years.
But as it becomes the standard for many nonprofit groups, it is also causing some confusion about how charities and foundations should be reporting their foundation assets.
In addition, there are concerns that the new rules will push federal lawmakers to step up their efforts to press universities and other charities to spend more money from their endowments.
To help ease that confusion, the Financial Accounting Standards Board, in Norwalk, Conn., this month released a proposed set of reporting standards to help organizations comply with the new rules.
The Financial Accounting Standards Board, a private organization, establishes standards of financial accounting and reporting that many nonprofit groups follow to satisfy creditors, investment managers, and auditors.
The new laws have “raised significant questions about the reporting of donor-restricted endowment funds,” said Jeffrey Mechanick, a project manager at the accounting board, in announcing the proposed reporting standards. “Organizations across the country now find themselves subject to increased public scrutiny on how they manage and use their endowments, which in many instances have seen tremendous growth over the past decade.”
Sen. Charles Grassley, the senior Republican on the Senate Finance Committee, has been leading an effort to determine whether colleges and universities, in particular, should be required to spend a minimum percentage of their endowments to reduce costs for students.
And some observers worry that the accounting board’s interpretation of the rules will give lawmakers more ammunition for the argument that universities and other groups are stockpiling too much money in their endowments.
Jack Siegel, a Chicago accountant and lawyer who advises nonprofit clients on tax issues, says he is concerned that the proposed reporting standards are written in a way that would understate the amount of money that should be held in principal to sustain endowments in perpetuity.
In turn, the standards would make it appear as though institutions should be spending more money annually from their endowments.
“Maybe nobody would care if this were just accountants and debits and credits,” says Mr. Siegel. “But this comes in the middle of Senator Grassley and lots of others charging that tuition costs are skyrocketing and these big universities have billions of dollars in endowments that they aren’t using to reduce those costs.”
The accounting board’s reporting guidelines are not final, however. The board is accepting public comments on its proposal until April 18 and will probably revise the document based on those comments.